ASK THE EXPERTS

I am buying a house which has been converted into 5 two-bedroom flats for £280k. £20k of the purchase price relates to Fixtures and Fittings. This includes cost of the fire alarm, sprinkler system, burglar alarm, boilers, carpets and lighting systems.

A. As the law currently stands there is no tax relief for such items. Such items are capital expenditure, in the same way that the building itself is, and so do not qualify for relief. Were these items in a commercial property or a holiday let, rather than a residential property, capital allowances would be due, but these are not given to residential properties.

The tax relief for such items, which are termed ‘integral features’ in residential property, is currently being reviewed and is likely to change from 6th April 2016. So it is possible that next year you will be entitled to some measure of relief, although if the rules were changed we would suspect that the change would apply only to expenditure incurred after 5th April 2016.

Q. My client holds a half share of his home with his unmarried partner who lives there with him as the other joint owner as tenants in common. He would like to gift his half share to his partner now in order to give her security and also in an attempt to save IHT, assuming he survives 7 years. Is this a gift with a reservation of benefit or does it come within the exception given when the donee and donor continue to live at the property? Can the donor give the whole of his half share or only part of it?

A. If the client gifts his half share of the house but continues to live there this will be a reservation of benefit unless he pays a market value rent as consideration for his occupation. This is because he would then own none of the house but would still be living there.

If he currently owned 100% of the house, he could give 50% away and continue to live there without there being a reservation of benefit because he would still own that part which he is deemed to be occupying. But to occupy 50% without owning at least 50% is a benefit.

Leaving his 50% to his partner in his will or converting the ownership to joint tenants so that his share passes automatically to his partner would give her the desired security or they could get married to ensure that they would benefit from the ‘surviving spouse’ exemption.

Q. I am a bit confused and I would appreciate some definite guidance if possible please. A UK VAT-registered business sells VAT-SR goods electrical equipment (not ESS services) via Amazon Market Place. Is VAT charged in line with normal rules, i.e. 20% on sales to UK and EU (unless VAT number given) and 0% on exports? Or are there different rules for Amazon sales?

A. The Amazon Market Place is just a platform to bring sellers and buyers together. Your client is selling directly to the customer in exactly the same way as if the customer visited the client’s website or the transaction were done face to face so the VAT treatment is exactly the same as normal.

I included the full original cost of the car per invoice in the capital allowances computation and have been using the appropriate WDA each year Appropriate Interest charged in the P/L account.

It is a type of HP agreement which has a balloon payment to buy the car outright which our client is going to do. Since the car is in the accounts at full cost presumably the balloon payment does not need to be included in the accounts?

A. UK GAAP, now FRS 102, requires you to capitalise the value of all future capital payments under the lease/HP agreement. So you should have already reflected the final balloon payment in the carrying value of the car in the balance sheet. So the double entry for the final payment ought to be Cr bank, Dr HP creditor.

If you have not done this and won’t have any creditor to offset the balloon payment against, it still needs to be reflected in the accounts; otherwise, they won’t balance: you are going to Cr bank with the payment so you need something to debit.

If the car were sold in the same year as the balloon payment, we would suggest you debited the ‘profit/loss on sale’; otherwise, you should add it to the cost of the car in the balance sheet. For tax purposes the payment will reduce the balancing charge/increase the balancing allowance on sale.

Q. Company with offices based in city A rents a flat in city A which is used occasionally (on average 2–3 days a month each) by the director and an employee who are based in city B. Those employees have their own houses where they live in city A (they work from home) and they travel to the company’s premises for meetings etc. Is there a taxable benefit in kind for the accommodation and household expenses? I cannot find any guidance or legislation on this.

A. You need to look at HMRC’s Employment Income Manual (EIM). Relief for travel and subsistence costs and the temporary workplace rules are dealt with at EIM 32000 et seq. You should look particularly at the example in EIM 32091 which we think is the closest to your clients’ situation.

In our opinion, the employees’ permanent workplace is in city A. When they travel to city B, this is infrequent enough (less than 40% of their time is spent in city B) to make city B a temporary workplace. Therefore the employer can meet the travel and subsistence costs without this constituting a benefit in kind.

The main UK sources that in practice are taxable on non-residents are rental income and pensions paid from the UK. Earned income would also be taxable if it arose in the UK, and sometimes dividends and interest can be taxable, but in practice they usually are not.

Technically, residence is determined by reference to whole tax years, so if you returned to the UK in 2015/16, you would possibly be held to be resident for the whole tax year. But in most cases ‘split year’ treatment applies, which means you will become liable to UK tax on your worldwide income from the date you resume residence in the UK, which will probably be the date your plane lands.

