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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3590
Experience:  FCCA FCMA CGMA ACIS
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can you answer a simple question now ?

Customer Question

can you answer a simple question for me now ?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
I can if you would kindly tell me exactly what the question is, please?
Customer: replied 2 years ago.

I am selling a small business investment that I was gifted about 18 months ago. The market value at that time was 500,000 and I am now selling it for 650,000. What would be the cost price? Would it be 0 because I did not pay anything for it (as it was gifted) or would it be 500,000 (the market price at the time).

Thanks

Shaf

Expert:  bigduckontax replied 2 years ago.
Hello Shaf, I am Keith and happy to assist you.
Presumably you are referring to Capital Gains Tax (CGT). The fact that it was gifted to you is irrelevant, you are deemed to have acquired it at the market price at the time of donation, 500K. You are selling it for 650K so you will make a gain of 150K. Deduct your Annual Exempt Amount of 11K, leaves 139K liable to CGT at 18% or 28% or a combination of the two rates depending on your income including the gain in the disposal year. Worst case scenario is a tax bill of say 39K. If you have run this business you might be entitled to Entrepreneurs' Allowance which reduces the rate of tax to flat 10% on the gain.
I do hope I have been of assistance to you with my answer.
Customer: replied 2 years ago.

Many thanks. Very helpful indeed.

Regards

Shaf

Expert:  bigduckontax replied 2 years ago.
Delighted to have been of assistance.
Please be so kind as to rate me before you leave the Just Answer site.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3590
Experience: FCCA FCMA CGMA ACIS
bigduckontax and 2 other Tax Specialists are ready to help you
Expert:  bigduckontax replied 2 years ago.

Thank you for your support.

One point I should have mentioned is that the gift creates a Potentially Exempt Transfer (PET) in the donor's estate. PETs run off at a taper over seven years and in the event of the donor's decease within that period are added back to his estate for Inheritance Tax purposes. PETs are the first to suffer tax and if the estate is insufficient to meet the tax on the PET then it cascades down to the beneficiary for immediate settlement. The classic defence against the PET is a reducing term life insurance.

Customer: replied 2 years ago.

HiCustomer

Would you be able to help with 1 more follow up question related to this subject ?

Shaf

Expert:  bigduckontax replied 2 years ago.
Certainly, delighted to help.
Customer: replied 2 years ago.

DearCustomer

Thanks for helping further.

I am transferring my personal investment asset freehold to my company (100% shareholder and only director). The asset is currently leased out and receiving a monthly rent. Once the asset has been transferred, the company will receive the rent and will repay me monthly the "full 100% loan" in 2 stages. Stage 1 is where no interest is paid - for about 5 or 6 years and then Stage 2 where interest outstanding will be paid.

My question is - If for example the rent was £1,000 pm, how would this be split in terms of Corporation Tax, Loan repayment, expenses, for both the stages ?

I also understand that interest will be taxed by the company under CT61 and the rest paid to the director but would that also be due for Corporation Tax/Expenses ?

Thanks a lot

Shaf

Expert:  bigduckontax replied 2 years ago.
Your understanding of the repayments by the company under the CT61 procedure is one way of doing it; tax at the basic rate would be deducted and paid to HMRC with you receiving the balance.
The rent would be income for the company less expenses (ie the moneys paid to you) and the balance would be subject to Corporation Tax (CT) at 20%. Loan repayments would be outside the scope of UK taxation. Any interest paid would also be allowable against CT.
Beware of CGT as the property transfer would be a disposal for the purposes of this tax. This should be presented, if you need advice, as a separate question.
Customer: replied 2 years ago.

Hi,

Thanks for this. So to clarify; CT61 is one way of doing this. Is there another? (or is this beyond the scope of this issue?)

So, for my example, the £1,000pm is the rent. In Stage 1,If the Co. pays back the director the full £1,000pm loan principal amount, then no Corporation Tax is due as the full rent is paid back and its classed as an expense.

In Stage 2, the rent £1,000 has to have 20% paid to HMRC with CT61 and the balance of £800 paid to the director. Again no Corporation Tax is due as the £800 is an expense ?

Is my understanding of both stages correct ?

Yes CGT will be paid and has been calculated (Sob - big amount)

Thanks

Shaf

Expert:  bigduckontax replied 2 years ago.
Yes, you could be an employee of the company and paid under PAYE arrangements. Indeed, if you are a director this procedure is mandatory.
Repayments of principal are outside the scope of CT. Payment of interest on the loan is allowable against CT. So if the payment is repayment of the loan as opposed to the interest on the loan then the Company would be assessed for CT on the full rental received.
In your second point 1000, not 800, is allowable against CT as the payment on a CT61 is two bits, to the individual and the taxman and aggregated for acertaining the company's profit position.
Customer: replied 2 years ago.

Hi,

Really sorry to labour on with this point but I am still unclear.

Your 2nd para seems to contradict itself? Repayments of principal is outside CT, yet you then say repayment of loan would be assessed for CT.

Are you saying that repayment of principle is different from repayment of loan ? If so what would be the difference. I am selling (transferring) my asset to the company. The company will pay me for the asset over a number of years and then once the market value is paid back, the interest will start to be paid. I just want to know how should the company deal with the rent received in respect to paying me back.

Sorry about thisCustomer but you are my expert !

Best

Shaf

Expert:  bigduckontax replied 2 years ago.
No, you misunderstand me Shaf. The repayment of a loan (ie the repayment of the principal) is made without deduction of tax. The payment of interest is correctly done through the CT61 procedure. Any wages must be paid to a director through PAYE.
Customer: replied 2 years ago.

hi,

Really sorry about this but I am even more confused lol i am being thick

Can we focus on the example?

Example, the rent is £1,000pm.

In Stage 1, the Co. pays back the director no interest and wants to maximise the repayment. So, out of the £1000, is there a CT? if so can the rest be paid to director and is tax free? Or there is no CT and the full 1000 can be paid to director?

In Stage 2, interest has to be paid so how is the rent £1,000 split between CT, expenses, paid to director

We'll get there or shall we talk on the phone?

Shaf

Expert:  bigduckontax replied 2 years ago.
The repayment of the loan is not taxable in the hands of the recipient. Nor is it allowable against CT in the company, so it would be faced with a tax bill of 200 quid.
If interest is being paid then 1000 goes against the company's profit, thus reducing the CT liability and is paid to the lender through the CT61 procedure. The lender then receives 800 and the taxman 200 thus the former receives the interest net of tax at the basic rate.
Customer: replied 2 years ago.

phew finally understand lol

Thanks for your patience i will rate it add abonus tmrw

Many thanks

Expert:  bigduckontax replied 2 years ago.

Delighted to have been of assistance.

Thank you for your support.

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