I have attempted in previous articles to ascertain whether the global economy is improving. Some “green shoots” had certainly been identified by economists but, as I found, it was much harder to determine the depth and extent of the “green-ness”.
In other words, can we say a recovery is really underway or is new growth so fragile that it could vanish at the first blow of the levanter? Worse, and to borrow an over-used phrase, could it be that the light glimpsed at the end of the tunnel is actually another train bearing down on us from the opposite direction?
As usual, I should remind you that these columns represent my personal opinion rather than those of my employer. This month, that disclaimer is necessarily broader than usual because my opinion is firmly skewed in one direction – that there are “green shoots” to be found and therefore reasons for optimism.
We should also bear firmly in mind that it’s not the same story for everyone. Far too many people – here in Gibraltar or further afield, notably Spain – are dealing with, or living in fear of, unemployment. Personal financial concerns remain the concern of the majority rather than the minority, whether it be paying bills now or worrying about savings in the future.
So where do I detect these green shoots of recovery? Beginning at home, I have always contended that Gibraltar has shown real resilience in facing the recent economic maelstrom. We are extremely fortunate here to have a robust, growing economy based on several, widely diverse, sectors – financial services, tourism, gaming and shipping to name a few.
So to call a recovery here might be misleading. Indeed one might say that Gibraltar is only now seeing the real impact of the financial woes that have affected the rest of Europe in recent years. Everyone is aware of the difficulties in distinct sectors – local banking to cite one example – but taken overall, opportunities are already presenting themselves in Gibraltar as we face the realities of a new economic order.
It is pleasing to see new businesses setting up in Gibraltar every month. Some of these represent brand new economic interests whilst others build on existing activities where we have proven experience and can offer highly trained personnel.
A good example of the latter is Hyperion Family Office, a recent addition to the Gibraltar finance scene although the principals are all well-known locally. I listened to an economic presentation at one of its recent breakfast events that was so positive about “green shoots” that I was in danger of turning green myself – with jealousy. But as the speaker was a client director at a global investment firm, you would perhaps expect him to be a “glass half full” type.
I follow several “barometers” in order to gauge how real any recovery might be. Stock markets around the world are very volatile but several of the major indices are at levels not seen for many years. Indeed some, such as the Dow Jones in New York and the DAX in Frankfurt, are at or close to “all time” highs. The trend in recent years has certainly been upwards. Why should this be, at a time of such economic upheaval?
There are several reasons. Firstly, the indices are simply representative of a broader picture. The UK’s FTSE100, for example, is a snapshot of the top 100 companies measured by their market capitalisation value. As companies fall by the wayside, others replace them so, by definition, the index measures only the top tier firms and some of these are doing very well indeed. There is a great deal of money sitting on the balance sheets of some of these companies just waiting to be used. Couple that with the possibility of increased lending from the banks and it becomes easier to understand the reasons for optimism that are starting to appear.
Staying in the UK – although this is also true in the US and elsewhere – the government may soon be able to recoup some of the money spent on the bank bailouts. The cost of these rescues has been one of the main drags on the budget deficit, so this should lead to a welcome reduction in the previously eye-popping national “overdraft”.
In Europe too, all is not doom and gloom. Although the state of many European economies remains highly volatile, the eurozone has not imploded. Latvia plans to replace its currency with the euro in 2014 and Croatia should have become the EU’s 28th member by the time this column is being read. It is good to see these positive developments at last. Time will tell if such confidence is justified.
There are even encouraging signs in the housing market – where everything went wrong in the first place. There are real reasons for optimism in several countries. In Spain, foreign buyers – in particular Russians – are coming back into the market by acquiring whole blocks of so-called “toxic debt” directly from the banks. Hmm! Buying Spanish property on the cheap hoping to make a quick buck when prices recover? We have heard all this before, but it’s a start.
Unemployment in Europe remains the greatest challenge to a sustained recovery. Recent figures show an overall rate of 11% unemployed across the EU (the lowest being Austria, which reported 5%, and the highest, Greece, at 27%). We read alarming reports of the situation leading to an entire “lost generation”.
