Peter Vaines considers recent tax developments - and makes a pessimistic prediction.
New Non Dom Rules
The Finance Bill was published on 20th March and, would you believe it, the proposed rules relating to the non doms have been changed yet again. They have fiddled around with the wording of the provisions quite a lot and although the main thrust of the proposals continues, some have been substantively changed and others have been removed altogether. These will be included in a future Finance Bill - and with luck, they will not be retroactive.
There are very few changes to the new rules which bring UK residential property into charge to inheritance tax, where it is held though an offshore company or other vehicle. However, the value threshold for the shares in the offshore company, below which the new rules have no application, has been increased from 1% to 5% which is clearly very helpful.
Another change of some significance is the abandonment of an exit charge in the event that a trust disposes of an interest in a company which owned a UK residential property. This was going to give rise to an immediate exit charge – but it is now proposed that the proceeds of any disposal (or the repayment of any loan which is caught by the loan rules) will remain outside the excluded property rules for two years from the disposal or repayment – similar to the proposals in respect of individuals.
The rules relating to the trust protections have been revised - particularly in connection with tainting of existing trusts. This would occur, for example, if the settlor makes an addition to the trust after 5th April.
If a settlor has made an interest free to a trust which continues after 5th April 2017, this will be regarded as an addition to the settlement and therefore cause the trust to be tainted. (Surely a sense of proportion was required here. There are pages and pages of legislation dealing with this point – which surely can hardly be of major significance). Anyway, the previous suggestion that a payment of commercial interest on such loans was necessary for the current year has been dropped. HMRC has confirmed that from m6th April 2017, the loan will be regarded as arm’s length (and therefore not be regarded as tainting) if the official rate of interest is paid annually.
It is no longer proposed that distributions from trusts to non-resident beneficiaries will not reduce the trustees stockpiled gains. Similarly, it was proposed that where benefit is received by a beneficiary who is a close family member of the settlor but who is not liable to CGT on the payment or benefit received, the charge would be made on the settlor. This too has been abandoned (at least for the moment), along with the recycling rule where a distribution is made to a beneficiary and the funds are given to a third party within three years. It was proposed that the remittance of those funds by the third party would be regarded as a remittance by the original recipient – but this is still OK for a while.
There are a whole load of new rules relating to the valuation of benefits – apparently to give more certainty to individuals receiving benefits about how they will be taxed. In many cases, the benefits will be based on the official rate. There are likely to be more changes before the rules are finally enacted and let us hope we will have until Royal Assent (rather than 5th April) to take all necessary precautions.
CGT Hold Over Relief
There are some interesting legislative interpretations this month. One of these arose in the case of Reeves v HMRC TC 5680 in which the Tribunal was concerned with a claim for holdover relief for capital gains tax. Mr Reeves made a gift of an asset to a UK company and claimed holdover relief. However, TCGA 1992 s 167 provides that holdover relief is not available if the company is controlled by non-residents.
Mr Reeves owned the shares in the company but he was married and his wife was non-resident. Husbands and wives are connected persons. So, if we consider the position of Mrs Reeves, she was connected with Mr Reeves and his shareholding could therefore be attributed to her. She was non-resident so it was possible to say that the company was controlled by a non-resident. Can you believe this? Try as they might, counsel for Mr Reeves could not get past the clear analysis of the legislation which denied holdover relief.
The definition of connected person is very wide. It is a spouse, brother, sister, ancestor or lineal descendant so if virtually anybody in the family is non-resident, holdover relief would be denied because that non-resident person could have the whole of the shares attributed to him.
The intention of Parliament seems to have gone a bit AWOL here. It might of course be said that this extraordinary result was exactly what Parliament intended – but that may be a minority view. If one looks at the reasoning of Lord Reed in UBS and DB in the Supreme Court, his formulation that if the construction makes no sense and could not be what Parliament intended, a purposive construction should be available to assist the taxpayer. Or to use the words of the Supreme Court more precisely, an appropriate purposive construction could be adopted to interpret the legislation in the light of the transaction which took place. It seems to me that the effects of this decision are so startling that some kind of HMRC practice or relieving procedure might be forthcoming.
No, I don’t think so either.