A non-UK domicile died owning shares in an Isle of Man company. Writing for Taxation magazine, BKL tax adviser Terry Jordan addresses the IHT, CGT and corporation tax aspects that need to be considered by the UK domiciled and resident son who inherited the shares. The article also considers whether an “instrument of variation” could offer prospective IHT savings for the son’s family.
Inheritance of a Manx company
I should be grateful for advice about an Isle of Man company that my father set up in 1979. He lived on the island from 1976 and was domiciled there until he died in November 2014. The company is a property investment business with just me and my father as the directors. I live in the UK. In his will, my father left me his six shares in the company.
I already owned one share and there were only seven shares issued in total. The company’s income consists entirely of rental income from UK properties. Tax is paid to the Manx government, although I now understand that it should have been paid to the UK authorities.
Must I move to the Isle of Man? If I sell the properties would I have to pay capital gains tax or any other tax? I am at a complete loss as to what to do and any advice would be appreciated. As a final comment, an adviser in the Isle of Man has suggested that I should resign as a director and let a chartered secretaries company take over. Is it all right to do this?
Query 18,521 – Manx Man
Reply from Terry “Lacuna” Jordan, BKL
On the basis that the situs of a company for inheritance tax purposes is where its register is kept, the shares in this case are non-UK situs.
Since the father was not domiciled within the UK, no inheritance tax charge would have arisen on his death. If the company is to be retained in the family’s ownership Manx Man could, within two years of his father’s death, create a trust by an instrument of variation and the inheritance tax settlor would be his late father so that the shares would be “excluded property” and outside the scope of UK inheritance tax. (A client of mine has recently done exactly this with an Isle of Man property investment company owned by her late mother who was domiciled there.)
For other tax purposes, the residence of the company is uncertain. Manx Man is a director and it may be that the company has been managed and controlled from the UK.
While the value of the shares would have benefited from an uplift to market value as at the date of the father’s death for capital gains tax purposes, the value of the underlying properties would not have been uplifted. If the properties are sold, a gain will arise in the company. Either the company will be liable to corporation tax (if UK resident) or the gain will be attributed to Manx Man under TCGA 1992, s 13.
Manx Man asks whether he must move to the Isle of Man. Unless the values are very significant that seems a rather drastic step to take, although if he were to become non-UK resident and not only temporarily non-resident he would, under current rules, be outside the scope of UK capital gains tax. However, he may also need to consider the new rules that will impose tax on non-residents owning UK residential property with effect from 6 April this year.