Hi Montrose,
Thanks for sharing this. It makes me feel a lot better about the planned change of accounting date, and hopefully there will be another happy client.
It also occurred to me that when introducing changes in the corporation tax rate it would be a relatively simple matter for the legislature to countermand any tax advantage arising from a change in accounting date designed to take advantage of the transition. As it is, the legislature has chosen not to do so.
No, the client doesn't think that the reversal of the 17% etc applies only to his company, but I suspect he is kicking himself because he has delayed the sale in the hope of benefitting from a lower rate of tax. That of course proved to be a bad decision. But still a nice problem to have. Capital gain is over 85% of sale proceeds.
I've already told the client that he's already had the best part of this particular meal, by bringing the effective tax rate down from 25% to nearer 21%. So, as you say, is the extra saving worth the candle? At 0.67% the tax saving is still several £000's, and the client has really got the bit between his teeth. He feels betrayed that the company tax rate was not brought down to 17% as promised several years ago, and that Kwarteng's proposed cancellation of Sunak's increase to 25% was subsequently reversed by Hunt. He bust a gut but failed (short of a last minute miracle) to get the sale contract over the line before the end of this month. We also spent a lot of time looking at a sub sale scenario in order to bring the company's sale date even further forward but decided that for a number of reasons it was too risky.
Intrigued by the concept of "notional" changes to legislation (which I had not come across before), I sent a request for clarification to the contact email address given on legislation.gov.uk. I have copied in below the reply I got from the Legislation Editorial Manager. This confirms what richard thomas wrote. But I am struggling to think of any other purpose to which the Reg 34 notional changes would not apply in this case.
"Although there may well be other conceptual uses of the term “notional” in legislation, I think in this case that the drafter of S.I. 2008/704, reg. 15(2) is using the word “notionally” precisely in the sense you have indicated.
As you note, S.I. 1998/1870, reg. 34(2) applies 1992 c. 12, ss. 104-114 for specific purposes (in this case, for the purposes of pooling and identifying account investments) with modifications relating to those purposes only. This is a “non-textual amendment”, which changes the meaning of s. 106A (and the other applied provisions) for those specific purposes without “really” changing the text.
S.I. 2008/704, reg. 15 then comes along and changes the wording of those modifications by altering the text of S.I. 1998/1870, reg. 34(2). We have carried through these textual amendments in S.I. 1998/1870, reg. 34:
And we have added a cross-note (or C-note) annotation for the original non-textual amendment plus an extra appended annotation for its subsequent change by S.I. 2008/704, reg. 15 in 1992 c. 12, s. 106A:
“Ss. 104-114 modified (6.4.1999) by The Individual Savings Account Regulations 1998 (S.I. 1998/1870), regs. 1, 34(2) (as amended (6.4.2008) by S.I. 2008/704, regs. 1, 15(2))”
Thanks for these fascinating insights. This seems to be a case of HMRC secretly marking its own homework. I only wish I had an ISA holding large enough, and a corresponding non-ISA holding with a lower acquisition cost, to make it worthwhile challenging the vires of the Reg 34 modifications.
Thank you all for such valuable insights which in turn have prompted some further research. I attempt to summarise the position below.
Re non-pooling of ISA investments
I think richard thomas’ post clearly answers the question for all practical purposes. Given the intended purpose of Reg 34, the following points are probably of academic interest only:
1. Reg 34 of SI 1998/1870 does not actually add a new subsection 12 to section 106A TCGA 1992 but only treats the section as applying as if the new subsection were added. Both Tolley’s Yellow Tax Handbook and the “as amended” version of TCGA on legislation.gov.uk observe this distinction by not adding a subsection 12, referring to the Reg 34 amendment only in the footnotes. As succinctly asked by richard thomas: why the deeming conceit?
2. The parliamentary draftsman is clearly aware of the distinction between actual and deemed amendments, eg Reg 15(2) of SI 2008/704 refers to the “notionally added” subsection 12.
3. Arguably the purported amendment of TCGA by statutory instrument goes further than the extremely limited mandate in section 151 TCGA 1992.
If the point were ever litigated I would not want to bet on the outcome.
Re pooling or otherwise of joint shareholdings
The answer seems to revolve round the juridical nature of joint shareholdings compared with holdings in sole name. It is amazing that there appears to be no definitive answer.
There is a useful summary of the relevant company law here: Joint shareholder rights and how to manage joint shareholdings (informdirect.co.uk) where it is stated that:
- On the death of a joint shareholder the holding automatically passes to the surviving shareholder(s) regardless of any contrary provision in the will of the deceased shareholder.
- Only the first-named shareholder can vote the shares, appoint a proxy or sign a written shareholder resolution.
- Only the first-named joint shareholder is entitled to receive certain notices from the company.
The article is written largely from the viewpoint of the company. It does not explore the relationship between the joint shareholders. Eg is there an implied trust possibly imposing a duty on the first-named shareholder to consult with the other joint shareholder(s) before voting the shares?
The above attributes of joint shareholdings, and in particular the inability of a joint shareholder to legate an interest in the shares, strongly suggest that with respect to a company formed under the UK Companies Acts a joint shareholder does not hold shares in the same capacity as a sole shareholder. The position with regard to shares in an overseas company could well be different.