It is easier and most definitely cheaper to set up and run a UK trust than an offshore one and, with the array of anti-avoidance provisions that now apply to non-resident trusts, probably no less tax efficient, depending on the circumstances.

Q. I have had a 20-year fight to obtain the freehold of a property that I made a short-term loan on. In 2012, I obtained the freehold in the High Court, after buying out a second mortgage. The property comprises 3 domestic dwellings in poor condition (one large house divided into 3 many years ago) which have cost me about £400k, not including legal costs. But I have obtained outline planning on some of the land for 4 dwellings and have been offered £600k for this land. The area is probably less than 1.5 acres with a drive across the plots to the existing dwellings. I have put the titles into joint names with my wife and am trying to find ways of getting the sale into two years so that we can get the CT allowance. Are there any other options available?

A. Do you have any other close relatives such as children you could gift a part share in the land to? A gift to anyone other than your wife would be a disposal at market value so would give rise to a capital gain against which you can use your annual allowance. You would not need to gift an equal share just sufficient to crystallise a gain of £22,000. This gift would be made in this tax year and then the three of you would make the sale to the third party in the next tax year. The recipient of the gift would make little or no capital gain next year because there would be little difference between their base cost (this being the market value at the time of the gift) and the subsequent sale price, and you and your wife would receive £22,000 less so would be taxed on £22,000 less.

Q. Spouse and I (both only-UK citizens) have joint whole of life assurance policy offshore (CMI), which has grown in value over the decades from 40,000 to 240,000 value in GBP, though it is denominated in USD funds. It is not in a trust, though it could be if helpful. (Sadly, it cannot be in an excluded property trust.) Apart from spouse’s £30,000 UK pension, it will be our main pension provision. We are 5–10 years away from retirement.

With the new pension freedoms, would it be financially astute to begin transferring it into two (spouse and self) UK pensions? We intend to retire in the UK; though, being an international family, this could change. This would seem to offer: reduced currency risk, significant govt uplift on pension contributions, 25% tax-free sum, no IHT until aged 75 and reduced estate value. How do the benefits of putting it into a UK pension compare with benefits of keeping the CMI policy? (Regarding the latter, is it correct the encashment would be treated as return of capital and hence subject to capital gains once annual CGT allowances had been exceeded?) Would transferring a portion rather than the whole have any advantages? We would be interested in flexible drawdown whatever the case.

The first thing to understand is the taxation of the insurance policy profit. This depends on the exact nature of the policy. It is possible, depending on your product, that a withdrawal will be assessed to income tax to the extent that the amount withdrawn exceeds 5% of the £40,000 originally invested per year of the policy. So if the policy has been owned for 30 years then £2,000 × 30=£60,000 of any withdrawal would be tax-free as a return of capital, but the remainder would be taxable. With income tax rates at up to 45% you need to be certain what sort of policy you have before taking any action. So you need to get the insurance company to confirm the tax treatment of the particular product you have. Is it worth paying a tax charge now so that you can receive 25% of a pension fund tax-free when you retire?

The next consideration with whether you have employment income or self-employed earnings. You will only get tax relief (govt uplift, as you term it) on the contributions to a pension if they are funded out of earned income and even then you are limited to relief on £40,000 each per year (less if your income is more than £150,000), so the switch would have to be phased over a number of years.

You are correct that there is no IHT on the value of the pension fund if you die before age 75. This is also true if you die over 75, but the income tax treatment for the successor to the pension is less good if you die at over 75. How much of the fund will remain by the time you reach 75 if it is your main pension provision?

Your investment grows tax-free in a pension and tax-free in an offshore insurance policy, so in that sense there is no difference between the two investments. Rather than just the tax consequences, you need to compare the investment returns and management charges of each product and decide which offers the better return, but investment advice is something we are not qualified or legally permitted to give.

We have asked HMRC for details of the option to tax date and other information but as yet have not had a reply, other than making reference to their numerous leaflets.

If you refer to Section 3.5 of that leaflet, you will see that in many circumstances the option to tax does not apply where the property is being let to a charity. Section 3.5 tells you what these circumstances are. Assuming the conditions are met ,the client should not have been charging VAT to the charity in the first place, so should claim a refund from HMRC of the VAT it has paid over incorrectly (going back up to four years) and should then refund that VAT to the charity.

If the charity does not fulfil the necessary conditions, it will not be possible to withdraw the option to tax until it has been in force for 20 years. Section 8.3 of the leaflet talks about when it is possible to revoke under this rule and what the client must do to revoke the option.