ASK THE EXPERTS
Q. I have a client who wishes to sell his company shareholding back to the company of which he is secretary. The shareholding is greater than 5% and it is hoped the gain would be eligible for entrepreneurs' relief.
However, the price agreed between the shareholder and the company is one which exceeds the present balance sheet value of the net assets. This is because it is accepted by all parties involved that the company has considerable goodwill, and that the price of the sale-back of the shares is the same percentage of the real value of the company that the shares being sold bear to the total share capital.
Unfortunately, as I understand it, the company cannot merely create goodwill. But, it did pay for improvements to its trading premises, the freehold of which is owned by a third-party landlord. There is no doubt that by enhancing the premises by this expenditure, the company has effectively created goodwill. On the basis that all relevant parties agree that this is the case, are you able to say that it is goodwill that can be shown to be paid for?
S. D., via email
A. We do not understand why you are concerned about goodwill. One would nearly always expect the value of a company's shares to exceed its net asset value. There is no need to value goodwill so that the pro rata value of the shares is equal to the assets.
The main requirement to effect a purchase of own shares is that there must be sufficient distributable reserves to cover the payment. Assuming the company is profitable and given that your client does not appear to have a majority shareholding, we assume this won't be a problem. You then just need to make sure the ITA 2007 conditions are fulfilled so that the payment is treated as capital and not a dividend, i.e. the shares have been held for five years, the shareholder will not retain any connection with the company, there must be a trade benefit to the buy-back and the company must be a trading company.
Q. Further to your tax tip in November's issue of the Schmidt Tax Report, I have already taken my tax-free lump sum, does this preclude the consideration of QROPS?
J. C., via email
A. As long as your pension plan is neither a guaranteed open-market annuity nor a final-salary scheme where the pension is in payment, you are free to transfer your residual fund to a QROPS. The transfer will, however, be treated as a second benefit crystallisation event and the growth arising since the last crystallisation (when you originally took benefits) will be tested against the lifetime allowance. If you are non-UK-resident, aged over 55 and have been for at least the previous five tax years, a New Zealand QROPS can allow you to take up to 100% of the remaining fund as a lump sum without tax in the UK or New Zealand. You will need to check, however, the tax treatment in your country of residence.
Q. I own several apartments in Bulgaria and Cyprus bought off-plan some years ago.
The original intention on buying was to sell when completed and hopefully have a capital gain. For some time the apartments were un-saleable. We have now managed to sell some for losses of about 60%.
All the apartments attract charges for insurance and maintenance. Some apartments have been let; some have not. None have been let for long enough to qualify as 'holiday rentals' units.
HMRC has refused to allow the expenses accrued on the unlet apartments to be set off against the rentals from the let ones.
The Inspector also disallowed a claim against rentals for write-downs on the furniture. This was important since I will have no gains to be set against the capital losses.
Is the Inspector correct? I always thought that expenses on a letting portfolio could be put into a pool and charged against a rental income pool.
J. W., via email
A. You pool all property income and expenses from the same country. However, this is on condition that all properties are let or at least available for letting. If you have been trying to let the unlet flat then, yes, these are all part of the letting business, and costs associated with trying to let them are allowable. But if you have not tried to let them then by definition any maintenance costs are not part of the letting business and so do not qualify for tax relief.
You are able to claim relief for furnishings in the form of the wear and tear allowance. Please see the note below, which is an extract from HMRC's tax return guide and refer the inspector to this.
Box 23 10% wear and tear allowance
If you let any furnished residential accommodation (such as a house or flat) you cannot claim capital allowances on any machines, furniture or furnishings supplied, or on any fixtures that are part of the building. Instead, you may claim a renewals deduction in respect of the renewal of all such items in Box 12. Or you may claim the 10% wear and tear allowance in Box 23. But you cannot claim both. The wear and tear allowance is equal to 10% of the net rents after deducting charges or services that a tenant would usually bear but which are, in fact, borne by you (such as local rates). You cannot claim capital allowances for any furnished residential lettings.
Q. You will recollect that you have been immensely helpful in respect of the recent UK-Swiss tax agreement (see below) and also with the excellent article in the October Report.
Apart from this Swiss matter, the family tax affairs are very simple and as such the annual UK tax returns are handled by a small country accountant in a perfectly adequate manner. In making the 'Voluntary Disclosure', however, I wonder if it would not be more sensible when formulating the 'Voluntary Disclosure' to embrace the advice of a larger UK tax accountancy firm which has an appreciation of 'international' situations such as the UK-Swiss agreement and which in all likelihood they will be following with interest on behalf of some effected clients.
If you think this a good idea, could you please recommend, say, two or three firms that would fit these criteria?
M. R., via email
A. We would advise you to discuss the matter with your current accountant and see what they think. Given that there is nothing to disclose, i.e. no income has been omitted from the UK tax returns, this ought to be a simple situation and something that can be dealt with perfectly adequately by your current accountant. In the unlikely event that things did turn nasty, you could always appoint an investigations specialist at that stage.
Q. I act as a commission agent for a principal in Indonesia. 2010/11 commission £31k received gross, expenses £9k, profit shown under self-employment of £22k. I am a basic rate taxpayer. My principal tells me that they should be deducting withholding tax of 20%. Am I right that my FTCR will be restricted to 20% of £22k and I will therefore be worse off by 20% of the expenses (£1,800)?
P. A., via email
A. Yes, you are correct. Your double-tax relief is the lower of the foreign tax suffered and the UK tax liability on the foreign profits. So effectively you are not receiving tax relief on your expenses.
However, you need to ask your agent about the UK-Indonesia double-tax treaty. This says that independent services are only taxed in the country in which the taxpayer resides. Therefore, we think that if you were given the appropriate paperwork to fill out, it would be possible for the Indonesian tax authorities to agree that you can be paid without the need for withholding tax to be deducted.
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