Questions of Cash: December 2014

Q. My daughter was selected as part of a group of 16 girls to go on a school hockey trip to Holland during Whitsun half-term this year.  At a pre-trip meeting, parents were encouraged to order sports clothing for the event that would carry embroidered details of the trip.  The PE staff said this would project a professional image for the hockey team and promote a team spirit.  We paid £64 in May for a sports top, hooded top and tracksuit bottoms. The clothing for the whole squad arrived from the supplier, Kukri, ahead of the trip, unembroidered, with the promise that the kit could be returned after the trip for this to be added retrospectively. The kit was returned as agreed, but ‘South Africa’ was then embroidered on the clothing instead of ‘Holland’.  The school sent the order back to be corrected, but the corrected kit never arrived.  The school says that no one senior at Kukri has returned calls.  No date has been given to receive the kit. I would be inclined just to cancel the order and demand my money back, but my daughter insists that she still wants a memento of the great time she had. DL, Solihull.

A. You contacted us in September – and the corrected kit eventually arrived, in two batches, in December. During those three months we have persistently and repeatedly contacted Kukri to request this matter be resolved. We understand that a serious illness to a senior member of staff plus IT systems problems caused the delays and customer service failures. But we expect a reasonable sized business such as Kukri that promotes itself as being customer friendly to have sufficient resilience in its systems to cope with problems of this kind. Kukri’s spokeswoman explains: “From what I can see there was a factory error, then the sales manager in this area left Kukri and along with the fact there has been quite a lot of internal change within the business recently, this case has been one of the casualties which has not been dealt with properly, if at all. All I can do is sincerely apologise. We do really care here at Kukri, but from this email trail you are well within your rights to think we don’t and are a bunch of idiots.”

Q. In 2007 my son, who was in the RAF, wanted to buy a rental property – anticipating a time when he would leave the forces. As he was regularly on duty in Afghanistan, my wife and I offered to help him with the deposit and administering the mortgage. We ended up buying a small house, with my wife and I putting up 20 per cent of the purchase cost, with him covering the repayment mortgage and all three of our names on the mortgage. The mortgage deal was at 5.5 per cent for three years and then reverted to 1 per cent above the base rate. My son has now left the RAF, got married and wants to sell the property. However, my wife and I would like to keep it as a rental property, so we agreed to pay him back what he had invested in the property through his mortgage payments. Obviously with the interest rate being so low, we do not want to take out another mortgage, so my son’s name will remain on the mortgage, but my wife and I will take over the payments. My question relates to the £23,000 that we will now pay my son. What tax, if any, would be due on this money? What can we do to avoid my son having to pay any tax that may be incurred?  IB, Gloucestershire.

A. David Truman, private client tax partner at Menzies Accountants, replies:The HMRC would take the view that the reader’s son is essentially disposing of his share of the property to his parents with the sale proceeds being the £23,000, which they are paying to him in cash. As the reader, his wife and son are connected persons for capital gains tax purposes, the disposal value would be deemed to be the open market value of his share of the property.  There would therefore be a capital gains tax charge on the difference between the market value at the time of transfer and the original purchase cost.  This capital gains tax would be payable at 18 per cent or 28 per cent (or a combination of the rates) depending upon the son’s level of income in the tax year. There are some mitigating factors that could be utilised to help reduce the chargeable gain. There is an annual capital gains tax exemption of £11,000 per person if not used elsewhere. A proportion of the costs of acquisition and disposal – ie stamp duty, professional fees – can be excluded from the charge. On the basis that the property is jointly owned, it is likely that HMRC would accept a discount of up to 10 per cent on the share of the market value. While it was purchased as a rental property, if the son has occupied the property at any point in time as his principal private residence, then this may provide some mitigation for periods of actual or deemed occupation. Any enhancement expenditure on the property would also be allowable to reduce the gain. The reader could consider transferring part of his share to his wife in advance of the disposal to the parents to utilise her annual exemption and any of her remaining 18 per cent tax band. In addition to the capital gains tax, it is possible that there might be stamp duty implications depending upon the detail.

“Finally with regard to the mortgage, my advice would be to speak to the mortgage lender and advise them of the transaction taking place and seek their approval.  The risk of not advising the lender is that the transaction might breach the covenants on the mortgage and cause the mortgage to become repayable.”

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