michaelblake
Member Since: 6th Oct 1999
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Michael Blake
Professional History
1973 – 1988 Inland Revenue Inspector of Taxes Specialist areas included the taxation of jockeys, trainers, bloodstock breeders and farmers.
1988 – 1994 Tax Specialist, Grant Thornton - providing strategic planning, taxation, business and financial advice to agricultural and land based clients. Spokesman for the firm at national events, e.g. RASE Royal Agricultural Show, RASE Equine Event, Smithfield Show, at colleges, and on local and national radio.
1994 – 1998 Tax Specialist in the Leeds office of Coopers and Lybrand leading and developing the firms agricultural practice in the North of England. Organising and developing training nationally on tax and legal issues arising in the agricultural and landed estates sectors.
1998 – 2000 Member of PricewaterhouseCoopers tax investigations practice handling investigations originating from the Inland Revenue Special Compliance Office the division of the Inland Revenue that handles cases of serious tax evasion and initiates civil and criminal prosecutions.
From 2000 Running my own business offering specialist tax consultancy to businesses and to legal and accountancy firms both regionally and nationally.
Consultant acting as a national specialist for IRIS Professional Tax Practice until 2012 and from 2012 for Tax Action Consultancy Ltd in the fields of inheritance tax and capital gains tax and tax issues particular to farming, landed estates, bloodstock breeders, mineral extraction and the development of land.
My answers
You are assuming here that the solicitors letter of engagement with the client did not say (as many do) that they will not be providing tax advice in relation to the transaction
I would take the view that the residue of the estate has been ascertained when all the assets in the estate have been identified, and either valued or sold, and all the debts due from the estate, including tax liabilities, have been ascertained and paid. At that point the executors are able to pay any specific bequests made under the will and write to those who benefit from the residue and let them know how they propose to deal with the residue in accordance with the will.
If there are chargeable assets in the residue of the estate that are left to more than one person, such as a property, the executors have two possible courses of action. As others have noted, if the beneficiaries request it, the executors could instruct solicitors to transfer the title to ownership of the property to the beneficiaries who could then sell it. As an alternative the executors could write to the beneficiaries and say instead of transferring the title to you, and to save the legal costs of transfer, would you like to instruct us to sell the property, as bare trustees for yourselves. If the beneficiaries write back and say yes please sell for us as bare trustees then the beneficiaries can treat any gain that has arisen from the date of death as theirs. If however there has been no exchange of correspondence to establish that the executors are selling as bare trustees for the beneficiaries then. in my view, the gain must be treated as the executors.
As far as I understand it under UK land law, and without a legal document recording anything to the contrary, the value of the improvements would belong to the directors as the owners of the land in which the extension sits. The company has therefore, on the face of it, enriched the directors as the owners of the freehold by the value of the improvements. As others have noted this could lead to unplanned tax liabilities. I would suggest that the position should be rectified by asking solicitors experienced in land law to prepare the appropriate documents recording the fact that the company paid for the improvements and owns the value of them.
I would suggest that what needs to be done is to explain to her what the law expects from her in terms of record keeping; the disclosure that would have to be made on the return if estimated figures were used; what HMRC could reasonably expect to want to examine in the event of an enquiry into the return; the possible consequences in terms of penalties if she were found to be careless in making the return, and finally the limitations imposed upon you by professional standards if she cannot for whatever reason cooperate fully with you in working within the standards imposed by the law and HMRCs interpretation of that law. It might also be worth making the point that you can only provide a valuable service to her by assisting her to comply with her obligations and would be doing her a disservice if you helped her achieve anything that fell short of that. As others have noted this should all be explained in conversation, and whatever the outcome, a copy of the file note sent after the event recording what was said, and any actions agree by both sides following the conversation.
The ICAEW ethical guidance Helpsheet C1 in relation to this matter
https://www.icaew.com/technical/tax/pcrt/2019/helpsheet-c-dealing-with-e...
notes at paras 41 and 42 that
41. Where the error relates to a self-assessment return the client should amend any self-assessment affected by the error if they are within the time limit to do so. Where the time limit for amending a self-assessment has passed the client should provide HMRC with sufficient and accurate information to explain the error.
42. If HMRC fails, or is unable, to take any necessary action, for example to issue a discovery assessment, a member is under no legal obligation to draw HMRC’s failure to their attention, nor to take any further action. Where it is relevant a member should ensure that the client is aware of the potential for interest and/or penalties.
Thank you. Those were my thoughts but the employer seems to be confused as to what to do.
A The planning costs should be claimed as a deduction in the calculation of the gain arising on the part retained (the garden) and not the gain on the part disposed of (the house) since the enhancement in value achieved by the expenditure relates to the part retained and not the part disposed of. B and C There is a notional CGT disposal at market value when the development starts (TCGA 1992 s161) unless an election is made under TCGA s161(3) . The period of ownership will start when the house and garden were acquired and the gain is calculated in a straight line basis from that date (Henke v Henke) There is no period for which the gain can qualify for PPR if the garden is sold after the house is sold - see Varty v Lynes and the HMRC guidance at CG64337. C There is a case in my view for arguing that PPR should start from the period that they occupy the caravan as a main residence providing that they have no other residence at the time they occupy the caravan and the occupation has the quality of permanent residence which it should have if they go on to occupy the house as their only or main residence for a period of years. As in reply to B the period of ownership of the garden starts when they first acquired the house and garden (Henke v Henke); the gain is calculated on a straight line basis, and there is no period prior to the occupation of the caravan that would qualify for PPR (Vartey v Lynes)
The best course of action would be to prepare a deed now recording what was agreed in 2012. What appears to have been agreed then is that mother owned the property,worth £140,000, and that the son owned an interest in the property represented by the value of the improvements which cost £100,000. If the value of the property following the improvements was £320,000 then the sons interest in 2012 might be taken as either 100/240ths of the property, or arguably 180/320ths, depending upon what was agreed at the time about how the increase in value brought about by the cost of the improvements £230,000 should be shared between the two interests. That will be the starting point for deciding upon what fractional interest in the property mother has disposed of to the son in 2018. That interest will have to be valued at open market value and will have a base cost of £10,000 which is the value of the mothers interest when she acquired it in 1990. Whatever mother and son agree should be paid by the son to the mother is disregarded in calculating the gain. Having said that if £200,000 has been agreed for the value of the mothers interest now that would be more consistent with mothers interest being 140/240ths rather than 140/320ths ie £370,000 x 140/240 x 90% =£194,250.
I would be tempted to ask them to describe what documents they believe may be in existence that would prove what they want to see proved. HMRC Inspectors quite often (and wrongly) take the view that if facts cannot be proved by reference to pieces of paper then they cannot be accepted. It sometimes necessary to point out to them that where matters cannot be proved by reference to documents then the ultimate arbiter, if a claim is refused, would be a tribunal, or court, where oral evidence is accepted as well as written evidence and point out that if the client is a truthful and credible witness their account is likely to be accepted.
Agreed although two things that could be done to reinforce any claim is to ensure that the new enterprise is neither commercial (judged against the criteria adopted by HMRC in their guidance) nor makes a profit (as measured using normal tax and accounting rules and taking into account all trading income and expenses)