We were pleased to attend this year’s UK Annual Tax Conference hosted by the Society of Trust and Estate Practitioners (STEP). BKL’s Geraint Jones has reported on the conference for Taxation magazine.
Topics included agricultural property relief, stamp duty land tax, entrepreneurs’ relief and domicile dilemmas.
Key points from the conference:
- Care is required to avoid double tax charges if a settlor-interested trust is created.
- The inheritance tax entry charge when assets are transferred into relevant property trusts can be avoided.
- A two-year rule applies for business property relief, but in respect of the shareholding rather than the business.
- Inheritance of a property rather than a purchase can result in a 3% stamp duty land tax surcharge.
- TCGA 1992, s 169I(6)(b) requires the vendor to have been an officer or employee of the company throughout the 12 months ending with the disposal.
Double charges
Chris Whitehouse (5 Stone Buildings) opened the STEP conference by warning that recent changes to the law on trusts may result in detrimental tax charges unless careful planning is undertaken.
Chris provided the example of the creation of a settlor-interested relevant property trust settlement in excess of the estate exemption of £325,000. This could result not only in a chargeable lifetime transfer on the settlement, but also a decennial charge within the trust. Not only that, the property remains within the settlor’s estate. To prevent double taxation, any lifetime tax can be deducted from the amount payable on death, but double taxation will arise, in effect creating the worst of all worlds.
Entry charge
Chris proceeded to highlight several ways to mitigate the inheritance tax entry charge when assets are transferred into relevant property trusts. The three main ways to achieve this are:
- the use of agricultural property relief (APR) and business property relief (BPR);
- gifts out of income, settling every seven years; and
- resettling a reversionary interest (IHTA 1984, s 48).
However, there is a danger of a clawback if the donor dies within seven years of the gift.
Agricultural and business property relief
Emma Chamberlain (Pump Court Tax Chambers) focused on APR and BPR, pointing out that there is now a clearance procedure if gifts of agricultural or business property involve a potential immediate inheritance tax. Thus, if there is a proposed gift into trust that could be an immediately chargeable transfer, a clearance valid for six months could be sought. This would provide certainty in estate planning.
Emma also reminded us of the importance of HMRC v Nelson Dance Family Settlement Trustees [2009] STC 802. Before this judgment, it was thought that BPR was available only on a transfer of the business or part of it. So, if land owned by a business was settled on to discretionary trusts, the land would not itself be an interest in the business and would therefore be denied relief. Nelson Dance confirmed that if the value transferred is attributable to the value of relevant business property, the relief is indeed available.
The ‘two-year rule’
The importance of IHTA 1984, s 106 (‘Minimum period of ownership’) and the ‘two-year rule’ was also highlighted by Emma. This states that shares in a business need to be held for two years to qualify for BPR, but the business does not necessarily need to be trading throughout that period.
To use Emma’s example, Freddie owns X Ltd which has been renting out properties for many years. X Ltd then sells the properties and starts trading. Soon afterwards, Freddie dies; would BPR be available on his death? The answer is yes because there is no requirement in s 106 for the business to be trading. The relevant business property is the shares and the ‘two-year rule’ relates to their ownership. HMRC appears to accept this point as long as the company is not dormant and is conducting business.
Rights issues
A useful planning variant on the ‘two-year rule’ arose from Vinton v Fladgate Fielder [2010] EWHC 904 Ch. Emma reminded us that shares purchased through a rights issue are treated in accordance with basic principles (TCGA 1992, s 127) as having been acquired at the time of the original holding – potentially many years earlier – so the normal two-year ownership rule need not be met. Thus, death bed planning could involve a large rights issue to convert cash into shares that would qualify immediately for BPR. So even though the shares have been owned for only a matter of days, they would qualify for relief. However, a business need for the money raised by the company should be shown. The company cannot just stockpile it.
This should be contrasted with a simple subscription for further shares whose ownership date is that of the subscription and would therefore not circumvent the two-year rule.
Stamp duty land tax
Caroline Fleet (Gabelle) pointed out the increasing complexity of stamp duty land tax (SDLT). There are now 11 different rates that could be charged depending on whether the property is residential or commercial, a first or additional property, whether it qualifies for multiple dwellings relief, or is sold to a company. Caroline focused on the 3% surcharge – pointing out that:
- married couples are treated as a single unit;
- a second property includes any other property worldwide; and
- the surcharge applies to residential property only.
Caroline also emphasised that it was not the purchase of a second property that leads to the 3% surcharge; it is the ownership. Thus, inheritance of a property could result in a 3% surcharge being due.