But consider other parts of the world where the impact of the global recession has been muted, or at least less marked, than in Europe. Over the past year I have written about the successes of the BRICS countries – Brazil, Russia, India, China and South Africa. Although beset by different problems, all five are economic powerhouses; they remain priority targets for the Gibraltar government which is targeting them as a source of inward investment. I also pointed out recently that GDP is growing in all 60+ African countries. That is to say there is no “recession” anywhere on that continent – from Algeria to Zimbabwe.
Speaking of Zimbabwe, I read a fascinating article recently by Matthew Parris, former MP and now one of my favourite columnists. In it, he described a recent visit to the country he knew as Rhodesia when growing up there as a boy. He didn’t hide the enormous problems the country faces but in highlighting the benefits of the travel experience there – reasonable prices, incredible safaris and tourist sites far less crowded than, say, Kenya – he got me thinking.
Tourism is one of the fastest growing business sectors worldwide. Given cheaper air travel and more choice generally, personally tailored itineraries are easy to arrange, especially online. If a recovery really is underway, people will be looking to travel more.
To return home to Gibraltar in summing up, I don’t speak for the government, or the local Chamber of Commerce – which compiles empirical data as part of its day job – but I see what I see. Look around you. Yes there are difficulties; some companies are reducing their staff complement, or even closing up altogether. But I see encouraging signs too. Many firms, including Sovereign where I work, are taking on staff regularly as business grows. The official Gibraltar Gazette keeps publishing new business applications – many of them made by local people. On the tourism front, more visitors will lead to more spending and so it goes on.
That is why I welcome the publicity afforded Gibraltar by a string of TV programmes shortly to air, ranging from documentaries to police dramas. We will also be seeing Michael Portillo and Top Gear mention our home. It all builds on the impression that there is much more to our tiny corner of the Mediterranean than apes on a rock. In fact that may be a good way for all of us to help this effort. Spread the word that we have apes, and a whole lot more. Summer in Europe may be the time when everyone else is on holiday but down here it should be busier than ever for all of us. Enjoy the sun!
Thursday, July 18, 2013
Confidentiality, tax avoidance and evasion
Dennis Healy, when he was the UK Chancellor of the Exchequer, once said that “the difference between tax avoidance and tax evasion is the thickness of a prison wall.” What he meant was that there is a fine line between tax evasion, which is illegal, and tax avoidance which might be frowned upon but is legal. Put another way, if someone gets married and the unplanned consequence is that tax is saved that is lucky. If that person gets married and the main reason is to save tax, it is tax avoidance. If that person tells the tax authorities that they are married when they are not in order to save tax it is tax evasion.
Governments all around the world, including China, need to find more money and are under great pressure to collect more tax. Tax departments are becoming more sophisticated and better at catching tax cheats. Many are mounting concerted campaigns to convince the public that tax avoidance is illegal and immoral. It is not the former but is arguably the latter. The public relations war is being lost by wealthy tax payers. The vast majority of the population is paid a straight-forward wage and has little or no opportunity to reduce their taxes.. Even if there were tax saving possibilities it is likely that the fees they would pay to properly implement any kind of tax planning would be more than the tax saving. It is hardly surprising, then, that the majority do not like the idea that the wealthy minority employ professional advisors to reduce their taxes or simply hide their money, fail to declare taxable income and illegally evade tax.
As professional advisors, we clearly see nothing wrong in engaging in legitimate tax mitigation. That is not necessarily a view which the majority will agree with. Frequently we find it necessary to point out to those who judge tax saving to be immoral that it is also possible for us to advise them how to pay more tax if they feel that any sort of tax saving is wrong. Rarely is that offer taken up.
