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New queries: 5 November 2020

03 November 2020
Issue: 4767 / Categories: Forum & Feedback

Remittance basis

Tax basis on non-dom children’s annual income.

My clients, a married couple, are returning from working overseas with their two minor children. The mother is UK domiciled, but the father (and, therefore, each of the children) is domiciled in Cyprus.

The couple have made investments (contributing equally) on behalf of their children that give rise to annual income that is in excess of the limit in ITTOIA 2005, s 629 (£100 a child for each settlor), with the effect that it will be taxable on the settlor parents. The income is, however, less than £2,000 a child, which would mean that the remittance basis would apply automatically if it were taxable on the non-domiciled children directly.

I suspect this is not the case, but I do wonder if this gives the UK domiciled mother access to the remittance basis, and the father automatic remittance basis access, in respect of this income.

I would welcome readers’ thoughts.

Query 19,655 – Walter.

Offshore funds

Calculating excess reportable income on tax return.

My client invests in offshore funds and has ‘excess reportable income’ (ERI) to report on his tax return. ERI is excess income which has not been distributed by the fund. The relevant legislation is the Offshore Funds (Tax) Regulations 2009/3001, Pt 3, ch 8, reg 94. ERI is a notional distribution, not an actual distribution of income, but it is taxable.

The legislation says that the ERI is to be treated as paid on the fund’s distribution date, which is six months after the fund’s reporting year end. An offshore fund that had a year end of 31 December would therefore have a fund distribution date of 30 June. The ERI is taxable in the tax year that the fund distribution date falls into.

I need to convert the ERI to pounds sterling (GBP) because it is in foreign currency. I have carried out some research online into the question of the date to be used for the exchange rate, but the fund managers give conflicting advice. Some say it should be converted on the fund’s distribution date, being six months after the fund’s year end. Others say that it can be converted on the dates that the fund made actual distributions because that is when the ERI arose.

The actual distributions are likely to fall into the tax year before the fund distribution date, so if this method is followed, it could mean using a conversion rate based on a date(s) which falls into one tax year, but the notional distribution could then be reported on the tax return for the following tax year, into which the fund distribution date falls. This seems illogical to me.

I cannot find anything on this in the Offshore Fund Regulations, or in the HMRC manuals. Can readers please advise how I determine the date to use for the conversion of the ERI to GBP?

Query 19,656 – Grandad.

Funding gap

Potential future claims against business premises.

My client runs a successful trading company which has accumulated substantial reserves and is currently enjoying a period of growth.

As part of their expansion plans, they are seeking to acquire business premises. They are looking at ring fencing the risk from potential future creditor claims against the business premises to be acquired. Apart from the obvious solution of owning the property personally, which would require the extraction of funds from the company through the dividend route, I have come up with the two following possibilities.

  • Form a holding company, after obtaining the usual clearances, and pay a dividend up to the holding company to fund the property acquisition, with additional funds required being by way of bank borrowings due to the cost involved.
  • Set up a parallel property investment company (PropCo) which would receive a loan of, say, £500,000 from the main trading company. The balance of funds required to purchase the premises of, say, £1m would then be borrowed within PropCo. The idea would be that the inter-company debt between the two companies, which would initially be interest-free, would be waived in, say, two years’ time. Under the provisions of CTA 2009, Pt 5, it would seem that no tax debit or credit would arise within either company.

Can Taxation readers comment on the proposed options?

Query 19,657 – Partridge.

A bridge too far?

Input tax on the costs of bridge maintenance.

I act for a VAT-registered husband and wife partnership who trade as a rural café in the Lake District. They also own a bridge near the café, which collects toll fees. No VAT is accounted for on these toll fees because they are earned through a separate legal entity with their children that is not VAT registered; in other words, the annual turnover is less than £85,000.

In the past, all of the repair and maintenance costs for the bridge have been paid for by the separate entity, but a large task now needs to be carried out which will cost £20,000 plus VAT.

It has been suggested that the café should pay half of this cost because the bridge is one of only two routes to the café because of its remote location.

My thinking is that the partnership should engage the builder and fully claim input tax, making an onward charge of £10,000 plus VAT to the separate entity that collects the bridge fees – in other words, for half of the cost.

Do Taxation readers see any problems with this approach?

Query 19,658 – Bridget.

Issue: 4767 / Categories: Forum & Feedback
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