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New queries: 12 August 2021

09 August 2021
Issue: 4804 / Categories: Forum & Feedback

Employee ownership trusts

Tax relief on merging two employee ownership trusts.

My client company is 100% owned by an employee ownership trust (EOT) for several years. I also act for the trustees.

The trustees are considering selling the company. I am comfortable with the overall capital gains tax implications when the trustees sell but there is one quirk here on which I would appreciate readers’ views.

One of the prospective purchasers is itself another EOT. If the trustees were to sell the entirety of their shares to another EOT, how would this be treated for tax purposes?

A plain reading of TCGA 1992, s 236P seems to suggest the trustees are treated as disposing of and immediately reacquiring the shares pre-sale. If so, capital gains tax would arise in exactly the same way as if they sold to a limited company.

This does feel counterintuitive because the intent of the legislation is presumably to encourage the use of EOTs. As such, surely merging with another EOT ought to result in a preferential tax position. I wanted to check that I am not missing some relief designed to cover this scenario.

I look forward to readers’ views.

Query 19,803 – Uncertain.

Main residence

Only or main residence relief on house and converted garage.

One of my clients has purchased, together with his wife, a property which has been the family home. It cost £265,000 in 1996 and is now worth in the region of £1.4m.

They are in the process of converting the garage into a one-bedroom apartment which will have a separate entrance and an outside space at the back which will be decked out. The estimated conversion cost is £60,000. The plan is to rent out this apartment for a few years with rental income estimated at £13,000 to 14,000 a year.

My client expects to sell the apartment in about five years’ time (retaining the main house). Only or main residence relief will be restricted but will some relief be due for the period before the garage conversion?

Just to complicate matters my client and his wife were out of the country from July 2018 to March 2020 and the whole of the property was rented out to third party tenants during that period.

I would be interested in readers’ views on the extent to which only or main residence relief will be available but also on any steps that my client could take now to make the computation of the disposal easier when it comes to completing the tax return. For example, would a valuation of the house without the garage at the date the conversion is finished be helpful?

Query 19,804 – Garage Man.

Group relief

Transfer of asset by dividend to parent company.

My client has a corporate group in which one company has a deficit on reserves but has an asset which it would like to transfer via a dividend in specie to its parent.

To do this it needs reserves at least equal to the cost of the asset and so at the moment it cannot declare a dividend.

The company has traded at a loss and could surrender the loss as group relief. It has been suggested that the claimant pays for the relief in full based on the amount of the loss, not the tax effect (ie, for every £100 of loss it pays £100 not £19). This would produce a credit to the tax charge in the subsidiary and would create positive reserves, thus enabling a dividend in specie to be paid.

This sounds good in theory, but does it work in practice? Are there any issues, either from an HMRC or company law perspective of which my client needs to be aware?

Query 19,805 – Optimist.

Golf entry fees

Is there VAT on golf competition entry fees?

My client trades as a limited company and organises golf competitions for good quality players. For a typical tournament, each player will pay an entry fee of £500, and this will be allocated as follows:

  • £300 is allocated to a prize fund – two-thirds of the pool goes to the tournament winner and one-third to the runner up;
  • £50 is paid to the caterer for a three-course meal after the tournament;
  • £150 is retained by my client’s company as its profit and to cover other costs, such as green fees, to the club hosting the competition.

My understanding is that as far as the VAT registration threshold is concerned, the relevant figure in the above example is £200 because the competition fund is outside the scope of VAT.

This seems logical but I do not want to find myself in a big VAT bunker as the business is growing. If the relevant figure is £500, do readers envisage any problem with my client incorporating a second company, with one company doing men’s competitions and the other women’s competitions, ie a business split with each company having annual sales of less than £85,000?

Query 19,806 – Bunker Man.

Issue: 4804 / Categories: Forum & Feedback
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