There is a worldwide effort being made to prevent tax evasion. Swiss banks are now being forced to offer up details of clients so that their home tax authorities can check that the capital in their accounts has had tax paid upon it and that the revenue generated on the capital sum is also being taxed correctly. In many cases it appears that this is not the case and that some naughty people have been using Swiss bank secrecy to assist their efforts to evade tax by failing to declare correctly on their tax forms. Who would have thought it!
Another question we frequently hear asked is how the home tax authority will find out if an individual fails to declare their income correctly. It is a strange question from otherwise law abiding persons but the answer is that normally they find out because the tax payer tells them. The process of being caught out generally starts with a tax investigation. This could be triggered by an obvious disparity between lifestyle and declared income. Last Christmas the Italian authorities visited the ski resort of Cortina and started investigation procedures against the large number of Italian citizens who were arriving in Lamborghini’s and Ferrari’s but had been declaring either no income or only minimal income. They promised to conduct the same exercise on the Amalfi Coast this summer against those parking up in large boats. Investigations can start because another person is investigated and a connection is noted between them and the tax payer. Or it can start due to a random audit. Frequently the information which leads to an audit is supplied by an aggrieved ex-employee or spouse. Normally if a tax authority suspects that income is not being properly declared it will give the tax payer the chance to come clean and make a full disclosure of undeclared income. At this point the tax payer will have no idea what the tax authority knows – or if indeed they know anything. If the tax man does know about some undeclared income then he will not indicate what so the tax payer will have no information about what they are looking for. The burden of proof is always on the tax payer. They are guilty until proven innocent on tax matters even if their criminal code provides for innocence until guilt is proven beyond reasonable doubt on all other matters.
If the tax payer satisfies the authority that he has fully and properly declared everything previously undeclared the normal result is a tax bill, a hefty fine and interest. If he fails to come clean the normal result is criminal prosecution and frequently a prison sentence. Legend has it that a world famous jockey used to ride races all over the world and opened bank accounts wherever he raced. Most of what went into the foreign bank accounts was not declared as required back in his home country. On enquiry by his tax authority he reluctantly provided what he said was a list of all foreign bank accounts and undeclared income. He confirmed that this was indeed everything he had not previously declared. The tax authority then issued him with a substantial bill which he promptly offered to pay using a cheque drawn on an account he had failed to reveal. He went to jail for a number of years. Hence the joke that the only 18 stone man to ride a Derby winner was this jockey’s cell mate.
Most countries, now including Hong Kong, Singapore, China have signed tax treaties which contain exchange of information clauses. All offshore financial centres such as BVI, Cayman etc, under pressure from the OECD, have been forced to sign Tax Information Exchange Agreements (TIEAs) which can be used by onshore countries to obtain information about the ownership of offshore companies, trust and bank accounts. Banking secrecy laws are being rolled back or removed altogether as evidenced by the details supplied recently by Lichtenstein and Switzerland to various tax authorities around the world. And finally if a tax authority cannot obtain the information legally then they are paying thieves who stole it to give it to them. My law studies suggested to me that it was illegal to pay for stolen information or property but apparently this law does not apply to governments. Recently a Swiss banker who was actually jailed for assisting US citizens to evade tax was awarded US$120 million for handing over details of the US tax evaders he assisted.
In short, banking secrecy and confidentiality has either completely disappeared or will completely disappear in the near future. Any tax plan which relies on the detail not being revealed is probably tax evasion and is probably going to be revealed and get the perpetrators, including their advisors, into a great deal of expense and trouble. So get it right and seek professional advice. Getting it right will almost certainly involve a degree of inconvenience and expense but should keep the tax payer out of trouble and out of jail. I suppose the other way of looking at it is that not seeking advice and just trying to hide taxable money involves two levels of saving: There is no need to pay professional fees and the end result is likely to be free board and lodge provided by your home penal authorities.
