It’s bad enough paying tax on what you have yourself received. But you can sometimes be liable to pay tax in respect of income or capital gains which have accrued to other people.
The detailed rules are complicated: but, very broadly, you will need to consider them if you put another person in a position to enjoy income or gains that might otherwise have accrued to you personally. And when we say ‘consider them’, we use that phrase advisedly: in most cases you are required to recognise and self-assess this sort of liability in your annual tax return rather than rely on HMRC to identify it; failing to do so can lead to penalties, sometimes of significant size.
The issue will most commonly arise in respect of ‘arrangements’ (which includes but extends far beyond formal trusts) which either:
- result in income arising to your minor children (grandparental settlements are normally OK); or
- are such that there is a possibility of your personally deriving any benefit at any future time (whether or not you actually do so).
Arrangements benefitting a spouse or civil partner may also be at risk, though there is a carve-out that exempts many such arrangements such as (in most cases) partnerships or transfers of ordinary shares.
The rules on capital gains tax (‘CGT’) are slightly different and are most likely to be relevant where overseas companies or trusts are involved. In particular, if you are resident and domiciled (or deemed domiciled) in the UK, you may be liable to pay CGT in respect of any gains made by a non-resident trust if:
- you, or any of a class of ‘defined persons’ (broadly, your family) can potentially benefit from the trust (regardless of whether or not they actually do so); and
- any of the trust property ‘originates’ from you – a tricky term including the provision of property directly or indirectly, but only if some element of altruism or bounty is involved. Probably allowing trustees to subscribe on favourable terms for shares in your startup company would count.
And, of course, if the trustees of an offshore trust established by someone else make a payment to you that can be matched with any capital gain made by the trust, you are likely to have a liability to tax.
As we say, the rules are complex; and the fact that you have afforded someone the opportunity of making income or gain won’t always put you in the frame for a charge to tax. But a safe rule of thumb would be to seek professional advice if you recognise the potential application of any of these provisions to your circumstances.
For more information, please get in touch with your usual BKL contact or use our enquiry form.