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Capital value
Capital gains tax implications of property rents.
I am looking at a situation where my client is making a gift of an undivided share in a property.
The intention is that he will not occupy the property but will retain the rental income from it. Therefore, the capital value of the property will pass to the donee, but not the rents.
This might be thought of as a gift with reservation of benefit. However, I am comfortable that FA 1986, s 102B(3)(a) takes this situation out of the reservation of benefit rules. There is also a similar provision taking this out of the pre-owned assets tax (POAT) provisions.
I do not think that my client has an inheritance tax issue here, but I am more concerned about the capital gains tax implications. Presumably, the retention of an income stream has a capital value and so will affect the allocation of the base cost in the capital gains tax computation for the gift. There is also the impact on the market value of the gifted share of the property to consider.
There appears to be little published commentary on the interaction between the inheritance tax and capital gains tax rules. Presumably there may also be a capital gains tax issue if and when the property is sold on terms that the right to income falls away.
I cannot imagine that any third party purchaser would buy a property without the right to the income from it. So, if at the time of the original gift a capital value was attributed to the right to receive income is there some form of capital loss at the point at which donee sells the property?
Am I worrying unnecessarily, or do I need to think about capital gains tax? Any guidance from readers would be much appreciated.
Query 19,735 – Cautious.
Certificates of residency
Chasing certificate of residence to claim tax relief abroad.
Obtaining certificates of residency is a constant battle for my clients. They are often needed with short notice, whether because the foreign jurisdiction suddenly demands them or because my client does not tell me in good time that one is needed.
This has always been a problem area but things have come to a head during the pandemic, not least because clients have often become stuck in the ‘wrong’ country because of travel restrictions.
I have one particular client that needs the certificates regularly for a number of countries. It took six months for HMRC to process the last application and then it ended up sending the wrong documents. I am following the guidance on the HMRC website (see tinyurl.com/2c62vfuy) and am trying both online and in writing but the process is agonisingly slow.
Have readers managed to find a way of obtaining certificates within a reasonable timeframe? Any hints on what I could be doing differently would be much appreciated.
Query 19,736 – Exasperated.
Buy back concession
Unaccounted shares during buy-back.
Several years ago, a client company undertook a purchase of its own shares in relation to a retiring director/shareholder, and Revenue clearance was obtained that the consideration paid for the shares could be taxed as capital.
It seems there was a misunderstanding regarding the number of shares in issue at the time of the buy-back, and it has just come to light that the legal documentation effecting the buy-back did not reflect the entire shareholding owned by the retiring director/shareholder. Only a small number of shares had been overlooked; no dividends had been paid by the company during the intervening years since the buy-back; and the now retired director/shareholder is content that he received the correct amount of consideration for what he and the company thought was his entire shareholding.
The question we have is concerning the ‘tidying up’ of these stray shares that the retired director/shareholder still, technically, owns. The intention would be simply to buy them back for their £1 per share nominal, but we are concerned whether this could cause any difficulty with the capital treatment that clearance was obtained for all those years ago.
We are aware that the Revenue can allow a retiring shareholder to continue to hold a small ‘sentimental shareholding’ after capital treatment has been given on the bulk of their shareholding, and wonder if that concession can be relied upon here.
Any thoughts readers have for the easiest way to sort out this inadvertent mistake would be appreciated.
Query 19,737 – Stray.
Farming partnership
Partial exemption dilemma for farmer.
I act for a farming partnership that has rental income from four cottages as well as arable sales. The business is partially exempt and uses the standard method but normally the exempt input tax is within the de minimis limits, so we claim everything.
However, for the year ending 31 March 2021 there was no farming income because of a bad year for wheat and barley. The partnership has sown winter seed and the year ending 31 March 2022 should have sales of both crops.
This means that the farm will not be able to claim any input tax on general overheads, mixed costs or costs relevant to the cottages in the 2021 tax year because the standard method will give zero input tax recovery on these costs and the de minimis threshold will be exceeded.
This seems unfair – do readers have any suggestions to help our client?
Query 19,738 – Yeoman.