The Chinese tax authorities have quickly become much more knowledgeable and efficient at collecting tax. The tax code in China is quite basic but it is interpreted by different tax inspectors in different ways. Normally those tax inspectors consider offshore companies and trusts to be ineffective for saving tax. The tax system relies upon the tax payer properly declaring his taxable income and if there is doubt about whether income is taxable then it should be declared and the tax man can decide whether that income taxable or not. He rarely decides it is not. Chinese nationals appear to becoming increasingly sophisticated as well. They do have large amounts of money in Swiss banks and this has as much to do with security as with tax saving. They want to know that they have money outside the country in case something goes wrong inside the country. Spending some money and seeking professional advice as to how to give the best possible protection to that money and making legitimate tax savings is of increasing importance. Do not take short cuts and just try and hide money. It will not work. There are legitimate structures available which will protect assets held abroad and ensure that the money within them is not subject to tax. So why risk being a tax evader if you can achieve the same savings and protection with a legitimate, legal and compliant structure?
Howard Bilton is an UK and Gibraltar barrister, professor at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
Governments all around the world, including China, need to find more money and are under great pressure to collect more tax. Tax departments are becoming more sophisticated and better at catching tax cheats. Many are mounting concerted campaigns to convince the public that tax avoidance is illegal and immoral. It is not the former but is arguably the latter. The public relations war is being lost by wealthy tax payers. The vast majority of the population is paid a straight-forward wage and has little or no opportunity to reduce their taxes.. Even if there were tax saving possibilities it is likely that the fees they would pay to properly implement any kind of tax planning would be more than the tax saving. It is hardly surprising, then, that the majority do not like the idea that the wealthy minority employ professional advisors to reduce their taxes or simply hide their money, fail to declare taxable income and illegally evade tax.
As professional advisors, we clearly see nothing wrong in engaging in legitimate tax mitigation. That is not necessarily a view which the majority will agree with. Frequently we find it necessary to point out to those who judge tax saving to be immoral that it is also possible for us to advise them how to pay more tax if they feel that any sort of tax saving is wrong. Rarely is that offer taken up.
There is a worldwide effort being made to prevent tax evasion. Swiss banks are now being forced to offer up details of clients so that their home tax authorities can check that the capital in their accounts has had tax paid upon it and that the revenue generated on the capital sum is also being taxed correctly. In many cases it appears that this is not the case and that some naughty people have been using Swiss bank secrecy to assist their efforts to evade tax by failing to declare correctly on their tax forms. Who would have thought it!
Another question we frequently hear asked is how the home tax authority will find out if an individual fails to declare their income correctly. It is a strange question from otherwise law abiding persons but the answer is that normally they find out because the tax payer tells them. The process of being caught out generally starts with a tax investigation. This could be triggered by an obvious disparity between lifestyle and declared income. Last Christmas the Italian authorities visited the ski resort of Cortina and started investigation procedures against the large number of Italian citizens who were arriving in Lamborghini’s and Ferrari’s but had been declaring either no income or only minimal income. They promised to conduct the same exercise on the Amalfi Coast this summer against those parking up in large boats. Investigations can start because another person is investigated and a connection is noted between them and the tax payer. Or it can start due to a random audit. Frequently the information which leads to an audit is supplied by an aggrieved ex-employee or spouse. Normally if a tax authority suspects that income is not being properly declared it will give the tax payer the chance to come clean and make a full disclosure of undeclared income. At this point the tax payer will have no idea what the tax authority knows – or if indeed they know anything. If the tax man does know about some undeclared income then he will not indicate what so the tax payer will have no information about what they are looking for. The burden of proof is always on the tax payer. They are guilty until proven innocent on tax matters even if their criminal code provides for innocence until guilt is proven beyond reasonable doubt on all other matters.
If the tax payer satisfies the authority that he has fully and properly declared everything previously undeclared the normal result is a tax bill, a hefty fine and interest. If he fails to come clean the normal result is criminal prosecution and frequently a prison sentence. Legend has it that a world famous jockey used to ride races all over the world and opened bank accounts wherever he raced. Most of what went into the foreign bank accounts was not declared as required back in his home country. On enquiry by his tax authority he reluctantly provided what he said was a list of all foreign bank accounts and undeclared income. He confirmed that this was indeed everything he had not previously declared. The tax authority then issued him with a substantial bill which he promptly offered to pay using a cheque drawn on an account he had failed to reveal. He went to jail for a number of years. Hence the joke that the only 18 stone man to ride a Derby winner was this jockey’s cell mate.
