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New queries : 10 September 2020

08 September 2020
Issue: 4759 / Categories: Forum & Feedback

Critical cover

Benefit in kind issues relating to life and critical illness cover.

A client who is an employee has sent me their relevant life policy, which was arranged by their employer. I know these policies are tax efficient because the premiums are not charged to tax or National Insurance as a benefit in kind for the employee. The employer receives tax relief and any payment from the policy is tax free for the recipient.

However, this policy includes what is described as ‘significant illness cover’. I assume this is another term for critical illness cover. My understanding is that premiums for this would not be a tax-free benefit in the hands of the employee.

Does wrapping the critical illness cover in a relevant life assurance policy mean that the whole premium is tax free? Alternatively, must I work out how much of the premium relates to the critical illness element and treat that as a benefit in kind?

I should be grateful for advice on this matter and on any other advantages or disadvantages to such policies.

Query 19,623– Ryerson.

Falling values

Tax complications from falling share values after death.

A client died earlier this year. His estate was worth about £2m, of which a large part comprises quoted shares. Since his death, the stock market has fallen and the shares lost value. We therefore completed a form IHT35 and claimed a repayment of inheritance tax based on the difference between the sale proceeds of the shares and the original date of death valuations. The share values were ascertained for inheritance tax so the same value must now be used for capital gains tax purposes.

The share sale proceeds exceeded £500,000 so a tax return is required. In calculating the gain, there will, in any event, be a loss because the IHT35 did not reflect stockbrokers’ charges and incidental costs of sale, whereas the sale proceeds do. Further, statement of practice 2/04 will increase that loss because this allows for the incidental costs of acquisition by the executors.

In this case, such costs will be £8,000 divided between the assets in proportion to their probate values. My problem is that the probate values of the sold shares have now changed so, presumably, I must recalculate the total value of the estate to get to the new and correct denominator in my fraction, rather than use the original probate value. Is my understanding correct? Also, should the approach be different if the shareholdings have been assigned to the beneficiaries before sale rather than being sold by the executors?

I look forward to replies.

Query 19,624 – Bear.

Spanish tax problem

Tax credit position on expat’s UK dividends.

A UK national emigrated to Spain a few years ago and has been non-UK resident for 2016-17 onwards. His main source of income is substantial UK dividends from a controlling interest in a UK-based manufacturing company. This has been reported on his UK tax return as excluded income, so is not subject to UK income tax.

He is in dispute with the Spanish tax authorities. As a non-resident he is, by ITTOIA 2005, s 399(2), ‘treated as having paid income tax at the dividend ordinary rate on the amount or value of the distribution’. In essence, this seems to be a straightforward dividend tax credit and I suggested it may be possible to claim double tax relief for this on his Spanish tax return because the UK considers income tax to have been paid.

The Spanish tax authorities are seeking to tax the whole of the dividends received as gross income. They argue that a tax credit is not available because there is no evidence of the tax having been paid. This does not seem right. In the pre-6 April 2016 days there would have been a visible tax credit on the dividend voucher which one presumes would have been sufficient evidence of a tax credit, although it is not an actual tax deduction as such.

When dividend tax credits were abolished in April 2016, the requirement to issue a tax certificate under CTA 2010, s 1106 was amended to exclude reference to tax credits, so it is not even possible for the company to issue a tax certificate making reference to the 7.5% tax. This makes sense as the company is not expected to know the residency status of the individual shareholder.

I always assumed that the intention of s 399(2) was to prevent non-residents suddenly facing increased foreign tax bills due to the withdrawal of the 10% credit.

I appreciate that this is more of a Spanish tax issue, but if a credit for the 7.5% income tax is not available for relief against foreign tax then it begs the question: what is the purpose of s 399(2)?

Query 19,625 – Confused.

VAT on a vintage vehicle

VAT on the sale of a secondhand bus.

A client buys and sells buses and incorporated his business some years ago after having previously operated as a sole trader.

The sole trader business owned a vintage bus which it transferred to the company with a value of £25,000. It is now being sold for £20,000 to a private buyer. The client cannot remember how much he paid for the bus and whether he paid VAT when he bought it in 2009 (he thinks not). He only keeps his business records for six years.

Can the company ignore VAT because it is a secondhand vehicle being sold at a £5,000 loss, so no margin tax is due?

If this is incorrect, how should the company deal with VAT on the sale?

It seems wrong to charge 20% VAT, although the reality is that the sale will be for £20,000 including VAT as this is the buyer’s final offer, so to speak.

Readers’ thoughts are welcomed.

Query 19,626 – Olive.

Issue: 4759 / Categories: Forum & Feedback
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