March questions and answers
Newsletter issue - March 2017.
Q. Will I have to pay stamp duty land tax on a property I am about to inherit?
A. Stamp duty land tax (SDLT) is generally payable on land transactions. There is a land transaction when land passes to a beneficiary under a will, or by virtue of the law on intestacy. However, the legislation governing SDLT (Finance Act 2003, Schedule 3, para. 3A) provides that the acquisition of property by a person:
- in or towards satisfaction of his entitlement under or in relation to the will of a deceased person,
- on the intestacy of a deceased person
is exempt from SDLT.
You should note though that this exemption does not apply where the beneficiary gives consideration other than the assumption of secured debt or the acceptance of an obligation to pay inheritance tax. Secured debt is debt that, immediately after the death of the deceased person, was secured on the land. The most common example of this is a mortgage to the extent that the mortgage is not paid off on death.
The exemption applies whether the transfer is to a sole beneficiary or to joint beneficiaries.
Q. I run a small business but I am registered for VAT. What are the advantages and disadvantages of using the annual accounting scheme?
A. The annual accounting scheme aims to help small businesses by allowing them to submit only one VAT return annually. During the course of the year, fixed sums are paid to HMRC - based on the previous year's liability - and a balancing payment is made, if necessary, once the annual return has been prepared.
Key points of the scheme are as follows:
- A business can join the scheme providing its taxable turnover does not exceed £1,350,000 per annum.
- The business must stop using the scheme if its taxable turnover exceeded £1,600,000 per annum in the previous accounting year of the scheme.
- The business makes nine monthly payments of 10% of the total paid in the previous year or, if newly registered, the amount it is expecting to pay in the next 12 months. Alternatively, it can choose to pay 25% quarterly.
- HMRC may agree to alter the level of interim payments if the business trading pattern changes.
- A business may not obtain approval to use the scheme if it owes a significant debt to HMRC.
- Payments start on the last working day of the fourth month of the scheme's accounting year and must be made by standing order, direct debit, or other electronic means.
- The annual VAT return, together with any balance due to HMRC, is submitted two months from the end of the scheme's accounting year. This means that a business gets an extra month over the time limit applicable to a normal return.
- The scheme may assist some businesses with cash flow, particularly where the business is seasonal. For example, if the busiest trading period is in the summer, a scheme year ending, say, 31 January, will spread the payments, thus assisting cash flow. It may also be more convenient to produce both the annual VAT return and the annual accounts at a quieter time of the year.
- It is generally felt within the accountancy profession that the discipline of preparing a quarterly VAT return helps businesses to keep their records up to date and on top of their financial affairs.
Q. I live in a leasehold flat in a property in which there are six other leasehold flats. The opportunity has arisen for the leaseholders to buy the freehold reversion from the landlord and all of the leaseholders have agreed to contribute equally towards the purchase. Our solicitor has advised a limited company should be set up to buy the freehold. Are there any tax consequences involved here?
A. The Law of Property Act 1925 stipulates that a maximum of four persons can be the legal owners of land and property, which is likely to be the reasoning behind your solicitor suggesting the use of a company. This restriction, however, only applies for legal ownership, which means that named persons could hold the ownership as trustees for other persons too. Tax is usually based on beneficial ownership, not legal ownership and a 'bare trust' is often used in cases where one or more persons would hold the freehold reversion as bare trustee for all the leaseholders. For tax purposes, the tenants would be deemed to own their share of the freehold absolutely. A similar arrangement can exist in a company providing the company is a 'nominee company' which is the corporate equivalent of a bare trust. This too would have the same consequences as a bare trust.