Can input tax be claimed on house improvements?
One of my clients has incorporated a limited company and purchased a derelict house at an auction. He is spending £350,000 on the property to renovate and improve it and originally planned to sell it after the work had been completed. However, the downturn in the property market and adverse economic situation generally means that he is thinking of renting it out for perhaps five to ten years and then selling.
My advice was that he could not register for VAT and claim input tax because any rental income and selling proceeds would be exempt. However, a colleague has suggested that the location of his property – in the centre of a popular tourist city – would make it ideal for temporary lettings, ie an Airbnb type of arrangement. This income would then be taxable, he said, and my client could therefore register for VAT and claim input tax. My questions are threefold:
Is my colleague correct in his opinion?
- Could we backdate the registration to when the company purchased the property?
- Am I correct that my client would need to opt to tax the company’s interest in the house and also consider the capital goods scheme because the spend exceeds £250,000 excluding VAT?
Query 20,727– Speculator.
Preserving the family heritage
My client’s father has just died at the age of 95. He was a man of modest means, but he did own one painting, which he had purchased in a junk shop 70 years ago for a few pounds that turns out to have been worth about £100,000 at the time of his death. In his will he left the painting to my client but said to him – nothing was put in writing – that he would like the painting to remain in the family as a permanent memorial of his life.
What is the best way of achieving this? Should my client set up some sort of family trust or is it better simply for each person to leave the painting to the next person in their will? Or could the father’s will be rewritten retrospectively via a deed of variation to set up the trust immediately on death?
Any suggestions that readers can give me would be greatly appreciated.
Query 20,728– Constable.
Partnership tensions
I act for a longstanding partnership of two married couples, Mr and Mrs A and Mr and Mrs B. The partnerships carry on a successful trade as kitchen designers and fitters. Historically the partnership profits have first been divided 50-50 between the A and B families and then each couple has agreed a split of their 50% between them. This final allocation between the four is then used to allocate profits in the partnership accounts and tax returns. It has worked well for many years. I act for the partnership and all four individuals.
However, Mr and Mrs B are now involved in an acrimonious divorce. I am trying to get the accounts finalised for the year to 30 September 2025. The profits are agreed but Mrs B refuses to agree anything about the profit share for that year and everything has ground to a halt.
Understandably, Mr and Mrs A are very frustrated with this – they know what their 50% share of partnership profits is and have agreed an allocation between them. They want to submit their personal tax returns, but I have told them that until the partnership allocation is agreed by all four partners, there is nothing that can be done. They can’t treat ‘their half’ of the partnership in isolation.
Is there anything here that can be done or are Mr and Mrs A completely dependent on Mr and Mrs B sorting things out? If they can’t all agree, I might be forced to cease acting because of the conflict of interest.
Query 20,729– Piggy in the Middle.
Making tax digital confusion
My clients are gradually waking up to the reality of making tax digital (MTD). One client has suggested that she can avoid being in MTD by forming a partnership with her spouse – he has another full-time job, so his involvement in the partnership would be nominal and he would be entitled to, say, 5% of the profits. A partnership agreement would be drawn up. The client has always had turnover in excess of £50,000. Partnerships are outside MTD, but MTD has already started.
If the partnership were to be formed on, for example, 1 July this year, what MTD obligations, if any, would my client have? Given that the partnership would have been formed before the first MTD filing was due, does that mean that she would have escaped MTD completely, or has she left it too late?
I would welcome readers’ views on this.
Query 20,730– Procrastinator.
Queries and replies
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