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New queries: 28 March 2019

25 March 2019
Issue: 4689 / Categories: Forum & Feedback
Coming of age; Free money; New build; Innocent incorporation?

Coming of age

Increase in property invested on behalf of beneficiary.

We have been asked to act on behalf of a trust that was established under the will of a deceased grandparent in 2016. About £200,000 was left on trust to a grandchild beneficiary who was 22 at the time, but could not inherit the capital until aged 25.

The trustees invested the money and purchased a rental property and tax has been paid on the income by the trustees. The beneficiary will soon reach the age of 25 and the property will be transferred directly to the beneficiary.

I have the following questions for readers.

  • The market value of the property has increased by about £30,000 since acquisition so does a capital gain arise on the trustees of £30,000 which needs to be disclosed on the trust tax return?
  • If so, can the capital gain be held over?
  • Are there any inheritance tax implications?

Any guidance on the above would be greatly appreciated.

Query 19,343– Trustman.

Free money

Taxing of incentive payments to switch banks.

Our client, a trading limited company, has their banking and invoicing discounting facilities with Royal Bank of Scotland. The client has recently received a letter from the bank asking them to move their account as part of its ‘business banking switch’ scheme agreed with the government.

Under this scheme the bank will provide incentives to small business customers to leave RBS and move to another bank.

Our client has been offered £25,000 as well as a period of free banking with the new bank if they switch to another bank. We have been considering the various ways that this could be taxed. Can Taxationreaders comment on whether the receipt should be taxed as income or capital, and might there be any reliefs that could apply here?

I look forward to hearing from readers on this subject.

Query 19,344– Windfall.

New build

VAT status of building a log cabin.

A UK client is registered for VAT, and is buying wooden components from Romania which will be shipped to the UK and then constructed as a house in the UK described as a ‘log cabin’.

The foundations are being prepared by someone else and he is arranging for the house to be erected by the same Romanian suppliers. He is not involved in anything to do with the contents, water, waste or electricity that may be installed within the house.

I assume planning permission will have been obtained but, again, my client is not involved with that. He will just be acquiring and arranging for the construction of the carcass and roof of the building.

His supplier in Romania will be charging him VAT. Am I right in saying that if he provides them with his VAT number, they should be able to ship it to him without charging VAT? And if it is a new residential house, will his supply be zero rated or is he treated as supplying materials, albeit they will be erected, and so would VAT be charged at the standard rate?

I do not know whether the building is to be used as anything other than an ordinary residential building, but should my client ask further questions on this issue?

It all seems an odd sort of business so readers’ guidance on the correct VAT treatment would be much appreciated.

Query 19,345– Romany Man.

Innocent incorporation?

Does an incorporation fall foul of anti-avoidance rules?

My client runs a second-hand car business as a sole trader. The land on which he stores the cars was acquired many years ago for about £20,000 but, because of a recent decision by the planning authorities, has increased in value substantially. He has had an indicative offer (nothing formal as yet) to sell half of the land for £1m. Capital gains tax is obviously an issue. One possibility would be to incorporate the business for an issue of shares under TCGA 1992, s 162. The base cost of the business would be rolled over into the shares and the assets would be rebased to market value. This would enable the company to sell the land with little or no gain arising.

I have discussed this with my client and he understands the implications of operating though a company, but is attracted by the potential capital gains tax savings.

I think the technical analysis is straightforward, but I have one concern: the only reason for incorporating the business would be to save capital gains tax and to suggest otherwise would be disingenuous. So, if I suggest a purely tax driven transaction, do I fall foul of the general anti-abuse rule (GAAR) or, more likely, my professional obligations under the rules on the professional conduct in relation to taxation (PCRT)? I would like to think not and that what I consider to be straightforward tax planning is still permissible. But in the current environment nothing seems to be certain anymore.

What do readers think? Am I worrying unnecessarily here?

Query 19,346– Cautious.

Issue: 4689 / Categories: Forum & Feedback
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