Private Client Topical tax matters
Andrew Shepherd / 17 July 2013 © 2013 Deloitte PCS Limited. All rights reserved.
Agenda • A case study - trading in UK land and the UK/IoM Treaty
• Excluded property and the inheritance tax anti-avoidance legislation concerning the deductibility of liabilities
• Changes to the IHT rules – non dom spouses
• Transfer of Assets Abroad and close company gains
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Private Client – Topical tax matters
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Trading in UK land
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Private Client – Topical tax matters
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Case Study Background • Settlor of the trust is UK domiciled but non-UK resident (settlor interested trust for income).
Trust
• IOM company will purchase UK land, obtain planning permission and sell to a third party. IOM Company
UK Land
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Private Client – Topical tax matters
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Key Factors to Consider Resident in the UK? Investment? UK PE? Income tax charge Transfer of assets abroad legislation? Artificial transactions in land legislation Could GAAR apply?
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Private Client – Topical tax matters
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Key factors to consider Company residence • Where incorporated? • Management and control • Substance
Trading or investment • Case Law – motive on acquisition Simmons v IRC [1980] STC 350 Kirkham v Williams [1991] STC 342
• Badges of Trade
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Private Client – Topical tax matters
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Key factors to consider Permanent establishment • UK law - broadly in line with OECD Model Tax Convention • Company has a UK PE if 1 of 2 conditions met: it has a “fixed place of business” through which the business of the company is wholly or partly carried on, or an “agent” acting on behalf of the company has (and habitually exercises) authority to do business on behalf of the company
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Private Client – Topical tax matters
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Key factors to consider Permanent establishment “Fixed place of business” • Geographical place of business (e.g. premises/site) • Place of business must be fixed - certain degree of permanence • Non-resident’s business must be carried on through this fixed place of business, normally by the personnel of the enterprise Building sites and construction projects are a fixed place of business (although not under the UK/IoM Treaty) “Independent agent” • Agent must be independent both legally and economically and must act in the ordinary course of his business when acting on behalf of the enterprise • OECD Model Tax Convention provides guidance, “An independent agent will typically be responsible to his principal for the results of his work but not subject to significant control with respect to the manner in which that work is carried out.” 8
Private Client – Topical tax matters
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Key factors to consider UK/IoM Treaty • Article 3 - the UK can only tax the profits of an Isle of Man enterprise if it “…is engaged in trade or business in the United Kingdom through a permanent establishment…” which is situated in the UK. Where such a permanent establishment exists, the UK may only tax those profits which are attributable to it • The term ‘permanent establishment’ is defined by article 2(k) of the treaty as: “…a branch, management or other fixed place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regularly fills orders on its behalf.”
• Obviously key not to have a UK PE - must not carry on business through the UK either itself or through a dependent agent
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Private Client – Topical tax matters
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Key factors to consider Income tax charge • If no PE in the UK may still be subject to income tax in the UK if it is carrying on a trading activity in the UK • UK/IoM treaty may displace this charge
Transfer of Assets Abroad • TAA legislation - UK anti-avoidance legislation is intended to prevent individuals who habitually live in the UK from transferring assets, including cash, to non-UK individuals, trusts or companies, in whose hands the income arising from the asset is not taxed and from which the individual or their spouse can benefit • TAA legislation does not apply to non-UK resident individuals
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Private Client – Topical tax matters
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Key factors to consider Artificial transactions in land • Legislation in point where land is acquired or developed with the sole or main object of realising a gain, and in in due course a gain of a capital nature is obtained when the land is disposed of • Highly complex area of legislation • Not only applies to dealer/developer but also to provider • Potential protection under UK/IoM treaty
General Anti-Abuse Rule (“GAAR”) • The intention of the GAAR is to counteract tax advantages arising from tax arrangements which are abusive • Apply to income tax, corporation tax, capital gains tax, inheritance tax, petroleum revenue tax, stamp duty land tax and ATED • Tax arrangements entered into on or after Royal Assent to the Finance Bill 11
Private Client – Topical tax matters
© 2013 Deloitte PCS Limited. All rights reserved.
Summary case study Resident in the UK?
X
Investment?
X
UK PE?
X
Income tax charge
X
Transfer of assets abroad legislation?
