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Monthly Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author and presenter of Monthly Tax Review, reports on a potential problem area involving non-resident companies and offshore trusts.

Context

TCGA 1992 s 13 ensures that chargeable gains accruing to a company which is not UK resident but which would be a close company if it were UK resident do not necessarily escape UK tax. The gain is apportioned among the participators in the company, so that a UK resident participator (who if an individual is UK domiciled) with an interest of more than 10% is treated as realising the appropriate portion of the chargeable gain.

Consider the case where the non-UK company owns UK property which is the main residence of a beneficiary under an offshore trust which owns the shares in the company. Two questions arise:

• in apportioning the gains through to a UK resident and domiciled settlor under TCGA 1992 s 86, is the benefit of main residence relief available? And

• how, more generally, are gains attributed to the trustees?

No main residence relief available

TCGA 1992 Sch 5 para 1(3) deals expressly with the case where the trustees are participators in a company in respect of property which originated from the settlor (necessary for the s 86 charge to apply) and gains or losses are treated as accruing to the trustees under s 13, in effect so as to ensure that the s 13 charge will bite.

In a case where s 86 applies in principle, s 86(4) provides that chargeable gains are treated as accruing to the settlor in the year. The problem, however, is that there seems to be nothing in the legislation to treat the s 13 gain imputed to the trustees as attracting relief under general principles. Section 225 cannot apply because the gain does not accrue to the trustees, and s 223 cannot apply because the gain does not accrue to an individual.

Imputation of s13 gains

Suppose the non-UK company sells the property at a gain, a gain is imputed to the trustees under s 13(10) and so becomes relevant when considering the capital payments charge for beneficiaries under s 87. Suppose the non-UK company is then liquidated within the period mentioned in s 13(5B), there will be an offset under s 13(5A) of the ‘amount of tax paid’ against the trustees’ s 13 liability on the distribution, although the capital gain realised by the trust on the shares in the company will be taxable (and added to the s 87 pool).

But if the non-UK company is wound up outside the s 13(5B) time frame, there is in effect a doubling of the gain which will enter the s 87 pool. Relief is available under s 13(5A) only if an amount of tax has been paid pursuant to s 13(2), but the non-UK trust is not chargeable under s 13(2), so there seems to be no relief available from double counting, whether or not there is a distribution within the s 13(5B) period or later.

If the company were not to be liquidated but were to pay a dividend, this would enter the s 740 pool but would not affect the s 87 pool (which would continue to include the gain imputed under s 13 pursuant to s 13(10)). Accordingly, instead of the trust gains including both the company’s gain and, eventually, the trustees’ gain ‘on disposal’ of the shares in the company, the apparent duplication would be the company’s gain and the comparable amount in the s 740 pool.

One should also beware any possible income tax charge by reference to beneficial occupation, if the beneficiary could be said to be a director or employee of the company.

The above said, however, this scenario would be unlikely to apply, unless perhaps the structure had been established when all the beneficiaries were non-UK domiciled but the principal beneficiary has become UK domiciled. However, could not the gain then be washed out by the trustees to a non-UK domiciled beneficiary instead?

As an alternative idea, could there be any scope for arguing that the offshore company is merely acting as nominee for the trustees - assuming that the facts back up such a suggestion?

All the correspondents seem to agree there is a real possibility of doubling up the CGT disposals (with gains on both the property and the company shares), even though there is economically only one gain. However, there is a suggestion that the Centre for Non-residents might be reasonable about the s 13(5A) set off. If cash is paid out to a beneficiary which crystallises both CGT events, might HMRC agree that one CGT charge could be set against the other, so that only one level of tax is paid?

(Postings on Trusts Discussion Forum between 12 and 23 October 2005 by Janet Patterson of Creaseys, Ray McGill, Malcolm Gunn, Richard Neil of Moore Stevens and Philip Dearden)

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