I note that your actual question is: "how can we find out the 2002 Probate values of the properties". If your client's friend cannot obtain this information from the deceased mother's records, HMRC should be able to assist if you give them full details. This must be a relatively common occurrence, and in my opinion that is the procedure you should follow notwithstanding the inevitable delay.
In the meantime you will probably need to make an estimate of the capital gains tax liability. The previous posts are in point here - compare 2002 sale price of similar properties or if that fails look at the relevant property price index and work out the 2002 value from there.
TaxDragon makes a good point - you need a new engagement letter. And also consider whether you are qualified to advise on property valuation. If not, follow ann domonkos' lead and consult a local valuer. But bear in mind that if you can establish the definitive probate value that may not be necessary.
Don't forget the new(ish) time limit for reporting gains on residential property (assuming the properties are in the UK).
Thank you all for your extremely valuable insights which have helped to show the strengths and weaknesses of the various arguments, and in particular the danger of conceding that role already fully remunerated. But that unfortunate admission did have the advantage of enabling some important issues to be aired in a safe environment.
My apologies to Stepurhan for misspelling of name.
Best wishes, Andrew M627
In response to DavidEx: may be "fully" remunerated is going too far. Pay levels are variable and what an employee's contribution is worth is subjective. We would struggle to justify extra £15,000 by reference to one year's work. But looking back over say 5 years, giving an extra £3,000 a year, is well within the bounds of reasonableness and would stand comparison with what would have been paid to an unconnected person over that period. There was no contractual entitlement to the contribution.
The answer to Stephuran's point (if role so vital, why so little remuneration) is that the employment is not full time, but nevertheless vital.
In response to the comments received we are considering reducing the contribution and also recharging part of the expense to an associated company for which the employee also carries out work (not separately remunerated by that company to which part of the salary has also been recharged in most years).
You could consider one or more of the following but be aware of the risks:
Consider subsistence expenses if working far from home
Accrue salary/bonus to wife (earned before separation eg for answering phone, laundry etc)
Provision for post year end remedial work (if the separation/divorce is stressing him out he may have fallen below his usual standard of workmanship)
Identify any amounts received that may be deposits for work not carried out as at the year end
Provision against year end debts if any
Provide for anticipated costs of transition to MTD
Transfer business to a company and claim overlap relief
My answers
Hi Montrose,
Thanks for sharing this. It makes me feel a lot better about the planned change of accounting date, and hopefully there will be another happy client.
It also occurred to me that when introducing changes in the corporation tax rate it would be a relatively simple matter for the legislature to countermand any tax advantage arising from a change in accounting date designed to take advantage of the transition. As it is, the legislature has chosen not to do so.
No, the client doesn't think that the reversal of the 17% etc applies only to his company, but I suspect he is kicking himself because he has delayed the sale in the hope of benefitting from a lower rate of tax. That of course proved to be a bad decision. But still a nice problem to have. Capital gain is over 85% of sale proceeds.
My fee will not be an issue.
Thanks for the reality check.
I've already told the client that he's already had the best part of this particular meal, by bringing the effective tax rate down from 25% to nearer 21%. So, as you say, is the extra saving worth the candle? At 0.67% the tax saving is still several £000's, and the client has really got the bit between his teeth. He feels betrayed that the company tax rate was not brought down to 17% as promised several years ago, and that Kwarteng's proposed cancellation of Sunak's increase to 25% was subsequently reversed by Hunt. He bust a gut but failed (short of a last minute miracle) to get the sale contract over the line before the end of this month. We also spent a lot of time looking at a sub sale scenario in order to bring the company's sale date even further forward but decided that for a number of reasons it was too risky.
Intrigued by the concept of "notional" changes to legislation (which I had not come across before), I sent a request for clarification to the contact email address given on legislation.gov.uk. I have copied in below the reply I got from the Legislation Editorial Manager. This confirms what richard thomas wrote. But I am struggling to think of any other purpose to which the Reg 34 notional changes would not apply in this case.
"Although there may well be other conceptual uses of the term “notional” in legislation, I think in this case that the drafter of S.I. 2008/704, reg. 15(2) is using the word “notionally” precisely in the sense you have indicated.
As you note, S.I. 1998/1870, reg. 34(2) applies 1992 c. 12, ss. 104-114 for specific purposes (in this case, for the purposes of pooling and identifying account investments) with modifications relating to those purposes only. This is a “non-textual amendment”, which changes the meaning of s. 106A (and the other applied provisions) for those specific purposes without “really” changing the text.
S.I. 2008/704, reg. 15 then comes along and changes the wording of those modifications by altering the text of S.I. 1998/1870, reg. 34(2). We have carried through these textual amendments in S.I. 1998/1870, reg. 34:
https://www.legislation.gov.uk/uksi/2008/704/regulation/15/made
https://www.legislation.gov.uk/uksi/1998/1870/regulation/34
And we have added a cross-note (or C-note) annotation for the original non-textual amendment plus an extra appended annotation for its subsequent change by S.I. 2008/704, reg. 15 in 1992 c. 12, s. 106A:
“Ss. 104-114 modified (6.4.1999) by The Individual Savings Account Regulations 1998 (S.I. 1998/1870), regs. 1, 34(2) (as amended (6.4.2008) by S.I. 2008/704, regs. 1, 15(2))”
https://www.legislation.gov.uk/ukpga/1992/12/section/106A
I hope this is useful."
