In this month's Tax Clinic, Malcom Finney considers: if Tax is Due on Property Inherited Abroad, Principal Private Residence Relief and Lettings Relief on the Sale of Former Home, Inheritance Tax on Gifts Where the Beneficiary is Overseas, Can Brought Forward Corporate Trading Losses be Set Against Capital Gains, Corporate Ownership of Overseas Property to Avoid Foreign Inheritance Tax, and the Merits of the Enterprise Investment Scheme

Is Tax Due on Property Inherited from Abroad

Both queries Tax Due on Inherited Property Abroad by Rockyroad and Inheritance Tax Payable on Canadian Estate? from petermjdavies asked about the UK tax implications where a UK resident inherits from an estate outside the UK.

As far as UK taxes are concerned in principle no UK taxes are levied on an inheritance from an overseas estate. In addition, the inheritance does not require disclosure to the UK tax authorities. However, as not all foreign tax systems adopt the principles underlying the UK’s Inheritance Tax (IHT) laws it may well be that a UK resident beneficiary’s inheritance does bear tax levied according to the laws of the nationality/domicile of the deceased; the quantum often determined according to the relationship between the deceased and the beneficiary.

It should, however, be noted (as per contributor Maths’ comments) that where the inheritance comprises, for example, foreign currency, (e.g., $Canadian as in one of the above queries), such currency is a chargeable asset for UK Capital Gains Tax (CGT) purposes. Accordingly, should the beneficiary maintain the inheritance in an overseas bank account for a period, it may well be that when the monies are converted into £Sterling that a UK gain will arise, based on the increase, if any, in £Sterling equivalent value from the inheritance to the date of conversion. Such gain is then potentially subject to UK CGT.

For the non-UK domiciled individual resident in the UK, any such £Sterling gain may be subject to the 'remittance basis' treatment. For such an individual, any overseas asset inherited will constitute “excluded property” for UK Inheritance Tax purposes and, other things being equal, should ideally be left outside the UK.

Principal Private Residence Relief and Lettings Relief on Sale of Former Home

In his posting CGT on Second Home, Jon R asks about the interaction of Principal Private Residence Relief between two properties.

Capital Gains Tax is not, in principle, levied on gains made on the disposal of an individual’s "Principal Private Residence".

Even if for part of the time such a residence has been let out (for instance if the individual decides to take time out to travel around the world) and thus for that period is not the individual’s residence the availability of, inter alia, “Lettings Relief” may still enable a disposal of the property to be effected without a chargeable gain arising.

Contributor Peter D in response to this query commented as follows:

“I should add that Letting Relief will only be available on the PPR property and it appears that she has not disclosed the rental income on that property so LR cannot be claimed”.

In other words, Peter D is suggesting that lettings relief will only apply on the disposal of a main residence if the rental income has been declared to the tax authorities.

This is an interesting comment but one I feel is incorrect.

Lettings relief is provided for in TCGA 1992 s 223 (4). So long as the property in question has at some time, whilst in the individual’s ownership, been the individual’s only or main residence then lettings relief is available.

Any such claim following a sale is, of course, likely to cause the tax authorities to check whether any return of rental income has been made (which, if not, may lead to interest, penalties etc.) but nevertheless does not constitute grounds, per se, for denying lettings relief.

Inheritance Tax on Gift Where Beneficiary is Overseas

The query in Gift by Gunn concerns the possible UK IHT implications where, prima facie, a UK domiciled individual residing in the UK makes a gift of cash to a, prima facie, UK domiciled but non-UK resident individual.

Contributor pawncob indicated that a UK IHT iability “may” arise in such circumstances.

The gift is a "Potentially Exempt Transfer" for IHT purposes: should the donor (the mother in this case) survive for in excess of 7 years no IHT charge arises. However, if the mother dies within 7 years, as pawncob indicates, a possible liability arises depending upon various factors including whether the mother’s "Nil Rate Band" at the date of the gift has been fully utilised.

Perhaps the more intriguing issue is the mechanics of collecting any such tax charge should one fall due.