Most countries, now including Hong Kong, Singapore, China have signed tax treaties which contain exchange of information clauses. All offshore financial centres such as BVI, Cayman etc, under pressure from the OECD, have been forced to sign Tax Information Exchange Agreements (TIEAs) which can be used by onshore countries to obtain information about the ownership of offshore companies, trust and bank accounts. Banking secrecy laws are being rolled back or removed altogether as evidenced by the details supplied recently by Lichtenstein and Switzerland to various tax authorities around the world. And finally if a tax authority cannot obtain the information legally then they are paying thieves who stole it to give it to them. My law studies suggested to me that it was illegal to pay for stolen information or property but apparently this law does not apply to governments. Recently a Swiss banker who was actually jailed for assisting US citizens to evade tax was awarded US$120 million for handing over details of the US tax evaders he assisted.
In short, banking secrecy and confidentiality has either completely disappeared or will completely disappear in the near future. Any tax plan which relies on the detail not being revealed is probably tax evasion and is probably going to be revealed and get the perpetrators, including their advisors, into a great deal of expense and trouble. So get it right and seek professional advice. Getting it right will almost certainly involve a degree of inconvenience and expense but should keep the tax payer out of trouble and out of jail. I suppose the other way of looking at it is that not seeking advice and just trying to hide taxable money involves two levels of saving: There is no need to pay professional fees and the end result is likely to be free board and lodge provided by your home penal authorities.
The Chinese tax authorities have quickly become much more knowledgeable and efficient at collecting tax. The tax code in China is quite basic but it is interpreted by different tax inspectors in different ways. Normally those tax inspectors consider offshore companies and trusts to be ineffective for saving tax. The tax system relies upon the tax payer properly declaring his taxable income and if there is doubt about whether income is taxable then it should be declared and the tax man can decide whether that income taxable or not. He rarely decides it is not. Chinese nationals appear to becoming increasingly sophisticated as well. They do have large amounts of money in Swiss banks and this has as much to do with security as with tax saving. They want to know that they have money outside the country in case something goes wrong inside the country. Spending some money and seeking professional advice as to how to give the best possible protection to that money and making legitimate tax savings is of increasing importance. Do not take short cuts and just try and hide money. It will not work. There are legitimate structures available which will protect assets held abroad and ensure that the money within them is not subject to tax. So why risk being a tax evader if you can achieve the same savings and protection with a legitimate, legal and compliant structure?
Howard Bilton is an UK and Gibraltar barrister, professor at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
UK- NEW LEGISLATION ON TAXATION OF OFFSHORE COMPANIES WHICH OWN UK PROPERTY
In May last year the consultation document entitled “Ensuring fair taxation of residential property transactions” was published. As always, whenever the UK Treasury or HMRC refer to “fair taxation” what they really mean is considerably increased taxation. The resulting draft legislation was published on 11th December 2012 outlining the new taxes and charges which will have to be paid by offshore companies which own property in the UK worth over £ 2 Million. There were some significant changes from the consultation paper. Next, the actual legislation was included in the Finance Bill 2013 and again showed changes from the draft not least in the name of the new annual charge.
The main features of the legislation will only affect properties which either are, or will become, valued at more than £2 million and which are owned by “non-natural persons” - this being a reference to companies, partnerships, funds and the like, not to persons with strange personal habits.
