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MALCOLM GUNN FTII, TEP revisits a tax planning idea with deeds of variation.
ARE YOU FOR or against tax complexity? It sounds like a simple question with a simple answer: against. Or would it be more accurate to say that there is a short answer which is against, and a long answer which is maybe not! Reserve judgment until you have read what follows.
Causes of complexity
MALCOLM GUNN FTII, TEP revisits a tax planning idea with deeds of variation.
ARE YOU FOR or against tax complexity? It sounds like a simple question with a simple answer: against. Or would it be more accurate to say that there is a short answer which is against, and a long answer which is maybe not! Reserve judgment until you have read what follows.
Causes of complexity
The Revenue will say that tax complexity is largely caused by the scheming taxpayer trying to dodge round simple rules. And so the rules have to become complicated to cope with the dodges. Unfortunately, like most major problems, nothing is as simple as that and the causes of complexity are manifold.
Some complexity is to be laid firmly at the door of politicians. Is there really any sense in having a 20 per cent tax rate for bank interest and 22 per cent tax rate for employment income? The supposed justification is that saving must be encouraged. But ask the man in the street what tax he pays on his bank interest and he will simply answer that tax is taken off before he gets it and he has not a clue what the rate is. Does the starting rate band really serve any proper purpose, or was it just a piece of political window-dressing so that it can be claimed that we have the lowest rates of tax in living memory? Was the abolition of repayable dividend tax credits, and all the ensuing complications and upheaval which has followed from that, really to remove 'a distortion' in the tax system, or was the truth more simply that it was a method of raising massive sums of tax, with a by-product of much more complexity?
Other complexity arises from the fact that business life has allegedly become more complicated in itself and so the tax system must follow suit. To my mind, this may apply in the field of corporate tax on quoted companies but, in the realm of small business, complexity mostly comes from the requirements of the state machine and not from within the business.
Yet more complexity follows from the constant tinkering with the tax system and details in the rules. It is rather like starting with a small building, putting in a loft conversion, adding an extension, partly demolishing the original, then building an annexe onto the extension, then new internal walkways to different parts of the sprawling structure, and adding an outbuilding whilst partly demolishing one of the new extensions. The result is one of Prince Charles' 'carbuncles', but we have to live with it all the same.
Charitable giving
Now take a brief look at one small aspect of complexity in the last of the categories mentioned above. The original building was the deed of covenant system. It had its faults, and the Revenue insisted on lots of fire doors being put in, but charitable giving by means of deeds of covenant was a good old-fashioned structure which stood the test of time.
The extension built onto that structure was gift aid. It was designed to enable one-off gifts to qualify for the same benefits as deeds of covenant and in that way served an excellent purpose. The extension was enlarged in stages, leaving the original building (the deeds of covenant) in a progressive state of disrepair.
Then the Finance Act 2000 added an annexe to the extension to allow gifts of quoted shares to charities and by this time the original building was virtually derelict. The Finance Bill this year is adding an outbuilding to the annexe (gifts of real property to charity) and putting a loft conversion into the extension (carryback of gift aid relief to previous tax year)!
This is just one tiny aspect of the tax system and when you multiply this sort of activity by all the different areas of tax life which there are, it is no wonder that we end up with our heads spinning.
Bad news or not?
As readers will recall, there was a small planning dispute concerning the extension (gift aid). It surfaced in the Special Commissioners' case of St Dunstan's v Major SpC 127 which concerned a deed of variation of a will to direct £20,000 from an estate to charity. It was argued that this qualified as a donation under gift aid grossed up to £26,667, as well as permitting a reduction in the inheritance tax on the estate at the rate of 40 per cent, tax relief £8,000. The problem was that the planning permission for the extension contained a condition which was that the donor should not receive a benefit exceeding 2.5 per cent of the amount of the gift (that rule itself has since been changed!). The Revenue argued that the inheritance tax saving breached the planning condition because it exceeded 2.5 per cent of the gift. The argument was successful at the Special Commissioners, although the decision was controversial and was widely considered to be incorrect.
The annexe to the extension
You might think that the Finance Act 2000 relief for gifts of shares to charities would suffer from the same treatment. After all, it is all part of one very similar structure. Thanks to tax complexity, this is not so. The Finance Act 2000 relief, which introduced section 587B into the Taxes Act 1988, contains a different rule relating to benefits to the donor and it reads as follows:
'Where there are one or more benefits received in consequence of making the disposal which are received by the person making the disposal or a person connected with him, the relevant amount shall be reduced by the value of that benefit or, as the case may be, the aggregate value of those benefits; and section 839 applies for the purposes of this subsection.'
There is nothing about 2.5 per cent here and the rule operates entirely differently from the general gift aid rule. It would not help the donation by way of deed of variation which was made in the St Dunstan's case because that was a cash donation, but in any future case the best plan will be to have a deed of variation which relates to shares or land in the estate. If, for example, quoted shares of £100,000 are given to charity by a beneficiary of the estate by means of deed of variation, with the relevant inheritance tax and capital gains tax elections being contained in the deed, there will be an inheritance tax saving of £40,000. There is now nothing to prevent income tax relief also being claimed under section 587B, Taxes Act 1988 on £100,000 less the inheritance tax saving of £40,000, namely £60,000. For a 40 per cent taxpayer the further income tax saving is therefore £24,000. So the gift of £100,000 to charity has actually cost the donor only £36,000 and this will therefore be a much better and efficient method of giving to charity as compared to a straightforward gift aid donation. Ambitious people could contest the St Dunstan's decision and get the cost down to £20,000 if they win. I gratefully acknowledge this point to Peter Trevett QC from one of his recent seminars.
More complexity please?
So the long answer to my question about whether we want tax complexity or not is probably more accurately stated as: yes, tax complexity drives us nuts, but it keeps all us tax people firmly in business!
