Meeting Points

RALPH RAY FTII, BSc (Econ), TEP, solicitor, consultant with Wilsons reports an IBC conference on tax planning for the wealthy.

Tax avoidance after Westmoreland

In an analysis of Ramsay after the decision in Westmoreland Investments Limited [2001] STC 237, John Walters QC said that the House of Lords had set out to prevent Ramsay becoming 'petrified' into a rule of law. It is therefore a tool for the construction of taxing statutes. If a legal concept is referred to in the statute, it will be taken at face value and the Ramsay approach will not be applicable. If a business concept is referred to in the statute, the facts must be analysed to see how they comply with it.

As an example, under section 42(1), Capital Allowances Act 1990 a restriction can apply where machinery or plant is leased to a person who is not resident in the United Kingdom. The question may arise as to whether the allowances are restricted where the end user is United Kingdom resident, although one or more of the intermediate lessors are not so resident. Under the Westmoreland decision, the answer would seem to be that the section adopts commercial concepts in relation to leasing rather than legal ones, so that use by the end user should be definitive in the taxpayer's favour.

Inheritance tax business property relief

Matthew Hutton MA (Oxon), FTII, AIIT, TEP discussed inheritance tax business property relief with particular reference to section 105, Inheritance Tax Act 1984 and the 'wholly or mainly' test in relation to the business of the company. The Capital Taxes Office appears to interpret 'mainly' as more than 50 per cent and its Advanced Instruction Manual says that 'in practice you should have regard to the preponderant activities of the business, and to its assets and sources of income or gains, over a reasonable period preceding the relevant transfer'. Interesting possibilities may emerge in a group context. For example, if companies A and B in a group are wholly trading and company C is purely investment, by shifting assets and business activities around the group it might be possible to achieve full business property relief on the shares in the top company, always subject to the application of the excepted assets rule in section 112, Inheritance Tax Act 1984.

Occupation of trust property

Under the somewhat notorious Revenue Statement of Practice SP10/79, where trustees allow a beneficiary to occupy a property held in trust as his permanent home, the Revenue states that it will normally regard the exercise of a power in this manner as creating an interest in possession. Matthew Hutton directed attention to the decision of the Special Commissioners in the Woodhall case SpC 261. In that case, two brothers had the right to take up possession of a house, but only one actually did so. On his death, the Special Commissioner held that the brother in occupation did have an interest in possession in the house but that this extended only to one half of it. Although the appellant argued for no interest in possession at all, the decision does appear to have made some inroad into the Statement of Practice.

Share options

Andrew Thornhill QC said that in the current very favourable climate with the various types of approved share option schemes, unapproved schemes are, in general terms, to be avoided if possible. For existing unapproved options, he suggested that the employees could extricate themselves if the employer company were to set up an employee benefit trust, and the employees with options would then release them on terms that the trustees of that trust will form a number of companies and grant replacement options to the employees over the shares in these companies. The employer company could finance this process by paying a sum equal to the value of the original options to the trustees. The provisions of section 136(1), Taxes Act 1988 and section 237A, Taxation of Chargeable Gains Act 1992 should ensure that the exchange is tax free.

Once the exchange has been carried out, it would be open to the trustees and the optionholder to effect various transactions, for example:

(i) Loans could be made from the trust interest free to the employee. Paragraphs 1 and 2 of Schedule 7 to the Taxes Act 1988 set out the circumstances in which a loan is obtained by reason of a person's employment, and the only possible application of the provisions would be under paragraph 2. With care, it might be possible to escape the scope of that paragraph.

(ii) The trustees of the employee benefit trust might create a sub-trust in favour of the employee's family and that sub-trust might acquire shares in the company. The employee might release the options voluntarily, the benefit being taken by the sub-trust rather than him so that section 135(8)(c), Taxes Act 1988 does not apply. The effect is that the gain on the option disappears.