Thanks for these fascinating insights. This seems to be a case of HMRC secretly marking its own homework. I only wish I had an ISA holding large enough, and a corresponding non-ISA holding with a lower acquisition cost, to make it worthwhile challenging the vires of the Reg 34 modifications.
Thank you all for such valuable insights which in turn have prompted some further research. I attempt to summarise the position below.
Re non-pooling of ISA investments
I think richard thomas’ post clearly answers the question for all practical purposes. Given the intended purpose of Reg 34, the following points are probably of academic interest only:
1. Reg 34 of SI 1998/1870 does not actually add a new subsection 12 to section 106A TCGA 1992 but only treats the section as applying as if the new subsection were added. Both Tolley’s Yellow Tax Handbook and the “as amended” version of TCGA on legislation.gov.uk observe this distinction by not adding a subsection 12, referring to the Reg 34 amendment only in the footnotes. As succinctly asked by richard thomas: why the deeming conceit?
2. The parliamentary draftsman is clearly aware of the distinction between actual and deemed amendments, eg Reg 15(2) of SI 2008/704 refers to the “notionally added” subsection 12.
3. Arguably the purported amendment of TCGA by statutory instrument goes further than the extremely limited mandate in section 151 TCGA 1992.
If the point were ever litigated I would not want to bet on the outcome.
Re pooling or otherwise of joint shareholdings
The answer seems to revolve round the juridical nature of joint shareholdings compared with holdings in sole name. It is amazing that there appears to be no definitive answer.
There is a useful summary of the relevant company law here: Joint shareholder rights and how to manage joint shareholdings (informdirect.co.uk) where it is stated that:
- On the death of a joint shareholder the holding automatically passes to the surviving shareholder(s) regardless of any contrary provision in the will of the deceased shareholder.
- Only the first-named shareholder can vote the shares, appoint a proxy or sign a written shareholder resolution.
- Only the first-named joint shareholder is entitled to receive certain notices from the company.
The article is written largely from the viewpoint of the company. It does not explore the relationship between the joint shareholders. Eg is there an implied trust possibly imposing a duty on the first-named shareholder to consult with the other joint shareholder(s) before voting the shares?
The above attributes of joint shareholdings, and in particular the inability of a joint shareholder to legate an interest in the shares, strongly suggest that with respect to a company formed under the UK Companies Acts a joint shareholder does not hold shares in the same capacity as a sole shareholder. The position with regard to shares in an overseas company could well be different.
I note that your actual question is: "how can we find out the 2002 Probate values of the properties". If your client's friend cannot obtain this information from the deceased mother's records, HMRC should be able to assist if you give them full details. This must be a relatively common occurrence, and in my opinion that is the procedure you should follow notwithstanding the inevitable delay.
In the meantime you will probably need to make an estimate of the capital gains tax liability. The previous posts are in point here - compare 2002 sale price of similar properties or if that fails look at the relevant property price index and work out the 2002 value from there.
TaxDragon makes a good point - you need a new engagement letter. And also consider whether you are qualified to advise on property valuation. If not, follow ann domonkos' lead and consult a local valuer. But bear in mind that if you can establish the definitive probate value that may not be necessary.
Don't forget the new(ish) time limit for reporting gains on residential property (assuming the properties are in the UK).
Thank you all for your extremely valuable insights which have helped to show the strengths and weaknesses of the various arguments, and in particular the danger of conceding that role already fully remunerated. But that unfortunate admission did have the advantage of enabling some important issues to be aired in a safe environment.
My apologies to Stepurhan for misspelling of name.
Best wishes, Andrew M627
In response to DavidEx: may be "fully" remunerated is going too far. Pay levels are variable and what an employee's contribution is worth is subjective. We would struggle to justify extra £15,000 by reference to one year's work. But looking back over say 5 years, giving an extra £3,000 a year, is well within the bounds of reasonableness and would stand comparison with what would have been paid to an unconnected person over that period. There was no contractual entitlement to the contribution.
The answer to Stephuran's point (if role so vital, why so little remuneration) is that the employment is not full time, but nevertheless vital.
In response to the comments received we are considering reducing the contribution and also recharging part of the expense to an associated company for which the employee also carries out work (not separately remunerated by that company to which part of the salary has also been recharged in most years).
You could consider one or more of the following but be aware of the risks:
Consider subsistence expenses if working far from home
Accrue salary/bonus to wife (earned before separation eg for answering phone, laundry etc)
Provision for post year end remedial work (if the separation/divorce is stressing him out he may have fallen below his usual standard of workmanship)
Identify any amounts received that may be deposits for work not carried out as at the year end
Provision against year end debts if any
Provide for anticipated costs of transition to MTD
Transfer business to a company and claim overlap relief