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Meeting Points - John Hiddleston MA, ATII, senior tax technical manager at Horwath Clark Whitehill, reports a Key Haven conference on 'Tax Planning for High Net Worth Individuals'.

06 December 2000
Issue: 3786 / Categories:
Meeting Points

John Hiddleston MA, ATII, senior tax technical manager at Horwath Clark Whitehill, reports a Key Haven conference on 'Tax Planning for High Net Worth Individuals'.

Inheritance tax home loan scheme
David Ewart of Pump Court Tax Chambers said that the Capital Taxes Office is thought not to be too worried by the home loan scheme for circumventing the inheritance tax reservation of benefit rules, but warned there was no certainty that that would remain the case.
Meeting Points

John Hiddleston MA, ATII, senior tax technical manager at Horwath Clark Whitehill, reports a Key Haven conference on 'Tax Planning for High Net Worth Individuals'.

Inheritance tax home loan scheme
David Ewart of Pump Court Tax Chambers said that the Capital Taxes Office is thought not to be too worried by the home loan scheme for circumventing the inheritance tax reservation of benefit rules, but warned there was no certainty that that would remain the case.
Mr Ewart reminded delegates of the 'nuts and bolts' of the scheme, which are that the taxpayer sells his main residence to a trustee of a trust which gives him a life interest and thereafter life interests for his children. The sale is at present market value but, rather than paying the purchase price, the trustees issue a promise to pay the purchase price (the so-called IOU) on demand but only after the death of the taxpayer. The taxpayer settles the IOU on a trust for his children excluding himself from all benefit (or only a remainder trust). On the taxpayer's death, the liability under the IOU is deducted from the value of the property. There are possible capital gains tax and stamp duty complications.
Mr Ewart also pondered whether the IOU could be linked to the value of the house. He thought it was 'possible' that this would be effective tax planning because he thought it could be done so as to fall outside the relevant discounted security legislation. However, Andrew Thornhill QC of Pump Court Tax Chambers pointed out that in other circumstances, giving away a relevant discounted security was a 'fantastic tax shelter' because it could produce an income tax loss.

Film schemes
Andrew Thornhill QC warned against film schemes which were too reminiscent of the case of Ensign Tankers (Leasing) Ltd v Stokes [1992] STC 226. However, he said that the typical structure, consisting of a partnership of individuals with a corporate in it, seemed to him to work, although he had no evidence that the Revenue agreed with his view. He also remembered that there had been numerous film schemes in the early 1980s, sparked by some favourable remarks by the then Thatcher Government, and that most of these had eventually failed because of strong resistance by the Revenue.
Capital gains tax taper relief and takeovers
Richard Bramwell QC of 3 Temple Gardens Tax Chambers said the Revenue is understood to interpret the phrase 'having no substantial effect on the extent of the company's activities', important in determining whether there is a trading company and therefore a business asset, as meaning not more than 20 per cent of whatever measure is being applied.
Richard Bramwell raised two technical points of general importance on the meaning of 'securities'. First, in relation to business taper, 'securities' is undefined and so whilst it includes earn-out consideration deemed to be securities 'for all the purposes of this Act' by section 138A, Taxation of Chargeable Gains Act 1992 it does not include debentures deemed to be securities 'for the purposes of this section' by section 251(6). These are debentures which are not 'investments' for example, debentures which are charged with vendor warranties.
Second, Richard Bramwell pointed out that the restricted meaning of 'unascertainable' given by section 138A(10) (consideration not unascertainable if fixed by reference to another ascertainable amount) meant that in cases where the consideration was to be found by dividing the price per share at the earn-out date into a fixed sum, the consideration did not qualify as a 'security' and so did not attract taper relief.
However, he thought that concerns about the denial of taper relief for periods where securities have limited exposure to fluctuation had been overdone because the appropriate definition was very narrow.
Offshore trusts 'round the world' scheme
Robert Venables QC of Middle Temple explained, in relation to a trust containing assets with as yet unrealised capital gains and currently resident in a jurisdiction that does not impose an exit charge, that the trust could migrate to an appropriate country with an appropriate double tax treaty with the United Kingdom (for example, New Zealand). The gain would then be realised by the trustees in that country. An appropriate country is one where there is no substantial charge to capital gains tax. An appropriate treaty is one whose terms are such that the United Kingdom cannot tax the gain. In the same year of assessment, the trust becomes United Kingdom resident, e.g. by one set of trustees retiring and another set taking over. The gains would therefore be washed and section 77, Taxation of Chargeable Gains Act 1992 would not apply so as to tax the gain on the settlor (because there is no amount on which the trustees are 'chargeable'), nor section 86 (which requires the trustees to be non-resident throughout the year).

Capital gains tax disabled person's trust
James Kessler, barrister of 24 Old Buildings, Lincoln's Inn, in a session primarily devoted to non-tax uses of trusts, nevertheless commented that, although disabled persons' trusts benefit from a full capital gains tax annual allowance (as opposed to the usual one half for most trusts), the paragraph 1 of Schedule 1 to the Taxation of Chargeable Gains Act 1992 conditions attaching to such trusts were so onerous that it was often better not to try to fulfil them.

Emigration and residence
Robert Venables QC recommended caution when interpreting the Revenue booklet IR20 (residents and non-residents) with a tax planning motive. He said that where substantial amounts of tax are involved, the Revenue will tend to adopt a more restrictive view as was amply demonstrated in Regina v Inspector of Taxes ex parte Fulford Dobson 64 TC 343.
Robert Venables also pointed out that there is a regrettable tendency to see available accommodation in the United Kingdom as unimportant following the abolition of that rule by Finance Act 1993. Advisers forget that in several double tax treaties it remains an important principle.
He reminded delegates that double tax treaties must not be read as if they were United Kingdom taxation statute, but must be interpreted in accordance with international treaty law. They are based on the OECD model double tax treaty. Courts therefore need to consider the French original as well as the English. Treaties must be read in the context of the OECD's commentary on the model treaty. In cases where a treaty is in conflict with the commentary, it is the commentary that prevails and not the treaty.

Shadow directors following Dimsey
Peter Vaines of Haarmann Hemmelrath said that if a foreign individual wants to buy a house in the United Kingdom and live in it and this is settled into an offshore trust for husband and wife (a life interest with remainder to spouse, perhaps), the trustees then have a serious problem. This is that if the settlor dies, it is likely that there will be an inheritance tax charge.
They may therefore feel obliged to take advice, which will probably be to the effect that they should put the house into an offshore company. If they do this on their own initiative without telling the settlor and he never even knows of the company's existence, it is hard to see how he can be said to be a shadow director, provided, of course, that all these steps are genuine and supported by the facts.


Issue: 3786 / Categories:
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