Matthew Hutton MA, CTA (fellow), AIIT, TEP, Presenter of Monthly Tax Review (MTR), highlights some topical planning issues by James Kessler QC from a recent IBC IHT and Trusts Conference.
Matthew HuttonContext
The following points were made in a lecture by James Kessler QC at IBC’s IHT and Trusts Conference in London on 22 May 2008.
Non-UK ‘Close’ Companies
The amendment by Finance Bill 2008 of TCGA 1992, s 13 with the introduction of new s 14A has curious consequences. The participator (with more than 10%) would be taxed if the gains were remitted by the company (being a ‘relevant person’), even if the gains were not received by the participator. This then produces the odd consequence that proceeds would most likely be kept outside the UK which was bad for the UK economy – in that it would have to be a very good investment in the UK to make it worth paying the 18% CGT. By contrast, where the gain was realised within a trust, the trustees could reinvest in the UK without there necessarily being a tax penalty for the beneficiaries.
The Capital Payments Charge
The regime traditionally familiar from TCGA 1992, s 87 is that capital payments are matched with trust gains. As from 2008/09 the expression ‘trust gains’ is replaced with the term ‘section 2(2) amount’. It is not clear why and James noted that the HMRC Explanatory Notes still talks about trust gains.
The new ‘Last In First Out’ rule for matching purposes is generally helpful especially in minimising the impact of the supplementary charge (which now anyway could produce a maximum tax rate of 28.8% as opposed to the old 64%). However, trustees need to take care to achieve a fair result as between different beneficiaries.
James noted also that ‘washing’ still works. That is, the trustees could make a capital payment mopping up ‘trust gains’ to a non-UK domiciled beneficiary outside the UK who does not remit the gains in Year 1. And in Year 2 a capital payment is made either to a UK domiciled beneficiary or to a non-UK domiciled beneficiary who remits the payment to the UK. While such a payment could be matched with a future s 2(2) amount, the Year 1 trust gains effectively escape UK CGT – so long as the first beneficiary does not remit the payment.
The Use of Loans to Avoid a Capital Payment
Suppose a non-UK domiciled beneficiary lends money to the trustees of a non-UK settlement, repayment by the trustees is not a capital payment. That is a very good idea. Indeed, there are many trusts which were unscrambled in the pre-6 April 2008 rush which might now be re-established with loans. In fact, the same thing might be done even where the trusts were not unscrambled. While CGT continues to present a problem there, the opportunity for rebasing does at least get rid of future liabilities on pre-April 2008 accrued gains. The big issue with all of this is the need to preserve excluded property status with settlements made at a time when the settlor was actually and deemed domiciled outside the UK.
(James Kessler QC lecture notes 22.5.08)
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