Previously many buyers of UK property chose to register their properties in the name of an offshore company in order to eradicate UK inheritance tax (IHT) which would otherwise be charged at 40% on the whole value of the property , after allowances, upon the death of the owner. If a company owns the property the asset becomes the shares of the company, which is a non UK asset and therefore not subject to UK IHT as long as the owner is not UK domiciled. Owners who are UK domiciled are subject to IHT on their worldwide assets so pay IHT on the shares. Company ownership also facilitated the avoidance of stamp duty (SDLT) as any subsequent sale of the property could be effected by a transfer of the shares in the company leaving title to the property in the UK unaltered. This allowed the purchaser to avoid SDLT and/or allowed the seller to charge more, or a bit of both.
Offshore companies which own property worth over £2 million will now be faced with an annual charge of a minimum of £15,000 and a maximum of £140,000 depending on value. The new tax was to be called the Annual Residential Property Tax (ARPT). In the legislation it was called the Annual Tax on Enveloped Dwellings (AETD). I wonder which committee came up with that one? The companies will also pay 28% Capital Gains Tax (CGT) on resale.
Corporate trustees are not subject to these new taxes. There is also an exemption for bona fide business assets owned by companies. This would apply where the property is rented out exclusively and entirely to third parties. Those who have purchased property purely as a buy to let investment may well be able to rely on this and ignore the new legislation. Those who do, or may, live in their property will be effected.
The best structure going forward will depend on a variety of factors including the tax residency and domicile of the owners and any intended beneficiaries of the trust or even occupiers of the property but let us consider the example of Mr Guiseppe Sixpack (GS) an Italian resident and domiciled individual who intends to move to the UK during the current tax year (i.e. between 6 April 2013 and 5 April 2014). GS, through an offshore company, holds the freehold of a residential property in London which he will live in. The property was acquired in November 2001 for £1,400,000 and is currently valued at £4,000,000. It is not currently rented out and there is no mortgage.
As the property was beneficially owned by a company on 1 April 2013, the company will be subject to ATED (1). The property’s value as at 1 April 2012 will determine the liability to ATED (2). The Company is currently liable to pay a charge of £15,000. The first chargeable period runs from 1 April 2013 to 31 March 2014. The Company must file a return for the first chargeable period by 1 October 2013 and pay the charge by 31 October 2013 (3). This is a transitional measure and the return for the second chargeable period, commencing 1 April 2014, must be filed by 30 April 2014. The tax for the second chargeable period must be also paid by that date. The property will need to be re-valued on 1 April 2017 to cover the ATED returns for the five years starting on 1 April 2018. However until 30 April 2018 the charge should be limited to £15,000 payable by the 30 April each year. To correctly calculate the charge the property must be independently valued by a professional such as a chartered surveyor.
It is possible for a company to obtain relief where it does not hold the property throughout the whole chargeable period. This is known as interim relief and must be claimed (4). Broadly, the charge is reduced to reflect the number of days in the chargeable during which the property was not held in the company (5). For example if the property were to be sold to a third party individual on 30 September 2013, the seller Company could reclaim 50% of the original charge (6). The precise procedure for claiming the relief and the contents of the ATED Return will be fleshed out by HMRC in supplementary Regulations to be published in the summer.
Capital Gains Tax (CGT)
The legislation provides that a company which holds a property on 1 April 2013 that is within the scope of the ATED charge is deemed to have acquired the property for its market value on 5 April 2013 (7).
The property was acquired in November 2001 for £1,400,000 and it is assumed that it had a value of £4m on 5 April 2013.
Shadow Directorship issues
If GS were to occupy the property in the future rent free there is a danger that he would be subject to an annual benefit in kind tax charge as he would be treated as a shadow director. The case of Dimsey v Alan established that the benefit in kind provisions do extend to shadow directors.
For these three reasons, it is likely to be more tax efficient to consider moving the property out of the Company. Mr GS has a number of options to mitigate the applicable taxes.
