Confusion with property deal; can the situation be salvaged?
I have taken on a new client, whose previous adviser did not understand the rules on VAT and property and, most importantly, the option to tax. Here are the circumstances:
- The client owned a commercial property for 15 years and charged VAT on the rental invoices issued to the tenant on the basis that an option to tax election had been made with HMRC, also claiming input tax on the related expenses.
- The property was sold earlier this year for £800,000, with the tenant still in place. The previous adviser got written confirmation from HMRC that, in fact, an option to tax form had never been received from my client for that building, so the adviser told the client to treat the sale as exempt from VAT.
- The buyer has continued to rent out the property since it was purchased, has not opted to tax and not registered for VAT, treating their rental income as exempt from VAT.
A colleague said that my client should apply to opt to tax retrospectively with HMRC on the basis that the rental charge plus VAT was evidence of the decision being taken. However, will that not mean that the client is liable to pay HMRC 1/6 of £800,000 as an output tax error? My concern is that my client has applied different VAT treatment to the rental income and the selling proceeds, which cannot be correct. What do readers suggest?
Query 20,639 – Muddled.
Bolt from the blue
We acted for an estate that was wound up and distributed eight years ago. Inheritance tax was payable on the estate.
Out of the blue, we have received a letter from a major high street bank saying that it has reviewed the bank accounts the deceased had been advised to invest in, and believes incorrect advice was given. Had the correct advice been given, the deceased would have been £35,000 better off. Therefore, the estate is now to receive £35,000 as compensation.
Do readers consider the receipt is subject to IHT or is it outside the scope as it was not an asset at the date of death. If it is not with the IHT charge, is it subject to income tax? Or can we ignore taxation and distribute?
Query 20,640 – Windfall.
Corporate restructure riddle
A capital reduction demerger is to be undertaken involving the split of two trades currently being carried on by a trading company, using the accepted approach of a new holding company being placed above the existing trading company, with the new holding company issuing the required number of shares with a nominal value that matches the market value of the trading company.
Due to a lack of reserves, the assets and liabilities of ‘trade 1’ are to be transferred up to the holding company on loan account, which means the holding company then owes its trading subsidiary and amount equal to the value of which has been transferred up to it.
One individual will have a controlling interest in both the holding company and the new company to which the trading subsidiary (now just holding ‘trade 2’) will be demerged through the capital reduction procedure.
The current thinking is that the loan between the holding company and the trading company will subsist after the demerger has taken place.
Our question concerns the possible future write-off of that loan. We understand it will be ‘corporation tax neutral’ due to the common control of both the holding company and the new company that now owns the demerged trading company; however, could the write-off of that loan be regarded as a distribution to the shareholders (who are all individuals) of the new company that will then own the demerged trading subsidiary? If so, would it be preferable for the loan to be written-off as part of the capital reduction demerger restructuring process, while the holding company and trading company are still grouped, immediately after the ‘trade 1’ assets and liabilities have been transferred up to the holding company, but before the capital reduction demerger takes place?
We would rather the loan was kept in place, leaving a decision on whether all or part of it is written-off to perhaps one or two years down the line, but we are concerned that deferring the decision could prove costly if the new company’s shareholders are then taxed on the loan write-off as a distribution.
Readers’ thoughts would be appreciated.
Query 20,641 – Puzzled.
More on long-service awards
I read the answers to query 20,556 (Taxation, 31 July 2025) with interest: it appears possible for a personal company to give a long-service award to its owner/director within the concession that makes such things tax-free, provided the HMRC limits are observed (at least 20 years’ service, value not more than £50 per year, no previous award within 10 years, not cash or exchangeable for cash). The suggestion was that retailer vouchers would ‘work’.
I have a client who is interested in the idea, but is not much of a shopper: he wonders if his company could instead pay for a holiday, and if so, would it be necessary for the company to pay the whole of the bill (within the limits) or could it pay (say) £1,000 to the holiday company and he would pay the balance of a more expensive trip? Alternatively, could the company buy a ticket for air travel, as long as the ticket was non-refundable (possibly exchangeable for different flights, but not convertible into cash)?
Readers’ views would be welcome.
Query 20,642 – Gulliver.
