2 adult siblings (both married) resident in the UK for almost 30 years, so deemed UK-domiciled. Their non-domiciled parents (both in their late 70s) became permanently resident in the UK in 2014.
• Very shortly after the parents had become UK resident in 2014, they made an interest-free loan to a UK limited company (whose sole equal shareholders are their two children) to acquire UK commercial property where the funds were accounted for as a long term loan.
• For two years after the acquisition, rental income was used to repatriate 10% of the loan back to the parents offshore. No more repayments have been made since as the decision was made to convert the remaining 90% balance of the loan to a gift to the children. However, this balance is still accounted for as a long term loan in the company’s balance sheet.
• Parents would like to gift additional funds held offshore to the children who will utilise the funds to invest in more UK commercial real estate. A suitable acquisition has not yet been identified.
• Potential IHT liability if new funds are brought onshore and parents don’t survive 7 years. Same for the loan/gift in 2014, although this would be eligible for taper relief.
• Funds could be considered to be a remittance to the UK by the parents
Proposed method for gifting additional funds
• Parents transfer funds to an offshore bank account held by one of the children. He then transfers the funds from his offshore bank account to the limited company in the UK which would hold the real estate investment as shareholders’ loan.
• Are the risks sufficiently addressed by the proposed method for gifting additional funds? Are there any other risks not identified?
• Can a back-dated gift deed be made by the parents transferring their interest in the 90% balance of the loan to the 2 children to the date the loan was first given?
• The additional gift is for both children equally, but only one child has an offshore bank account to receive the gift offshore. He will transfer the gift to the limited company where it will be accounted for as a shareholders’ loan in respect of both shareholders. Is there any potential issue with this as theoretically, the other sibling will not have had any funds actually pass through his bank account in giving a loan to the company?
• Would any thin capitalisation issues arise if there is no interest on the loans?
• Upon eventual sale of the properties within the company, the proceeds will be used to repay the shareholders’ loans so that funds can be extracted from the company without any dividend tax. Could there be an issue in doing this?
• Is there a better way of gifting the additional funds or re-organising the original loan-turned-gift?
• Could any asset-protection measures be incorporated given both the children are married?