Our website uses cookies to enhance the visitor experience (what's a cookieCookies are small text files that are stored on your computer when you visit a website. They are mainly used as a way of improving the website functionalities or to provide more advanced statistical data.). Are you happy for us to use cookies during your visits?
Please note: continuing without making a choice equates to giving us your consent, which you can withdraw at any time via our cookies policy page.

 

March Questions and Answers


Newsletter issue - March 2016.

Q. What are the implications of selling my Scottish home? I own and live in a property in Scotland. What are the implications of me selling the house to a relative, who will buy it using a buy-to-let mortgage, and allow me to stay in it and pay rent to her as a tenant?

A If the house has always been your main residence, there should be no capital gains tax implications for you. Depending on the purchase price, your relative may have to pay the Scottish land and buildings transaction tax (LBTT), which replaced the previous stamp duty land tax (SDLT) in Scotland from April 2015. With regards to the new lease allowing you to remain in the property as a tenant, there may be relief from LBTT under the sale and leaseback provisions. For further information on LBTT, see the Revenue Scotland website at here. And of course, your relative will have to declare and pay tax if applicable, on any rental income she receives from you.

Q. Should we register for VAT to reclaim input tax on the costs of conversion? My brother owns a commercial business unit, and we have decided to convert it into residential units. Although I will be project managing the conversion, I will not be charging my brother. As you can imagine, there will be a lot of expenditure on building materials, which are subject to VAT and potentially contractors who are VAT registered. Will it be advantageous to set up a VAT-registered business for the development so that we can claim back the VAT incurred?

A Broadly, where an individual converts non-residential property into residential property they can zero rate the sale of the completed residential units. Where this is the case, it will be worthwhile registering for VAT as much of the input VAT incurred can be reclaimed. However, there are many rules and conditions that can apply in such circumstances. VAT Notice 708: buildings and construction should provide a useful reference tool. I would recommend that you read it in detail as it will help you satisfy yourself as to the correct liability of the supplies of goods and services being made by suppliers and contractors to you. The Notice can be found on the GOV.UK website at here.

Q. Is inheritance tax due on a gift? I have an elderly friend who has said he would like to give me a gift of £10,000 to help with my planned kitchen extension. Will there be any tax to pay on this very generous gift?

A If you make a gift during your lifetime, there will not usually be any inheritance tax (IHT) to pay. Lifetime gifts are usually treated as potentially exempt transfers (PETs) and will only become chargeable to IHT if you die within seven years of making the gift.

However, if you make a gift to a company or to some types of trust, the gift is immediately chargeable and you may have to pay some tax in your lifetime - if the total value of those gifts exceeds the IHT threshold (currently £325,000).

Any money you give away during your lifetime that doesn't fall under the exempt transfer rules may escape IHT as a potentially exempt transfer (PET). There are no limits on the amount of PETs you can make during your lifetime. Basically, for a PET to escape IHT completely you need to make sure that you survive for seven years after making the gift.

If you die within the seven year period, the PET will be partially chargeable depending on the number of years that have elapsed. The reduction is given in the form of taper relief. This is a sliding scale used to determine tax liabilities on gifts between three and seven years before death. The rates of taper relief are as follows:

Taper relief is only of real benefit if you can also fully use the nil rate band for other transfers. Taper amounts are set against the free slice first.

If you give £100,000 away during your lifetime and die four years later, leaving a further £350,000 in your will, the first £100,000 lifetime gift counts against your nil rate band first. So your estate will only have £225,000 (in 2015/16) left in nil rate band to set off against the remaining £350,000. This means that your executors will end up paying as much tax as if you had not made the gift at all.

Taper relief is worthwhile for those with large estates. Giving away £1 million and living for seven years takes the money right out of the IHT net. But if you only live for six years, the £1 million less the nil rate band is charged at only 8% tax instead of 40%. Obviously, anything that is transferred at death will be chargeable at the full 40% rate as the nil rate band will have been used up.

Many people use special life insurance policies to make sure that a potential liability to IHT is covered if they don't live for the full seven years after making a PET. These types of policy are designed to fit in with the tax taper. The proceeds are usually written into trust so they are outside your estate when you die.

 

 

Request a callback from Mapperson Price

Our philosophy is to provide a professional friendly service to local people, including employed, self-employed and small to medium sized businesses. Fill in our callback form and we'll contact at a suitable time for you.

The partners are supported by staff with a range of experience in accounts, taxation, payroll, and company secretarial work to support the various services the firm offers.

REQUEST CALLBACK

We always aim to get it right first time, every time, we'll respond to you as soon as possible after your form has been received by us.

 


Newsletter Icon

Newsletter Sign up

Handy tax tips delivered directly to your email inbox