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Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, highlights two points of practice on pre-owned assets tax, and on Limited Liability Partnerships (LLPs)

Pre-owned Assets Regime: Avoid by Sale to Spouse?

Context

Consider adapting the traditional double trust scheme by having a sale of the house to a spouse rather than to a life interest trust for the settlor.

Ensuring exclusion from POA by transfer to spouse

The settlor sells the property to his spouse for market value, the purchase price being satisfied by the issue of a debt on commercial terms which is not repayable until after the death of the survivor of settlor and spouse. The spouse gives away the debt to a trust from which both he and his spouse are excluded. The sale to the spouse will be an excluded transaction. Although the transaction may not be such as might be expected to be made at arm’s length between unconnected persons (FA 2004, Sch 15 para 10(1)(a)(ii)), the disposal is a transfer to a spouse and is therefore excluded within para 10(1)(b). No right of occupation is retained by the transferor, who relies on the permission of the transferee.

It is essential that, as with the traditional home loan scheme, there is no bounty: if there were, FA 1986 s102A would apply to bring in the GWR regime.

The success of the scheme depends on getting a deduction for the debt in the estate of the transferee spouse. Therefore the transferee must not have made gifts to the transferor which would cause a disallowance or abatement to arise on the transferee’s death under FA 1986 s103.

(CLT Conference ‘Capital Tax Planning for the Family Home’ 17 May 2005, lecture by Sarah Dunn)

Comment

Part of the difficulty in considering and recommending to clients structures for the family home, either in response to past arrangements which may now be caught by POA or in planning for the future, is that there is no guarantee that HMRC will not initiate legislation with ‘retroactive’ effect. This is a point that applies to, for example, the suggestion that a new revertor to settlor trust might cure any past POA problems – as indeed to this intriguing suggestion. Subject to the s103 point, and of course assuming that the home loan scheme works in principle, the idea seems technically impeccable, by simply taking advantage of the unlimited spouse exemption in the POA regime.

Limited Liability Partnerships: Tax Status

Context

Correspondence with HMRC has confirmed the tax status of income received by members of the LLP and of capital/loan accounts for IHT purposes.

The members of the LLP carry on the business

This is provided by TA 1988 s118ZA(1)(a). If an LLP carries on a trade, each registered partner is taxable on the income he derives from the LLP under the rules of Schedule D Case I [now replaced by ITTOIA 2005]. This includes registered members who may have been salaried partners in a predecessor general partnership.

Capital, but not loan accounts, attract BPR

A number of cases have been encountered where, when converting to an LLP, the capital/current account balances of the old partnership (say £50,000 per partner) have been designated £1,000 to member’s capital account and £49,000 to member’s loan account. HMRC have confirmed that the loan accounts will not attract BPR under general principles.

(TAXline March 2005 – Issue 3 p5, contribution by Mark Morton of Mercia Group Ltd)

It is well understood that loan accounts have their attractions in terms of enabling a tax-free method of drawing on cash which belongs to the proprietor, albeit for the time being at the disposal of the company. But the cost in terms of denial of business property relief of 100% is a real one and may be too expensive (see the Special Commissioners’ decision in Beckman v IRC [2000] STC 59 (SPC 226)).

July 2005

Matthew Hutton MA, CTA (fellow), AIIT, TEP

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.

Matthew Hutton’s Autumn Series of Estate Planning Conferences resumed on 15 September 2005 in Stratford-upon-Avon. The remaining dates and venues are listed below.

SDLT Conference

Matthew Hutton is running an SDLT conference in London on 31 October 2005. For further information, please visit TaxationWeb’s Tax Events Calendar: www.taxationweb.co.uk/taxevents

Matthew Hutton’s Autumn Series of Conferences

Thursday 15 September - Stratford Manor, Stratford-upon-Avon

Tuesday 4 October - Wood Hall, Wetherby

Tuesday 18 October - Renaissance Hotel, nr Derby

For further details, brochures and booking forms please contact Matthew Hutton: email – mhutton@paston.co.uk or telephone – 01508 528388.

About The Author

Mark McLaughlin is a Fellow of the Chartered Institute of Taxation, a Fellow of the Association of Taxation Technicians, and a member of the Society of Trust and Estate Practitioners. From January 1998 until December 2018, Mark was a consultant in his own tax practice, Mark McLaughlin Associates, which provided tax consultancy and support services to professional firms throughout the UK.

He is a member of the Chartered Institute of Taxation’s Capital Gains Tax & Investment Income and Succession Taxes Sub-Committees.

Mark is editor and a co-author of HMRC Investigations Handbook (Bloomsbury Professional).

Mark is Chief Contributor to McLaughlin’s Tax Case Review, a monthly journal published by Tax Insider.

Mark is the Editor of the Core Tax Annuals (Bloomsbury Professional), and is a co-author of the ‘Inheritance Tax’ Annuals (Bloomsbury Professional).

Mark is Editor and a co-author of ‘Tax Planning’ (Bloomsbury Professional).

He is a co-author of ‘Ray & McLaughlin’s Practical IHT Planning’ (Bloomsbury Professional)

Mark is a Consultant Editor with Bloomsbury Professional, and co-author of ‘Incorporating and Disincorporating a Business’.

Mark has also written numerous articles for professional publications, including ‘Taxation’, ‘Tax Adviser’, ‘Tolley’s Practical Tax Newsletter’ and ‘Tax Journal’.

Mark is a Director of Tax Insider, and Editor of Tax Insider, Property Tax Insider and Business Tax Insider, which are monthly publications aimed at providing tax tips and tax saving ideas for taxpayers and professional advisers. He is also Editor of Tax Insider Professional, a monthly publication for professional practitioners.

Mark is also a tax lecturer, and has featured in online tax lectures for Tolley Seminars Online.

Mark co-founded TaxationWeb (www.taxationweb.co.uk) in 2002.