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New queries: 1 October 2020

29 September 2020
Issue: 4762 / Categories: Forum & Feedback

Order of phoenix

Arrangement caught by the anti-avoidance provisions?

A client has been operating A Limited, a successful trading company, for a number of years, during which it accumulated large cash reserves.

The client approached us with a proposal which, in effect, aims to liquidate A Limited, extracting cash reserves as capital (with £1m possibly under business assets disposal relief). Following this, he plans to recommence similar activities by way of a newly incorporated company, B Limited.

This appears to be the type of arrangement that is caught by the anti-avoidance provisions in ITTOIA 2005, s 396B et seq – commonly referred as the ‘phoenixing provisions’.

Indeed, given that the provisions mostly refer to a ‘winding up’, I am wondering whether the position would alter at all if the client was to sell A Limited. This could be either to his wife or to an unconnected third party at market value, thereby extracting funds as capital without, in fact, liquidating the company. This would be before setting up B Limited.

Could Taxation readers share their views on the matter?

Query 19,635– Ted.

Down under

Domicile and UK tax issues on an expatriate’s estate.

I have been engaged to provide UK inheritance tax advice in connection with the estate of an expatriate who emigrated to Australia and died there.

The deceased drafted an Australian will and appointed a partner in an Australian law firm and his widow, who continued to be UK resident, as his executors. My engagement has been a joint one with both executors who signed my letter of engagement.

The advice concerns the domicile of the deceased and the possible liability to UK inheritance tax. The deceased did not leave any UK land-related property.

Because this is a joint appointment by one UK resident executrix and one Australian resident executor, should VAT be charged on my fee?

I look forward to receiving advice from readers on this matter.

Query 19,636– Adviser.

Deed of trust

Structures for holding buy-to-let portfolios.

A client has several buy-to-let properties which are held in his own name and in the joint names of himself and his wife. He also has several companies which are mainly investment companies, each holding one or two properties for rental purposes along with some companies that will develop property.

He is finding it difficult to obtain finance for future buy-to-let residential properties if these are purchased in a limited company. It has been suggested that he buys the property personally and then uses a deed of trust to split the beneficial interest from the legal ownership whereby a company would receive the rent. The rent would be taxed in the company at 19% rather than on him personally at 40%.

I do not think the idea is a good one for the following reasons.

  • Would HMRC accept a deed of trust as an instrument to split the capital ownership from the related income?
  • If the director is a shareholder of the company, do the settlor interest rules apply as he will still be a beneficiary?
  • Accessing the income from the company requires either salary or dividends subject to tax at a further 40% or 32.5% having already incurred 19% in corporation tax.
  • If the income is retained in the company the asset will be subject to income tax on distribution or 20% capital gains tax on winding up.
  • No capital gains tax annual allowance is available on the subsequent sale of properties because the chargeable gain on the property would be taxed in the company first and then on distribution to the shareholder.
  • The income in the company will not be available for a company contribution to a pension.
  • The mortgage will be held personally, so the interest would not be deductible in the company. The loan repayments will need to be made by the director personally so the income in the company will need to be paid out of the company.

I would be interested to hear from Taxation readers on whether the proposed use of a deed of trust is the best solution and whether there might be better alternative structures to hold buy-to-let portfolios.

Query 19,637 – Brickie.

Apportionment scheme

Calculating the output tax of a sole trader business.

I have taken on a new client who trades as a confectionery, tobacco and newsagent business. He has three different stores under the same legal entity of a sole trader. The business is VAT registered and has always used apportionment scheme 1 to calculate the output tax payable in each period.

However, the client’s total annual turnover is £1.2m excluding VAT and has exceeded £1m for the past eight years. This would seem to suggest that he should not be using this scheme. My initial thought is that it seems unfair that HMRC does not appear to increase the scheme thresholds for inflation.

Is it relevant that no single store exceeds an annual turnover of £1m?

I have agreed with the client that, for future returns, he will use a point of sale scheme to calculate his output tax. But do we need to worry about past returns? There is probably not a lot of difference in the VAT liability owed between the two methods.

Readers’ thoughts are welcomed.

Query 19,638 – Jones.

Issue: 4762 / Categories: Forum & Feedback
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