Tax Clinic May 2009: Spanish Property, PPR, CGT, Pensions In Trust, Undeclared Income in an Estate

In his May tax clinic, Malcolm Finney reviews some more forum queries, and the tax issues arising therefrom: Taxing Spanish Property, PPR Relief and Inter-Spousal Transfers, Possible CGT Trap for Assets in Probate, Taxation of Pensions in Trust, Value in an Estate from Undeclared Income

This month’s clinic looks at FIVE issues:

1. UK TAXATION OF SPANISH PROPERTY OWNED BY UK RESIDENTS
2. PRINCIPAL PRIVATE RESIDENCE RELIEF AND INTER-SPOUSAL TRANSFERS
3. POSSIBLE CAPITAL GAINS TAX TRAP ON SALE OF ASSETS IN PROBATE
4. TAXATION OF PENSION POLICIES IN TRUST
5. ASSETS IN AN ESTATE ARISING FROM UNDECLARED INCOME OF THE DECEASED

1.UK TAXATION OF SPANISH PROPERTY OWNED BY UK RESIDENTS

The ownership of Spanish property by UK tax residents is not uncommon, as is perhaps illustrated by two recent queries ( Inheritance Tax Issue for Spanish Property and Spanish Property UK Ltd/LLP Company ).

The main issues which arise typically relate to the tax position in Spain should the property be sold, gifted or inherited on death.

From the UK tax perspective, if the owner of the property is a UK domiciled individual then UK inheritance tax will be in point should the property be gifted or inherited on death. However, if the individual owner is non-UK domiciled then no UK inheritance tax is payable.

On any sale, (or potentially other lifetime disposal), UK capital gains tax will be in point and if the property is let out then UK income tax will also be in point. However, if the individual owner is non-UK domiciled the “remittance” basis will be applicable (assuming a claim, etc., is lodged).

It must also be noted that in calculating any UK capital gains tax, the computation is carried out in £Sterling NOT €Euros and should there be a time delay in transferring the €Euros on sale, a further UK capital gains tax liability may arise depending upon the £Sterling/€Euro exchange rate movement. This is because non-£Sterling currency is a chargeable asset, so its ‘sale’ for £Sterling is normally a chargeable event for CGT purposes.

With regard to Spanish taxes both Luis Dura and Juan Carlos proffer their views in their contributions to the aforementioned queries, with respect to Spanish inheritance tax, capital gains tax, VAT and transfer taxes where the Spanish property is directly owned or where an intermediate company may be utilised (commonly adopted to avoid Spanish inheritance tax).

2.PRINCIPAL PRIVATE RESIDENCE RELIEF AND INTER-SPOUSAL TRANSFERS

For probably one of the longest sagas on taxationweb see the two related queries raised by petergibbinson ( DTE Tax Brief on Principle Residence Reliefs [sic] and Private Residence Relief and Moving Abroad ). At the time of writing, the first query gave rise to 17 replies and 134 viewings and the second (actually earlier) related query 82 replies (!!) and 445 viewings (!!).

In short, the primary issue related to whether, for UK capital gains tax purposes, principal private residence relief would be available in the circumstances outlined in the query. In short, following marriage, H had transferred 50% of his Principal Private Residence (PPR) to W. However, at the time of the transfer H and W were based abroad and prior to the transfer W had never, de facto, resided in the property.The basic point was whether, on a future sale by H and W, PPR relief would be available to W with respect to periods of time prior to the date at which H transferred 50% to W.

There does not appear to be unanimity amongst the answers provided (which ranged from the two extremes, i.e., that no PPR relief was applicable to yes, PPR relief would be applicable) which is perhaps not surprising given the complexity of the relevant legislation albeit on a topic that many non-tax practitioners would, I suspect, expect to be relatively straight forward.

I fear that anyone trying to follow these arguments without some prior knowledge of the PPR rules will find the discussions very difficult to follow. It is clear that misunderstandings between the contributors arose and only became more protracted as the discussion continued. It also is worth noting that the only real solution to providing technical advice relies on a detailed understanding of the legislation and, whilst comments made by HMRC are of course important, they are not necessarily statements of the law (e.g., comments made in their Manuals, to which extensive reference was made in the discussion).

3.POSSIBLE CAPITAL GAINS TAX TRAP ON SALE OF ASSETS IN PROBATE

A recent query highlighted a possible capital gains tax “trap” that can arise on asset sales following death (CGT on Inherited Property - Sale 3 Months After Probate ). On death, property (e.g., the deceased’s house) owned beneficially by the deceased is inherited by the beneficiaries (whether under a will or the rules of intestacy) at the value of the property on death.

It may be (as in the above query) that the deceased’s house is to be inherited equally by five beneficiaries who then intend to sell. Assuming the sale gives rise to a capital gain the beneficiaries may assume that in effect 5 lots of annual exemption are available to reduce any such capital gain.

However, this may well not be the case and in fact only one annual exemption may apply. This would be the position if the sale is effected by the executor(s) in their capacity as executors i.e., if the house has not first been “assented” (i.e., transferred) by the executors to the beneficiaries.

A conscious decision therefore needs to be taken as to what all parties require and then it is important to ensure that all relevant steps are implemented. As one contributor noted:
“with the assistance of a suitably qualified solicitor or accountant advising on the estate this trick would not have been missed”.

4.TAXTION OF PENSION POLICIES IN TRUST

For an example of the lengths to which some contributors are prepared to go to give helpful advice to those raising queries see Pension Policies in Trust.

“AvokadoK” provides detailed and specific comments and covers much useful ground in discussing the whole issue of pension policies in trust.

5.ASSETS IN AN ESTATE ARISING FROM UNDECLARED INCOME OF THE DECEASED

No-one ever knows everything about one’s parents’ affairs and a recent query ( I have inherited a Swiss Bank Account ) illustrates the issues/problems which can arise when a beneficiary inherits some property which apparently the deceased (in this case the father) never disclosed to the tax authorities; a somewhat unfortunate position to be put in for the executor, who raised the query.

Contributors have understandably encouraged the querist to consult a suitably qualified professional with a view to making full disclosure to the tax authorities.  

Article Added Sunday, 10 May 2009

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