If the property were gifted to GS there would be no SDLT as there is no mortgage. There should be no charge lifetime IHT (8) as the asset would still form part of the beneficial owner’s estate. However there would be CGT to pay- if the property at the time of value was worth more than the £4,000,000 April 2013 value. Here there is a nasty trap. If GS was resident when the company sells the property the whole of the gain since acquisition could be attributed to him under s 13 TCGA 1992
Advantages of individual ownership
This plan would involve GS’s family member establishing a new dry trust (i.e. a single asset holding trust) with a nominal cash sum. GS would sell the Company shares to that trust. The consideration would be a loan note equal to the market value of the property on the date of the share transfer. The Company would be liquidated by the trust. The liquidation would not cause a SDLT issue as there is no mortgage.
Advantages
Non UK domiciled purchasers should henceforth use a similar trust structure to the above. Domiciled purchasers should consider purchasing via a QNUPS structure.
From the above it will be apparent that is a highly technical area and expert advice is, as always, strongly advised.
Howard Bilton is a UK and Gibraltar barrister, Professor of Law at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
The main features of the legislation will only affect properties which either are, or will become, valued at more than £2 million and which are owned by “non-natural persons” - this being a reference to companies, partnerships, funds and the like, not to persons with strange personal habits.
Previously many buyers of UK property chose to register their properties in the name of an offshore company in order to eradicate UK inheritance tax (IHT) which would otherwise be charged at 40% on the whole value of the property , after allowances, upon the death of the owner. If a company owns the property the asset becomes the shares of the company, which is a non UK asset and therefore not subject to UK IHT as long as the owner is not UK domiciled. Owners who are UK domiciled are subject to IHT on their worldwide assets so pay IHT on the shares. Company ownership also facilitated the avoidance of stamp duty (SDLT) as any subsequent sale of the property could be effected by a transfer of the shares in the company leaving title to the property in the UK unaltered. This allowed the purchaser to avoid SDLT and/or allowed the seller to charge more, or a bit of both.
Offshore companies which own property worth over £2 million will now be faced with an annual charge of a minimum of £15,000 and a maximum of £140,000 depending on value. The new tax was to be called the Annual Residential Property Tax (ARPT). In the legislation it was called the Annual Tax on Enveloped Dwellings (AETD). I wonder which committee came up with that one? The companies will also pay 28% Capital Gains Tax (CGT) on resale.
Corporate trustees are not subject to these new taxes. There is also an exemption for bona fide business assets owned by companies. This would apply where the property is rented out exclusively and entirely to third parties. Those who have purchased property purely as a buy to let investment may well be able to rely on this and ignore the new legislation. Those who do, or may, live in their property will be effected.
The best structure going forward will depend on a variety of factors including the tax residency and domicile of the owners and any intended beneficiaries of the trust or even occupiers of the property but let us consider the example of Mr Guiseppe Sixpack (GS) an Italian resident and domiciled individual who intends to move to the UK during the current tax year (i.e. between 6 April 2013 and 5 April 2014). GS, through an offshore company, holds the freehold of a residential property in London which he will live in. The property was acquired in November 2001 for £1,400,000 and is currently valued at £4,000,000. It is not currently rented out and there is no mortgage.
As the property was beneficially owned by a company on 1 April 2013, the company will be subject to ATED (1). The property’s value as at 1 April 2012 will determine the liability to ATED (2). The Company is currently liable to pay a charge of £15,000. The first chargeable period runs from 1 April 2013 to 31 March 2014. The Company must file a return for the first chargeable period by 1 October 2013 and pay the charge by 31 October 2013 (3). This is a transitional measure and the return for the second chargeable period, commencing 1 April 2014, must be filed by 30 April 2014. The tax for the second chargeable period must be also paid by that date. The property will need to be re-valued on 1 April 2017 to cover the ATED returns for the five years starting on 1 April 2018. However until 30 April 2018 the charge should be limited to £15,000 payable by the 30 April each year. To correctly calculate the charge the property must be independently valued by a professional such as a chartered surveyor.
It is possible for a company to obtain relief where it does not hold the property throughout the whole chargeable period. This is known as interim relief and must be claimed (4). Broadly, the charge is reduced to reflect the number of days in the chargeable during which the property was not held in the company (5). For example if the property were to be sold to a third party individual on 30 September 2013, the seller Company could reclaim 50% of the original charge (6). The precise procedure for claiming the relief and the contents of the ATED Return will be fleshed out by HMRC in supplementary Regulations to be published in the summer.