X
Artificial transactions in land legislation
X
GAAR apply
X
• Conclusion – trading profit not subject to UK tax • Areas of risk • Advise disclosure
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Private Client – Topical tax matters
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Excluded property and liabilities
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Private Client – Topical tax matters
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Deduction of liabilities Background • Finance Bill 2013 - draft legislation which will affect the extent to which the value of assets can be reduced for IHT purposes by debts/liabilities secured against them • Will affect those who have borrowed money to invest in assets which are exempt from IHT or qualify for certain reliefs • The legislation will apply to liabilities which either: Are incurred in order to finance investment in assets which are either ‘excluded property’ for IHT purposes or which qualify for an IHT relief such as Business Property Relief ('BPR'), Agricultural Property Relief ('APR') or Woodlands Relief. Are not repaid following the death of an individual (subject to certain commercial exemptions) This provision will affect both individuals and trustees.
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Private Client – Topical tax matters
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Deduction of liabilities Implications • If an individual or trustee incurs a debt which is attributable to the acquisition, maintenance or enhancement of property which qualifies as excluded property or qualifies for one of the reliefs from IHT, that debt is first deductible from the value of the excluded/relievable property • If value of debt exceeds the value of the excluded/relievable property for IHT purposes, the excess amount of the liability can be deducted from the value of other assets. • In the case of excluded property, this deduction from the value of the remaining estate is only available provided the value of the liability does not exceed the value of the asset due to: Arrangements the main purpose or one of the main purposes of which was tax avoidance. This is not limited to avoidance of IHT, and; An increase in the amount of the liability, whether due to interest being rolled up or otherwise), and; A disposal (in whole or part) of the excluded property
Complex rules where part of loan repaid 15
Private Client – Topical tax matters
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Deduction of liabilities Other considerations • Grandfathering provisions will be introduced in relation to loans taken out before 6 April 2013 where these loans relate to property which qualifies for BPR, APR or woodlands relief • It does not appear that these provisions will apply to loans taken out in relation to financing excluded property
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Private Client – Topical tax matters
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Inheritance tax and non-dom spouse
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Private Client – Topical tax matters
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Inheritance tax Non-dom spouse Previous rules
• £55,000 restriction where transfer from domiciled spouse to non-domiciled spouse (non-domiciled for IHT purposes)
New rules
• From 6 April 2013 increase in restricted spousal exemption to nil rate band threshold (£325,000 for 2013/14)
• Non-UK domiciled individuals who have a UK domiciled spouse/civil partner will be able to elect to be treated as UK domiciled for IHT purposes – first election likely to be from summer 2013.This will allow an unrestricted IHT spousal exemption
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Private Client – Topical tax matters
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Inheritance tax Non-dom spouse The Election
• To be made in writing (no prescribed form) • Can be made during lifetime (can be backdated 7 years but not before 6 April 2013) • Can be made after death (within 2 years unless HMRC agree longer) – this will be particularly relevant • Election is irrevocable • Ceases to have effect if non-resident for 4 complete tax years
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Private Client – Topical tax matters
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Transfer of Assets Abroad and close offshore company gains
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Private Client – Topical tax matters
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Transfer of Assets Abroad and S13 Gains • Overview of Transfer of Assets Abroad (TAA) • FA 2013 updates • EU defence • Overview of section 13 • FA 2013 updates
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Private Client – Topical tax matters
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Transfer of Assets Abroad
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Private Client – Topical tax matters
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What is Transfer of Assets Abroad (TAA)? • Anti-avoidance legislation designed to counter tax avoidance by individuals • Applies where assets are transferred to overseas companies, trusts or other persons to reduce UK tax liabilities • There are different provisions for “transferors” and “non-transferors” • Transferors are taxable on all income received by the offshore person under s720 ITA 2007 - the income charge • Non-transferors are taxable based on benefits received under s731 ITA 2007 – the benefits charge • Exemptions may be available • Defences may be available from case law
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Private Client – Topical tax matters
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When does the TAA legislation apply? To apply, three conditions need to be satisfied: 1) A transfer of assets (or associated operation) is made to a “person abroad” (e.g. an offshore trust or company) 2) As a result of the transfer, an individual has the “power to enjoy” (i.e. he or she could potentially receive) any income received by the offshore person 3) A UK resident and ordinarily resident individual must be able to benefit from the income received by the offshore person (NB: will apply to residents from 6 April 2013)
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Private Client – Topical tax matters
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Non-transferors – S731 • Applies where the transferor is unable to benefit from a transfer • Tax liabilities are limited based on benefits received • Applies where UK ordinarily resident individuals receive benefits (residents from 6 April 2013) • Benefits has a wide interpretation and includes: − The free (or cheap) use of assets − Loans at beneficial interest rates − Provision of free services • Where benefits are received, those benefits must be matched to income received by the transferee • The Government are reviewing the matching rules and intend to introduce amended matching rules in FA 2014 25
Private Client – Topical tax matters
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FA 2013 updates Amendments to take effect from 6 April 2012: • EU defence (for income arising from certain transactions which occur after 6 April 2012 – discussed in more detail later). Amendments to take effect from 6 April 2013: • Will apply to UK residents (rather than ordinary residents) • Changes designed to stop ‘double non-taxation’ using tax treaties. • Legislating the practice that, where income has already been taxed once when received by an overseas person, it is not taxed again when received by the individual (e.g. distributions of income already taxed under s720). A wider consultation on the TAA provisions will be held in due course.
