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MALCOLM GUNN FTII, TEP and RALPH RAY FTII, TEP, BSc (Econ), solicitor report more highlights from this year's Key Haven Oxford Conference.
MALCOLM GUNN FTII, TEP and RALPH RAY FTII, TEP, BSc (Econ), solicitor report more highlights from this year's Key Haven Oxford Conference.
Stamp duty planning for beneficiaries of offshore trusts
Beneficiaries of offshore trusts who are within section 87, Taxation of Chargeable Gains Act 1992 are unable to set their personal capital gains tax losses against gains attributed to them in respect of capital payments. Kevin Prosser QC therefore advised that it may be better for them to sell a form of entitlement from the trust to a non-resident instead of receiving a capital payment. The losses could then be set against the gain on the sale of the interest.
Would stamp duty be payable on the sale document? Instruments executed abroad and not relating to United Kingdom situated property, or anything required to be done in the United Kingdom, are outside the scope of stamp duty. If English law applies to the trust, the situs of an interest in it is where the trust fund is; if any part of the fund is in the United Kingdom, the situs will also be in the United Kingdom. If overseas law applies, the right is against the trustees and the situs is the residence of the trustees.
Employee benefit trusts
Andrew Thornhill QC said that several accounting firms have now reached conclusions on the provisions of Urgent Issues Task Force Notices 13 and 32, as regards their application to employee benefit trusts. The conclusions are:
(1) If an employer promises (without a legal obligation) to place funds in an employee benefit trust to reward current work, there is a constructive obligation and deductible liability. There is therefore no asset to go on the employer's balance sheet because the funds are not at the employer's disposal to provide other rewards.
(2) If an employer institutes a long term award scheme with sums vesting indefeasibly as the employee hits targets, even if payment is deferred or held in a sub-trust of an employee benefit trust, then deductions should be obtained for each year's increase in the sum vested.
Settlors' liability in respect of trust gains: double dip
Schedule 11 to the Finance Act 2002 contains amendments to allow personal losses of a settlor to be set off against gains attributed from a settlement made by him or her. An election may be made for the new provisions to apply in respect of the years from 2000-01 onwards. Settlors have a right to recover tax on trust gains from the trust concerned and the election for past years therefore appears to offer them the opportunity of a form of 'double dip'. Thus a settlor may have been assessed in respect of a settlement gain for 2000-01; he will have paid the tax, recovered it from the trustees but may now elect to recover the tax from the Revenue as well by using up his own losses.
Nicholas Warren QC said that a point to be investigated is whether the trustees might have a restitutionary claim in such circumstances for repayment of the tax back to the trust. The settlor might resist this on the basis that he no longer has his losses available for use against future gains.
Substantial shareholdings: anti-avoidance limitation
The new 'substantial shareholding' exemption for corporate shareholders contains an anti-avoidance provision at paragraph 5 of Schedule 7AC to the Taxation of Chargeable Gains Act 1992 which denies the exemption where there are arrangements made in relation to a newly-acquired subsidiary and the sole or main benefit of the arrangements is to gain the exemption under the Schedule on a disposal of the shares. There are other detailed points to this anti-avoidance provision. However, David Goy QC advised that the provision should not affect existing structures set up before the Schedule came into effect. By definition, these could not be arrangements designed to gain the exemption under the Schedule.
Extending the boundaries of the Hastings-Bass principle
At present, the principle in Re Hastings-Bass is confined to the exercise of fiduciary powers by trustees, where they have failed to take into account factors relevant to their action. Nicholas Warren QC said that at present the principle is confined to trustee situations, but it may well be possible to extend it to other fiduciaries, such as the exercise of powers by company directors where a key factor is overlooked.
Hold over on transfer of property to discretionary trust
Where it is wished to transfer a home into a discretionary trust, claiming capital gains tax holdover relief under section 260, Taxation of Chargeable Gains Act 1992, Kevin Prosser QC advised that immediately before the transfer a short hold tenancy should be granted in favour of a beneficiary of the trust. This ensures that there can be no argument that the beneficiary is occupying by virtue of an interest in possession in the trust; if that argument could be sustained, there would be no holdover relief. Once the short hold tenancy expires, the beneficiary could then continue to occupy under the terms of the trust.
Making good use of Schedule 4B
The anti 'flip flop' provisions in Schedule 4B to the Taxation of Chargeable Gains Act 1992 give rise to a notional disposal of all remaining assets in settlor-interested or non-resident trusts immediately after the trustees have made a 'transfer of value' linked with trustee borrowing.
Kevin Prosser QC pointed out that if there are no such assets remaining after the relevant transfer of value, the Schedule will have no application. Thus if resident discretionary trustees own only foreign assets, the Schedule permits them to borrow against those assets in order to fund cash appointments to resident beneficiaries, and the foreign assets could then be appointed out with holdover relief to a resident non-domiciliary, subject to a lien for payment of the trustees' borrowing.
This is a simplified analysis of the arrangement, and in practice execution of it will require great care, since Schedule 4B comes into operation as soon as the trustees make a transfer of value (which includes a loan) when thay have a borrowing outstanding.
Loss making subsidiaries
Corporate groups holding subsidiaries which they wish to dispose of at a loss over cost price will be looking for ways to avoid falling within the terms of the new 'substantial shareholdings' exemption which both exempts gains and disallows losses. One idea may be to procure the issue of worthless ordinary shares in the target company to a non-group company so as to bring the shareholding down below the 10 per cent test which applies for the exemption.
David Goy QC advised, however, that, after the issue of the low value shares, the substantial shareholding requirement for the purposes of the exemption would still be satisfied for a twelve-month period so that the disposal would have to be delayed until after that time.
In some cases it may be appropriate to sell the subsidiary's business and assets, rather than the shares in it, if the loss can be realised in this way.
Melville planning
A gift of assets into a discretionary trust in which the settlor retains a reversionary interest, rather than a settlement power, is a means of reducing the chargeable transfer to the settlement for inheritance tax purposes, whilst preserving capital gains tax holdover relief under section 260, Taxation of Chargeable Gains Act 1992.
If, however, the asset transferred is a family company with substantial distributable reserves, a point which may be taken is that the company could pay out the reserves as a dividend thereby reducing its value. As a result, what the settlor has retained in his estate in the form of the trust interest might have a market value considerably lower than the asset transferred in.
In order to deal with this problem, Kevin Prosser QC advised that the terms of the discretionary trust should, in such circumstances, provide for compulsory accumulation of all trust income in the discretionary period.