Capital Gains Tax (CGT)
The legislation provides that a company which holds a property on 1 April 2013 that is within the scope of the ATED charge is deemed to have acquired the property for its market value on 5 April 2013 (7).
The property was acquired in November 2001 for £1,400,000 and it is assumed that it had a value of £4m on 5 April 2013.
Shadow Directorship issues
If GS were to occupy the property in the future rent free there is a danger that he would be subject to an annual benefit in kind tax charge as he would be treated as a shadow director. The case of Dimsey v Alan established that the benefit in kind provisions do extend to shadow directors.
For these three reasons, it is likely to be more tax efficient to consider moving the property out of the Company. Mr GS has a number of options to mitigate the applicable taxes.
If the property were gifted to GS there would be no SDLT as there is no mortgage. There should be no charge lifetime IHT (8) as the asset would still form part of the beneficial owner’s estate. However there would be CGT to pay- if the property at the time of value was worth more than the £4,000,000 April 2013 value. Here there is a nasty trap. If GS was resident when the company sells the property the whole of the gain since acquisition could be attributed to him under s 13 TCGA 1992
Advantages of individual ownership
- There would be no ATED charge from 6 April 2014 onwards provided the transfer was made to the individual before that date.
- There would be no UK CGT on a future disposal provided GS used the property as his main residence throughout the entire period of his ownership (9).
- There would be no shadow director issues which can arise with corporate ownership.
- The property would be subject to UK IHT of 40% on GS’s death.
- The ability to mitigate the charge with debt or even bank finance has been severely restricted (10).
This plan would involve GS’s family member establishing a new dry trust (i.e. a single asset holding trust) with a nominal cash sum. GS would sell the Company shares to that trust. The consideration would be a loan note equal to the market value of the property on the date of the share transfer. The Company would be liquidated by the trust. The liquidation would not cause a SDLT issue as there is no mortgage.
Advantages
- The property would be outside the charge to UK IHT.
- There would be no CGT on a future sale by the trustees.
- There would be no ATED from 1 April 2014.
- There is a ten yearly charge of up to 6% on the net asset value of the trust’s UK assets. However the charge should be mitigated by the value of the loan the trust owes to GS on the tenth anniversary (11).
- The trust would need to avoid selling the property, thereby realising a potential gain, when GS is UK resident. Otherwise GS would be subject to UK CGT to the extent that the value of his rent free occupation could be matched with the gain made by the trust on the sale. The liability would be significant but can be avoided provided GS is not UK resident in the tax year of the disposal and is not caught by the 5 year rule noted above.
Non UK domiciled purchasers should henceforth use a similar trust structure to the above. Domiciled purchasers should consider purchasing via a QNUPS structure.
From the above it will be apparent that is a highly technical area and expert advice is, as always, strongly advised.
Howard Bilton is a UK and Gibraltar barrister, Professor of Law at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
- Refer to Part 3 of the Finance Bill 2013
- FB 2013, Section 99(2)(b)
- Refer to the FB 2013, Schedule 33, Part 2, para 4.
- FB, s97
- FB s158(4) sets out the procedure for making the interim relief claim
- This must be paid by 31 October 2013.
- The FB has inserted a new CGT code into TCGA 1992 to account for ATED related gains. The calculation of the base cost is found in the new Schedule 4ZZA in TCGA. Refer to paragraph 3(2).
- Under IHTA 1984, s 94
- Under TCGA 1992, S10A
- It has inserted a new s175A IHTA 1984 which severely restricts the deductibility of debt on death
- This position needs to be carefully watched. It is possible that the debt may not be deductible under s.162A which is to be inserted into IHTA by the Finance Act. As yet it appears section 162A would not deny a deduction but it may be subject to further amendments before it hits the statute books.
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