Entrepreneurs’ relief
In a lively presentation, Robert Jamieson (Mercer & Hole) focused on capital gains tax entrepreneurs’ relief. He emphasised the various requirements to qualify for this; in particular that one looks only at the last 12 months of a company’s business to determine whether it qualifies.
Thus, a rental business that becomes a furnished holiday lettings business just 15 months before being wound up could qualify for entrepreneurs’ relief. This is of particular interest because the nature of the business before the final 12 months does not matter. So, if someone has owned a rented residential property any gain after a disposal would be taxed at a highest rate of 28%. If, however, more than 12 months before the sale, the individual decided to start renting the property as a furnished holiday letting his eventual gain would only be liable to only 10% tax. This is subject to compliance with the furnished holiday accommodation rules for at least the final 12 months. The fact that the property was rented out on a different basis for most of the client’s period of ownership is immaterial.
Employment and entrepreneurs’ relief
A particular problem that can arise with entrepreneurs’ relief and why careful planning is required was highlighted by the case of JK Moore v HMRC (TC04903). Robert explained that Mr Moore was a founding shareholder director in trading company. He owned 30% of the shares and was employed as the sales and marketing director. In 2008, there was a dispute between the shareholder directors over the future direction of the business, which ended with Mr Moore agreeing to leave the company. The parties entered into a compromise agreement under which Mr Moore’s employment was terminated and the company contracted to buy back his shares. Papers were filed at Companies House stating that he had resigned his position on 28 February 2009. However, the company did not resolve to repurchase his shares until 29 May 2009.
The entrepreneurs’ relief legislation in TCGA 1992, s 169I(6)(b) stipulates that the vendor must have been an officer or employee of the company throughout a period of 12 months ending with the disposal of his shareholding. HMRC contended that Mr Moore had failed this condition by virtue of his earlier resignation from the company. Thus, he was not entitled to entrepreneurs’ relief.
Consequently, it is important to ensure that the vendor remains an employee or an office holder throughout the 12-months before the disposal of their shares.
The meaning of ‘ordinary shares’
Robert also highlighted the important case of M McQuillan and E McQuillan v HMRC (TC05074). This explored the meaning of the term ‘ordinary shares’ and whether a share with no dividend entitlement was in fact one with a fixed rate; in other words, at 0%. The First-tier Tribunal decided that redeemable ordinary shares without a dividend entitlement were not ordinary shares for entrepreneurs’ relief purposes. However, this was reversed in the Upper Tribunal. It is now necessary to ensure that there is a fixed dividend rate, albeit at a minimal rate, to prevent a share being ordinary.
Domicile dilemmas
In an entertaining afternoon slot, John Barnett (Burges Salmon) highlighted the pitfalls of domicile especially those in which federal countries are concerned. John highlighted the example of a man whose father had a domicile of origin in England and Wales. He then moved to the US but did not settle in any one state. Because an individual is domiciled in a state rather than a country, he may never have established a domicile of choice outside the UK despite being in the US for a considerable time.
A further interesting example highlighted the unexpected consequences that failure to establish a domicile of choice might entail if the domicile of origin is in a country bound by Shariah succession laws. In such circumstances, the son will receive two-thirds of the inheritance and the daughter one-third which may not be what the parents wish.
John also warned of problems arising where countries have split or no longer exist. He highlighted the example of the Federation of Rhodesia and Nyasaland. This existed between 1953 and 1963, but had three different legal systems. It is, of course, the legal system that will determine the domicile so the moral is to know your history.
Various other quirks were highlighted. For instance, foundlings have a domicile of origin where they are discovered. In John’s example of a baby being found on the steps of an embassy, the exact legal status of the premises needs to be researched to see whose ‘legal soil’ it is. Adoption is one of the few processes that can change a domicile of origin. In such instances, the child then has a domicile of origin of the adoptive father (or mother if the adoptive parents are not married). John raised the hypothetical situation in which a same-sex married couple (or civil partners) with different domiciles adopt a child. Whose domicile will the child take? So far, there is no law on this.
Mixed-fund cleansing
John also highlighted the significant opportunities afforded by mixed-fund cleansing.
This is available to all non-domiciled individuals (irrespective of residence) other than returning domiciles. It allows offshore mixed funds to be ‘unmixed’ so that the individual components of each account can be split out and segregated.
So a series of foreign accounts are established and designated as, say, foreign dividends, foreign capital gains and the like. The individual components of a mixed account are then syphoned into those accounts. This allows pure capital to be remitted to the UK tax-free.
This applies only to ‘money’ held in an account and the provision lasts only until 5 April 2019, so action needs to be taken promptly.
This report is also available to subscribers on the Taxation website.
For more information on our tax services, please contact us using our enquiry form.