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New queries: 18 June 2020

16 June 2020
Issue: 4748 / Categories: Forum & Feedback

Co-operative trust

Tax implications of ending an employee ownership trust.

Our client’s business is owned by an employee ownership trust. When it was established, it qualified for all the reliefs and the shareholders did not pay any capital gains tax on the sale.

The company is in the process of being sold and the trustees are considering what they should do with the proceeds, which includes making payments to the employees.

Given that the employees are receiving the funds by reason of their employment, we assume that the amounts will be subject to PAYE and National Insurance contributions.

However, will the company be able to obtain a corporation tax deduction on the payments made to the trust now that the employees will be receiving funds? We assume that no inheritance tax will be payable on the basis that payments to the employee will be subject to PAYE. Finally, if the shares had been transferred to the trust at an undervalue, we assume there would have been no tax implications for the employees at that time.

I look forward to replies.

Query 19,579 – Perplexed.

Late developer

Apportioning tax liability on building new houses.

I act for a husband and wife who inherited some farm land about ten years ago, with a probate value of £100,000. They have now acquired planning permission to build five new houses on the site. They plan to do the work themselves and sell the houses when they are finished.

The land is now worth about £350,000 because of the planning permission, so if they spend £500,000 on building costs and sell each house for £250,000, this will produce a very good profit.

My question is whether we could somehow structure the project so that they will pay capital gains tax on the enhanced land value of £250,000, as it was acquired through non-commercial means, which will be at a much lower rate than if the profit is all subject to 45% personal income tax.

I thought about selling the land to a new limited company, with the company building and selling the houses, but this would create an extra stamp duty land tax charge and mean they would have high dividend taxes to pay to draw their profits out of the company.

What do readers think about this?

Query 19,580 – Speculator.

Estate and bare trust

Minimising the capital gains tax arising on an estate asset.

A widow died in March 2020 leaving her estate in equal shares to her three adult children.

Probate has been granted to one of the children as sole executor. The estate is straightforward and all the assets and liabilities have been ascertained and liabilities settled. There was no inheritance tax to pay but a return was submitted to HMRC.

The deceased’s home is still registered in her name. A professional valuation was obtained for probate, but the executor has now been advised of a possible £30,000 post-death increase in value because of its rural setting and suitability for homeworking. Despite this, there would still have not been an inheritance tax liability.

To avoid a capital gain on the executor, I suggested that the beneficial interest in the property be transferred to the three siblings immediately. Their annual allowances will mean no capital gains tax. To save unnecessary costs, the property could be left in the name of the deceased up to the sale, with the executor acting for the siblings as a bare trustee.

The solicitor dealing with the estate seems unsure of the documents required to transfer the property as proposed. Can readers advise on the paperwork needed so that the deceased’s former residence ceases to be an asset of the estate and becomes beneficially owned by the siblings while remaining registered at the Land Registry in the deceased’s name?

Alternatively, has the administration come to an end, with the executor already acting as a bare trustee (for herself and her two siblings). Would a letter from her to the beneficiaries, saying that the administration of the estate is complete and all assets are now held by her on a bare trust for the equal benefit of all three of them, be sufficient? When the property is sold they could each disclose a one-third interest on their respective tax returns.

Are things that easy?

Query 19,581 – Landlord.

Letting agent

VAT liability of rent guarantee insurance.

My client trades as a letting agent acting for residential landlords.

As part of his service, he encourages landlords to take out an insurance policy which guarantees payment of the rent in the event that a tenant defaults on their payments.

My client is charged an annual premium of £90 for each tenant by the insurance company, as long as the monthly rent is no more than £900 and the tenant has passed the usual credit checks. My client then charges £250 to the landlord to cover his time and costs, and gives details about the landlord to the insurance company; in other words, in the event of a future claim.

My question concerns the VAT liability of the £250 charge to the landlord: is this exempt from VAT as a supply of insurance, or is £160 exempt from VAT as my client’s commission? Alternatively, is the payment inclusive of 20% VAT because it is part of the overall property management service offered to landlords?

I look forward to replies.

Query 19,582 – Agent Alfie.

Issue: 4748 / Categories: Forum & Feedback
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