New property project: should a separate company be used?
I act for a small building company owned by a client who intends to retire within the next five years. The company has not been VAT registered for many years due to declining turnover; it also owns a residential property that is rented out to long-term tenants. So, for the latest company accounts, building turnover was £56,000 for the year and rental income £12,000.
The owner has now informed me that the company will buy a plot of land and build a residential property on it, which will be sold. I presume that the company will therefore have to register for VAT as the sale of the residential property will be zero rated for VAT purposes? This will also mean that the company will need to charge VAT on other building work it undertakes but that the rental income will always be exempt. This creates another problem with partial exemption issues.
My question is whether my client might be wise to set up a new company for the purpose of building the new residential property, or would HMRC challenge that as an unacceptable case of business splitting, ie because the purpose of the arrangement would be to avoid paying VAT on the building work. There would also be common ownership of the two companies because my client will be the 100% shareholder in both cases. What are readers’ thoughts?
Query 20,651– Speculator.
Is there a disposal or distribution?
A client invested in a US fund that held a single asset – bitcoin. Investors hold shares in the fund and are not connected to each other, except by holding the shares. The fund decided – with no consultation or prior notice – to exchange 10% of the original asset for shares in a sister fund. This would enable the sister fund to operate with lower fees and be more nimble. The client received shares in the sister fund. It is assumed that the transactions took place at market value. The client has a note from the fund saying that the exchange is tax neutral for US taxpayers. Our client is a UK resident investor.
My view is that there has been no ‘disposal’ or ‘distribution’ and instead there is a need to split the original purchase price between the two funds now held. If there is a future distribution or sale, the revised costs will be the basis of the CGT calculation. Do readers agree?
Query 20,652– Split Decision.
Family forgiveness
Twelve years ago, my client realised that her parents had taken out an unfavourable equity release loan secured on the family home. She borrowed against her own house to ‘buy them out’ of this arrangement, paying off that loan over the years from her own resources. She agreed with her parents and siblings that interest on the loan she had effectively made to her parents would roll up and be payable only when the house was sold.
The parents have now both died; the value of the client’s loan was deducted from the value of the house in calculating inheritance tax. She now has a loan with some £200,000 of rolled-up interest that will create a huge income tax liability if she is repaid. She says she does not need the money, and is minded to forgive the loan, or to forgive the interest, to avoid the income tax charge and the need to sell the house to fund it. Setting aside whether this is in her best interests, I am trying to get my head around the tax consequences.
First, if she waives the interest that she is legally entitled to, would that be sufficient to cancel any possibility of income tax? I have heard that interest is only taxable on individuals on receipt.
Second, presumably there would be a potential IHT consequence of any such waiver. Waiving the loan or interest would presumably increase the value of the siblings’ inherited shares of the house, but would it be a potentially exempt transfer (PET) or possibly a non-PET? And can readers think of any other tax consequences?
Query 20,653– Peccavi.
Can interest be paid for previous years?
My client is the sole director and shareholder of their personal service company and has accumulated a substantial director’s loan account. The company has not previously paid interest to the director, who now wishes to withdraw the money from the company. If we assume that this money is withdrawn before the end of the present accounting year end on 31 March 2026, could the company pay interest relating to the previous years in one lump sum?
I believe that the loan account has been accumulating for about ten years, so potentially there may be a fairly large amount of interest payable. Is such a payment in one tax year possible? In theory this seems to be no different to any other fixed term savings account where interest is credited at the end of the term, but am I overlooking any tax problem?
Finally, am I correct to think that the company would have to deduct interest and pay this to HMRC on a form CT61?
I look forward to thoughts from Taxation readers.
Query 20,654– Saver.
Queries and replies
Send queries and replies to taxation@lexisnexis.co.uk. Replies should be submitted by Monday, 11 days after print publication. We pay £40 for each reply published in the magazine and select those which reflect the widest range of answers. As a result, the views expressed are not necessarily our own and so they should be read with a critical spirit. Contributions may be identified by name or a pseudonym. For full T&Cs visit: tinyurl.com/RFguidelines.
