Any Answers Answered: Benefit in kind and pension lump sum
This month TAXtv hosts Tim Good and Giles Mooney answer questions about a residential property company and tax-free cash from a client’s pension.
To watch the full video of Good and Mooney answering readers’ questions, click here or scroll down to the bottom of the page.
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Residential property company: benefit in kind?
The first question clocked by Good and Mooney was from AccountingWEB member TickTock, who asked:
“I have a client company that owns several residential properties. This year I have noticed that two of the properties are being let to the director’s children for a lower than market rate (approx 2/3 of market rate). My thoughts are that this will be a benefit in kind on the director - personal use of company asset. The children are obviously not minors, but are still connected persons.”
Good began by pointing out that if a company provides a benefit to a director or a member of the director’s household, then that benefit is assessable on the director.
“The director’s household includes their family, guests and servants,” said Good, “the two children would indeed count as members of the director’s family, so if there is a benefit because of the occupation of property owned by the company it’ll be assessable on the director and should go on their P11D”.
However, Good also pointed out that as it is accommodation it will be taxed under the special rules that apply to accommodation.
Mooney added that while he agreed with AccountingWEB member TickTock that it was a benefit in kind, it is an accommodation charge, and the personal use of a company asset rule didn’t apply. “It’s the sort of thing that could easily be missed,” said Mooney.
Good also cautioned the questioner to keep an eye on the value of the property, as if it reached more than half a million pounds it would become subject to an ATED charge.
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Is 25% tax-free pension income or capital?
The next question that caught the attention of the donnish duo was from Caroline Bates, who asked:
“I have a client who has taken around £110,000 as his 25% tax free cash from his pension. He already regularly uses the [Normal Expenditure Out of Income] NEOI allowance but can he include this sum in say, the two year period from when he received it for this purpose or do HMRC deem this to be 'capital'. The manuals are silent on the point and income is not defined for this purpose but the manual does refer to 'pension payments'.”
Mooney began his answer by stating that one of the three key tests for NEOI is that it’s out of income, as outlined in section 21 of the Inheritance Tax Act 1984.
Good felt that although the question did remain unanswered on the forum (at time of recording), it was a fairly clear-cut case.
“Income for this purpose will not include a lump-sum payment from the pension fund,” said Good. “The Revenue manuals do refer to pension payments, but what they mean there is pension income. Regular annual income from a pension would count.”
When looking at the definition of income, Good stated that the capital element of a purchased life annuity bought since 1974 is not treated as income for the purposes of section 21, and in addition annual 5% withdrawals from a single premium policy are generally considered by HMRC to be of capital as opposed to income, and therefore cannot be taken into account.”
The pair also flagged up potential ways in which the poster’s client could escape IHT.
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