Regular gifts
With the impending imposition of IHT on pension fund holdings, I am looking with more interest at the ‘normal expenditure out of income’ exemption. From recent experience as an executor, I know that IHT 403 is a difficult form to complete when the main witness is dead, so I hope to encourage clients to fill it in while they are still alive.
This is not as straightforward as I had hoped. Take a married couple where the husband has a larger retirement income. He gives a regular amount to his wife, and they both put some money into a joint account, out of which household expenses are paid. His gifts to his wife are IHT-exempt, but do they reduce the available ‘surplus income’ out of which he can make exempt regular gifts to children? And how do I deal with the sharing of household expenditure? I hope that the end result is that he clearly has enough income to make the gifts exempt, but what if it is close?
Any helpful suggestions or experience would be welcome.
Query 20,683– Baffled.
A bridge too far?
Our client operates a property business as a husband-and-wife partnership. I am satisfied that this constitutes a genuine trade, as they are full-time in the business with several properties, including a few HMOs, meaning the 20-hour Ramsay scenario is met.
My query relates to the outstanding mortgages. The original purchase price of all properties is approximately £1.2m, with a current market value of £5.7m and outstanding mortgages of around £2.1m.
The proposed plan is as follows. The partnership will secure a bridging loan of £2.1m, which will be used to repay the individual mortgages. The properties (there are no other assets) will then be transferred into the incorporated PropCo along with the bridging loan. Subsequently, PropCo will refinance with a mainstream lender to repay the bridging loan.
I am aware that liabilities are generally treated as non-share consideration and could potentially trigger an immediate capital gains tax (CGT) charge. To mitigate this, I am considering obtaining a non-statutory clearance from HMRC confirming that TCGA 1992, s 162A would apply and that the liabilities would be disregarded.
My concern is that the original purchase price of the properties is £1.2m, while the outstanding debt is £2.1m, effectively creating a negative partner’s capital (similar to an overdrawn director’s loan account in a company). Could this result in the partners’ overdrawing of approximately £900,000 being chargeable to CGT, even if s 162A applies? Is there an alternative solution to this other than repaying £900,000?
Query 20,684– Landlord.
A retirement conundrum
We have several clients who were architects, accountants, solicitors, etc for many years. After retirement they continue to pay professional subscriptions but have no income against which to set them. Some are paying run-off insurance premiums as well for quite a few years after their business ceased.
Is there a way these costs can be allowed for tax going forward?
Query 20,685– David.
Employment-related loan
The 45% shareholder in a property investment company has recently passed away.
The deceased’s estate will bear a considerable IHT charge, and due to the lack of liquidity within their estate, it is proposed that the property investment company will temporarily lend some of its surplus cash to the deceased’s executry, so that the executry can fund a shortfall in the cash it has available to fund the IHT liability. This will be done on an interest-free basis.
It is accepted that the loan will fall within CTA 2010, s 455, though due to the timing of the company’s year-end, and the expectation of the loan only being required for six months or so, an actual s 455 corporation tax payment will not be required.
The question, though, is whether a beneficial loan income charge tax will arise under the ITEPA 2003, s 174(1)(2) provisions.
In this regard, it should be noted that the other 55% of the property investment company is owned by the deceased’s adult son: he and his late father were the two directors of the company.
Can the loan be linked to the son’s directorship, meaning the son will suffer a beneficial loan income tax charge? Whether it makes a difference or not, the son is an executor of his father’s estate.
We would assume that if, instead of the son, an otherwise unconnected person was a director and had owned the other 55% of the property investment company, a beneficial loan income tax charge would not arise.
Leading on from that, we could envisage a situation where if such an unconnected person had owned the other 55% of the company, they might still have been prepared to allow the company to make an interest-free loan to the executry: by enabling the deceased’s estate to settle the IHT liability, it would expedite the executry being able to deal with the 45% shareholding in the company, which would be to the 55% shareholder’s advantage.
So, we are not sure of the extent to which the son owning the other 55% of the company, and being a director of it, is relevant to the tax analysis of whether a beneficial loan income tax charge applies.
Readers’ thoughts would be appreciated on whether a beneficial loan income tax charge would arise in these circumstances.
Query 20,686– Puzzled.