Agricultural property and partnerships

Matthew Hutton warned that the Capital Taxes Office is now taking a point in cases where there is a partnership of which the landowner is a member and which occupies the land on a licence, with the land held outside the partnership and there being no partnership agreement or any document prescribing the terms of occupation. In the absence of a deed, there is a partnership at will governed by the Partnership Act 1890. In such cases, the partnership can usually be terminated only on the next accounting date following the giving of notice which may well take one beyond a twelve-month period. The Capital Taxes Office is therefore arguing that until the partnership can be terminated, the landowner does not satisfy the 'vacant possession in twelve months' test and therefore 100 per cent agricultural property relief will not be available.

Ensuring that there is a partnership agreement entitling the landowner to vacant possession within the twelve-month period would deal with the problem.

Taper relief anomalies

Emma Chamberlain, barrister, illustrated some taper relief anomalies. For example, if a husband has owned 5 per cent of the shares in a company since April 1998, whereas the wife has owned 10 per cent, while the husband is an employee of the company, but the wife has never worked in it, the husband is eligible for full business asset taper relief in respect of his holding. However, the wife qualified for the higher rate of taper relief only from 6 April 2000.

Assuming therefore that a sale of both shareholdings is envisaged shortly, it will be better in these circumstances for the wife to transfer her shares to the husband for subsequent sale by him as part of his shareholding. He will be eligible for the business asset rate of taper on the entire 15 per cent shareholding. For identification purposes, note that the husband is treated as acquiring the wife's shares last, and disposals are on a last in first out basis.

Taper relief and trustee appointments

Emma Chamberlain gave a reminder that the general rule is that any disposal, including a gift, starts a new period of ownership running for taper relief purposes even though capital gains tax holdover relief may be available.

For trustees, this means that they should think carefully before triggering a disposal. If the trustees are contemplating an appointment of funds on new trusts, might it be better for them to frame the terms of the appointment so that the assets remain within the same trust? Also, the trustees should carefully consider the position when a beneficiary becomes absolutely entitled; should they prevent this in order to preserve taper relief?

Agricultural property: minimum period of occupation

Agricultural property relief does not apply unless the relevant property was occupied by the transferor for the purposes of agriculture throughout the period of two years ending with the date of transfer, or alternatively it has been owned for seven years and occupied by another during that period.

Cases arise where the farmer leaves the farmhouse due to old age or infirmity and later dies in a nursing home. Matthew Hutton said that in his experience, the general practice of the Capital Taxes Office is that such absence will not itself prejudice a claim for agricultural property relief if the farmer did intend to return to the farmhouse within two years, even if death intervenes.

Non-domiciliaries and United Kingdom property purchases

Given the shadow director problems with the standard structure of offshore trust holding offshore company holding United Kingdom property, Michael Hayes, solicitor offered some alternative planning ideas for non-domiciliaries.

For a married couple, the obvious alternative is a purchase in joint names as joint tenants with joint life/last survivor insurance, and also if appropriate, a borrowing secured on the property to provide a deduction from its value under section 162(4), Inheritance Tax Act 1984. Where there is a borrowing, which is offshore, interest may be paid from offshore investment income without remittance problems. Note, however, that under section 349(2), Taxes Act 1988, payment of interest would have to be under deduction of basic rate tax unless the interest is payable on an advance from a bank which is within the charge to corporation tax at the time when the interest is paid (for example, the Jersey branch of a United Kingdom bank). Alternatively, deduction of tax at source from the interest may not be required if appropriate double tax treaty relief is available.

If the trust and company structure is still preferred, one possibility would be for the non-domiciliary to form a trust which incorporates the company. He then contracts to buy the United Kingdom property personally. He then contracts with the company that he will assign the property to it and pay full cost of purchase on condition that the company grants him and his family right to live rent free for so long as they wish, subject to payment of outgoings. There will be a stamp duty charge if the property is then conveyed to the company, but not if the arrangement rests on the contract alone. There should then be no benefit in kind liability under section 146, Taxes Act 1988, since the benefit has not been provided by the company and in any event it has not incurred any expenditure on acquiring the property.

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