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New queries: 17 December 2020

15 December 2020
Issue: 4773 / Categories: Forum & Feedback

Estate administration

Inheritance tax and capital gains tax on probate property.

We are regularly asked to advise where a property is the main asset of the estate of a deceased surviving spouse. The executors often ask us how to balance inheritance tax and capital gains tax on a sale out of an estate in administration, if indeed it is possible.

We have never been completely clear about the rules. We understand about appointing a property to individual beneficiaries before sale to enable personal capital gains tax allowances to be brought into play.

However if, for example, we have a non-inheritance tax paying estate we are not completely clear about the possibility of putting a higher sale price back for probate purposes, when a lower estimate has already been used. In other words, adjusting it to fit.

Taxation readers’ views would be much appreciated.

Query 19,679 – Querist.

Employment ownership scheme

Qualification and participation in an EOS.

Following on from last week’s article by Tom Klouda, Paul Brown and Daniel Andreca, ‘Envisage employee engagement’ (Taxation, 10 December, page 12) which I read with interest, I have two highly technical questions. I have received conflicting advice concerning employee ownership schemes as I am currently thinking about selling my company into one.

Over the years we have built up large cash reserves, but in any ‘normal’ sense we are a trading company and meet all the other conditions. Is there any case or taxation law where HMRC has challenged whether a company is ‘trading’ as a result of it having large cash reserves?

My second question concerns look back periods and options. One of my employees was granted an enterprise management incentive (EMI) option over 10% of the share capital of the company which he is not allowed to exercise until next year. Since this would invalidate him as a participator in the new employee ownership scheme we are going to lapse or cancel the option. He has had no benefit from the option. My question is if we lapse or cancel it can he still be a participator in the employee ownership scheme?

I hope readers can give me some additional reassurance on these particular concerns.

Query 19,680 – Puzzled.

Offshore trust

Tax on capital distributions from an offshore trust.

I have recently been appointed to act for a client who, along with his father, is the beneficiary of what I understand is a discretionary trust based in the Isle of Man. The trust was set up by my client’s grandfather who is resident and domiciled in South Africa. My client and his father are UK residents and are both domiciled here.

Income from the trust has been declared on my client’s self-assessment tax return, but I understand that a substantial capital distribution has been made in 2020-21. The client wants to use this to buy a new house in the UK and has asked for advice on how much he should put aside from this distribution on account of any eventual tax liability in respect of it. I do not know the exact source of the capital paid to my client from the trust, but suspect that it is from the sale of investments which probably includes shares and perhaps overseas property.

I should be grateful for advice from Taxation readers as to the general principles in play here. Does my client have a potential tax liability, or would this be the trust’s liability in the Isle of Man, with my client simply receiving a cash distribution? Alternatively, must one look through the trust so that my client may then have a UK capital gains tax liability?

I have not previously dealt with such a scenario and would like to know whether this is something for which I will have to prepare calculations or is there simply an offshore liability (if at all) in the Isle of Man, with my client only receiving cash that is UK tax free in his hands?

I look forward to replies.

Query 19,681 – Adviser.

Consultancy services

VAT dilemma on work for ski company.

I act for a UK client who provides consultancy services to a ski-slope business in Norway, mainly linked to health and safety issues.

We have treated the income as being outside the scope of VAT so my client has never registered. But HMRC has challenged this situation, saying my client should have registered for VAT six years ago because he uses the services of a buying expert to help him – the buyer is based in Iceland.

My client has always paid the Icelandic expert two payments each year of £50,000 each. Surely there cannot be a UK VAT problem for my client because both Iceland and Norway are outside the UK? If there is a VAT issue, how should this be solved? And can HMRC go back six years – I thought the time limit was four years?

Taxation readers’ thoughts on this would be very welcome.

Query 19,682 – Safety.

Issue: 4773 / Categories: Forum & Feedback
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