The primary liability arising on a PET is that of the transferee/recipient of the gift; however, in this case the recipient no longer resides in the UK. There is no IHT convention between the UK and Australia and thus HMRC may be faced with an inability to collect the tax from the recipient (should he refuse to discharge the liability).

But for HMRC all is not lost.

HMRC has the right to seek the tax charged from others (see IHTA 1984 s 199(1)) including the personal representatives (PRs) of the deceased (i.e., the mother in the above case) subject to certain conditions (for further discussion on the right to proceed against the PRs see Mathew Hutton’s article Failed PETS - and Other Lifetime Gifts: Liability for IHT)

Can Brought Forward Corporate Trading Losses be Set Against Capital Gains?

Queries involving Corporation Tax (rather than Income, Capital Gains or Inheritance Tax) are often not answered or elicit fewer responses. This query by Morrison B/f Trading Losses Offset Against Gain attracted no response.

It concerned the issue of trading losses carried forward and in particular whether such losses could be offset against a chargeable gain arising in a later accounting period.

Unfortunately, such an offset is not possible. ICTA 1988 ss 393 and 393A provide the relevant rules.

Had the chargeable gain been made in the same accounting period as the trading loss, then under ICTA 1988 s 393A(1)(a) an offset would have been possible as this section permits a trading loss of an accounting period to be offset against total profits (including chargeable gains) of the same accounting period.

Spanish Property UK LTD/LLP Company

It is probably true to say that many “Brits” own holiday homes in Spain. CroweUK's query Spanish Property UK LTD/LLP Company concerned one such individual who wanted to avoid Spain’s equivalent of UK IHT by utilising a UK limited company.

Contributor Wincham confirmed that this “worked” from the Spanish tax perspective, albeit according to contributor Maths some of his statements being technically incorrect (but not affecting the conclusion).

Unfortunately Wincham makes no reference to the UK tax issues involved - in particular, in the current case, the possible UK CGT implications of transferring the property from individual ownership to company ownership.  No mention is also made of the fact that on any future sale to a purchaser, that purchaser will be buying shares in a company and not the underlying Spanish property which many are reluctant to do as it then becomes necessary to request appropriate indemnities and warranties regarding possible liabilities, etc., residing within the company itself.

It is also necessary to check any double tax relief which may be available on, for example, death. In principle any Spanish IHT levied is creditable against any UK IHT on the same property; depending upon the comparable amounts the use of a UK company may be unnecessary. On the other hand, involvement in two separate tax systems as a general rule should be avoided.

Although an apparently simple query, the involvement of more than one tax jurisdiction immediately increases the complexities of carrying out any transaction. Solving, for example, a Spanish problem is of little comfort if a bigger UK problem arises; the overall picture needs to be examined (see Wincham's article The Spanish Property Inheritance Tax Time Bomb).

The Merits of the Enterprise Investment Scheme (EIS)

Despite the potentially attractive tax reliefs available under the Enterprise Investment Scheme (EIS) very few questions appear on TaxationWeb on the topic; however, one such query raised by mailsamd asked whether EIS relief would be available on the purchase of shares from a third party - About to Invest in a Ltd Company.

Unfortunately, as answered by contributor “RAL”, no tax relief (be that Income Tax or CGT) would be available on the purchase.

EIS reliefs only apply to new subscriptions for shares and not to the purchase of shares already in existence (the rationale of the EIS being to encourage new investment in embryonic companies).

An individual may invest between £500 and £500,000 in a tax year and Income Tax relief at 20% is available on the investment with no CGT charge on disposals once the investment has been held for at least three years.

Hold-over relief is also available and thus CGT arising on asset disposals may be deferred by reinvestment into shares qualifying under EIS although this perhaps is less attractive now the CGT rate is 18% (compared to the former marginal rate of 40%).

Unfortunately, the approach adopted by HMRC in scrutinising companies seeking to qualify for EIS reliefs in order to ensure the somewhat complex conditions necessary for the tax reliefs are satisfied has not helped in encouraging individuals to invest. Nevertheless, for those seeking attractive tax relief based investments, EIS should be actively considered.

Article Added Saturday, 19 September 2009 | 3920 Hits

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