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Private Client – Topical tax matters
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Existing defences
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Private Client – Topical tax matters
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Motives defences • The legislation contains exemptions from the TAA provisions. • These are contained in s736-s742 ITA 2007 • The specific exemptions applicable depend on when the relevant transactions were carried out: ‒ Pre 5 December 2005 - s739 ‒ Post 4 December 2005 - s737 ‒ A mixture of both pre and post 5 December 2005 transactions - s740 • A new defence is to be introduced by FA 2013 – discussed later.
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Private Client – Topical tax matters
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Transactions post 4-December 2005 • To be available, either Condition A or Condition B must be met: ‒ Condition A: it would not be reasonable to draw the conclusion, from all the circumstances of the case, that avoiding liability to taxation was the purpose, or one of the purposes, for which the relevant transactions or any of them were effected ‒ Condition B: all the relevant transactions were genuine commercial
transactions and it would not be reasonable to draw the conclusion, from all the circumstances of the case, that any one or more of those transactions was other than incidentally designed for the purposes of avoiding liability to taxation • The intentions and purposes of ‘any’ person to be taken into account – i.e. including those of advisors • Defences apply where an officer of HMRC is satisfied the conditions are met
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Private Client – Topical tax matters
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New EU defence
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Private Client – Topical tax matters
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EU law • Under the Treaty for the Functioning of the European Union (‘TFEU’), EU nationals are given certain protected rights (‘Freedoms’). These include: o Freedom of Establishment – the ability to do business elsewhere in the EU o Free Movement of Capital – the ability to move capital anywhere in the world o Free Movement of Goods – the ability to provide goods elsewhere in the EU o Freedom to Provide Services – the ability to provide cross-border services (applies within the EU only) • It is against EU law for Member States to restrict these rights, though there are certain exceptions where: o Doing so can be justified (such as preventing loss of tax receipts due to artificial arrangements), or o Where the legislation applies to tax certain types of arrangements, where the legislation was in force on 31 December 1993
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Private Client – Topical tax matters
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EU law and TAA • The European Commission (EC) previously started infringement proceedings against the UK, on the basis the TAA provisions are incompatible with EU law as they go further than is needed to prevent loss of tax revenues • In response, HMRC have produced draft legislation to be included in FA 2013 • The legislation will provide a new defence from the TAA provisions where certain conditions are met • The legislation will be backdated to apply to income arising from “transactions” which occur on or after 6 April 2012 and result in income arising overseas • Transactions includes both relevant transfers and associated operations • The EC referred the UK to the European Court of Justice two days after the consultation on the draft legislation closed – it isn’t clear if this is because they believe the amendments are insufficient or because they want to ensure the changes are made. If the former, we may see further changes to this legislation 32
Private Client – Topical tax matters
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EU defence – to be introduced in FA 2013 • HMRC have drafted a new defence from TAA for individuals whose rights under the Treaty for the Functioning of the European Union (TFEU) or under an EEA agreement are unjustifiably and disproportionately infringed • The legislation specifically allows the application of EU law in the context of the new legislation Tribunal – means we are much more likely to make EU claims • The new defence will apply to “genuine transactions” which are: o Done on arms’ length terms, provided a third party would have entered into the transaction, or o Outright gifts made for personal (not commercial) reasons, provided no consideration is received for the transfer (whether directly or indirectly) and the recipient benefits personally from the gift o Does not apply to sales at undervalue • Applies where HMRC are satisfied these conditions are met 33
Private Client – Topical tax matters
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Overseas business establishments There is an exemption for businesses carried on overseas which applies where: • Activities are carried on outside the UK by a ‘relevant person’ through a business establishment in the country in which those activities are carried on (using corporate tax PE test) • The business activities must involve the provision of goods or services to others on a commercial basis and involve: oThe use of staff in numbers, and with competence and authority oThe use of premises and equipment, and oThe addition of economic value, by the relevant person, to the person to whom goods or services are provided • The latter point is likely to be most difficult in practice, as how will clients be able to demonstrate that the goods/services provided have added value to their client? We have asked for guidance on this point. 34
Private Client – Topical tax matters
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Double Tax Treaties
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Private Client – Topical tax matters
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Treaty defences • It may be possible in some arrangements to claim defence against a charge to tax on the basis a double taxation treaty will mean income arising is taxable only in one jurisdiction (possibly not the UK) • HMRC might seek to challenge this defence by applying the decision in Bricom Holdings Ltd v IRC (1997) STC 1179. Bricom dealt with CFC legislation • In Bricom interest income was paid by the UK to a Dutch subsidiary company. The taxpayer argued that the CFC provisions did not apply because of the UK/Netherlands treaty • The Court of Appeal upheld HMRC’s position that the amount taxed under the CFC provisions was not the income which had been subject to the treaty, but a notional sum calculated by reference to such income • FB 2013 contains draft legislation amending the TAA provisions such that individuals are taxable on an amount equal to the amount of income arising abroad, which is intended to make it clear that ‘neither treaty provisions nor the transfer of assets legislation can allow a relief that would not otherwise be due’. • If enacted as planned, this will affect treaty claims. 36
Private Client – Topical tax matters
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Offshore companies
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Private Client – Topical tax matters
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Section 13 TCGA 1992 •Anti-avoidance which applies to chargeable gains accruing to a company: - Which is non-UK resident for corporation tax purposes, and; - Which would be a close company if it were UK resident •Gains are attributed to UK resident or ordinarily resident shareholders with >10% shares, in proportion to their shareholdings (residents from 6 April 2013) •This will be increased to 25% by FA 2013 (to be backdated to apply from 6 April 2012) •This is a de minimis limit •Shareholdings of connected persons are taken into account. There will be a further review of how this should apply to partnerships •Does not apply to trading companies or assets used within trade •Non-UK domiciled individuals are subject to tax on foreign source s13 gains on the remittance basis if they are remittance basis users 38
Private Client – Topical tax matters
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Calculating s13 gains •Calculate gains for Corporate Tax (CT) purposes •Gains which are income for CT purposes are not within s13 (e.g. debts and other loan relationships, FOREX gains, derivative contracts) •Indexation applies inside the company •Losses are not attributed or carried forward •Substantial Shareholdings Exemption may be available •Tax credit offsets are available •Care regarding potential double tax charges •May be able to claim relief under Double Taxation Treaties (although HMRC are reviewing this area and renegotiating tax treaties where relevant)
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Private Client – Topical tax matters
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Relief for tax paid under s13 • CGT paid under s13 can be deducted from CGT arising on a disposal of shares in the company. • Relief is also available where income tax, CGT or corporate tax are payable on distributions from the company (whether income, capital or on a winding up), provided the distribution is within the earlier of three years from: o The end of the company’s period of account in which the chargeable gain accrued, or o 12 months after the chargeable gain was accrued o A tax credit is available against distributions if the tax has otherwise not been reimbursed or relieved •Note, these reliefs apply where the distribution/proceeds represent an amount in respect of the gain – consider using separate bank accounts
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Private Client – Topical tax matters
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New exemptions – to be introduced in FA 2013 • As with the TAA provisions, the European Commission has commenced infringement procedures against the UK as s13 is incompatible with EU law • HMRC have produced draft legislation to be included in FA 2013 which includes: o
A motive defence from s13, where corporate tax and/or CGT avoidance was not a main purpose for the acquisition, holding or disposal of assets by the overseas person
o
A new defence will be introduced where the company provides goods or services to others, and those goods or services add economic value to those people. This exemption will apply regardless of the reasons for the transfer
o
An exemption will be introduced for furnished holiday lets
• These defences will apply with retrospective effect to 6 April 2012, but taxpayers can elect out of the new rules for 2012/13 only
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Private Client – Topical tax matters
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Questions
Deloitte PCS Ltd PO Box 500 2 Hardman Street Manchester, M60 2 AT
Andrew Shepherd Director Private Client Services
Tel: +44 (0) 161 832 3555 Fax: +44 (0) 161 829 3800 www.deloitte.co.uk
Direct: +44 (0) 161 455 8957 Direct Fax: +44 (0)161 829 3813 Mobile: +44 (0) 07884 117 888
[email protected] Member of Deloitte Touche Tohmatsu
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Private Client – Topical tax matters
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