We summarise the recent private client tax changes which include the eagerly awaited publication of HMRC guidance on the changes to the taxation of non-UK domiciled individuals, IHT on UK residential property interests, as well as the long overdue guidance on the ‘cleansing’ provisions.
We also look at several recent tax cases, including the Court of Appeal’s decision on Trigg and whether Sterling debt instruments were qualifying corporate bonds despite the fact that their terms and conditions provided for automatic conversion into euros should the UK join the euro currency union.
HMRC issued guidance on the new ‘cleansing’ provisions on 31 January 2018.
The new guidance sets out the basic rules for cleansing a mixed fund and gives a number of examples of cleansing, including multiple account nominations and cleansing of accounts with pre-2008 income and gains, which have had transfers out prior to April 2008.
In order to take advantage of the ‘cleansing’ provisions, individuals must ‘nominate’ a transfer of funds from a mixed offshore account to another offshore account between 6 April 2017 and 5 April 2019. The nomination of the transfer will identify the amount of income, gains or capital being transferred to the new account, and therefore ‘un-mixing’ a proportion or all of the original mixed fund.
HMRC’s guidance gives no suggested wording for a nomination nor any suggestion of how one would evidence the date on which the nomination is made. It would appear that there is no need to notify HMRC of the nomination.
The guidance confirms existing concerns that an over-nomination of income and gains could result in the nomination being invalid. It confirms that where there is insufficient information to identify the make-up of transfer out of an account, it should be treated as a transfer of income.
Unfortunately there are no examples where clean capital is transferred out of an account, so HMRC's view regarding the problem where transfers are made with a view to remittance remains unclear.
There are also no examples of transfers post April 2008 from accounts containing income and gains arising prior to April 2008.
HMRC has updated its guidance in RDR1 to include information regarding deemed domicile status from April 2017. The amendments appear to be minor and not especially detailed and refer readers to a tax advisor and HMRC’s manuals. The full updated guidance is available here.
HMRC has also published somewhat more detailed guidance on the meaning of deemed domicile here. This sets out the conditions for being deemed domiciled and explains which tax years should be counted, but contains no examples or more detailed considerations.
UK residential property and IHT
HMRC has published guidance on changes to enveloped UK dwellings and related finance from 6 April 2017.
This guidance covers the changes to excluded property for IHT in respect of interests in UK residential property (UKRP), the two year restriction on the availability of excluded property for proceeds from indirect disposals of UKRP and the availability of double tax relief.
The guidance also covers HMRC’s powers to collect IHT if it is not paid (by registering a charge against the property at HM Land Registry), transitional relief, as well as the new targeted anti-avoidance rule (TAAR) for arrangements entered into for the sole or main purpose of avoiding or to minimise the effect of the legislation.
Trust protections and CGT
HMRC have also published technical guidance on how the deemed domicile changes from 6 April 2017 affect:
- settlements legislation trust protections
- transfer of assets abroad legislation trust protections
- CGT legislation trust protections
- how a protected settlement can be tainted
- the valuation of benefits
- rebasing for CGT
- other changes for CGT
Business Investment Relief (BIR)
HMRC has updated its guidance on BIR to reflect to the changes which apply from 6 April 2017. These changes include:
- A qualifying investment can now be made by acquiring existing shares in a target company.
- Eligible hybrid-company has been added to the target company list. The definition of an eligible hybrid company can be found in the guidance.
- A new requirement that trade should be commercial, that is, conducted on a commercial basis with a view to making profits.
- A company which is a partner in a partnership won't be regarded as carrying on a trade if the trade is carried on by the partnership.
To qualify for BIR the company must:
- Have a commercial trade in its own right separate from the partnership
- satisfy the other qualifying conditions
- When a “chargeable event” occurs in relation to a qualifying investment there are time limits to remove proceeds from the UK (before a taxable remittance occurs). These time limits are called grace periods. There are 4 grace periods. Numbers 1 to 3 are unchanged. Number 4 has been updated from 6 April 2017, and this relates to the time investors have to dispose of their holding and remove the proceeds from the UK or reinvest them should the company not become trading, or become non-operational, within the specific time limits.
- From 6 April 2017 the “extraction of value rule” will only be breached if the relevant person receives value in circumstances that are directly or indirectly attributable to their investment and they fail to take the appropriate mitigation steps. Prior to 6 April 2017, there were no mitigation steps.
- Before 6 April 2017 if an individual invested in a target company that hadn’t started trading, to qualify for BIR the company must start trading within 2 years. For investments made on or after 6 April 2017 this period has been extended to 5 years.
Personal portfolio bonds: amending the property categories
On 4 December 2017 HMRC published regulations amending the legislation that prevents an individual placing personal property in a life insurance policy to defer a tax charge on income or gains arising from that property.
This measure took effect for all policies from 1 January 2018.
The legislation defines any life insurance policy as a personal portfolio bond (PPB) if its terms and conditions allow property selection, unless the only property that can be selected is that which is specified in legislation.
These amendments add three property categories to the list of permitted property:
- Real Estate Investment Trusts
- Overseas Investment Trust Companies
- Authorised Contractual Schemes
The regulations also remove category 7(a) (an interest in a collective investment scheme constituted by a company resident outside the UK, other than an open-ended investment company).
By virtue of a technical deficiency, category 7(a) is incapable of containing any property, and the regulations remove this sub-category.
Simplification of IHT on the horizon?
On 19 January the Chancellor, Philip Hammond, wrote to the Office of Tax Simplification (OTS) in order to request that they carry out a review into the IHT regime. He specifically asked for proposals regarding the simplification of the regime, investigation into the regime to ensure that it is fit for purpose and proposals for improving the experience of those who interact with it, to make sure that it is as smooth as possible. The letter is available here.
Vaines - Court of Appeal - Whether payment of expenses made by a partner was incurred wholly and exclusively for the purposes of the partnership trade
In this case, the taxpayer, an individual who was a member of a limited liability partnership (LLP1), claimed a deduction from trading income for a settlement payment he made in connection with his former membership of an unconnected limited liability partnership (LLP2). The Court of Appeal noted that the first step was to identify the relevant trade for income tax purposes which the taxpayer carried on in the relevant year. The Court found that the only trade the taxpayer carried on was the actual trade of LLP1, which was deemed to be carried on in partnership by its members. It went on to hold that, far from deeming there to be a series of separate trades carried on by the individual partners, the legislation treats the collective trade of the partnership as if it were the trade of a single UK-resident individual.
It was accordingly in the context of that deemed partnership trade of LLP1 that the deduction had to be justified. While from the taxpayer's personal point of view the expenditure enabled him to continue in his chosen career that did not mean that it was wholly and exclusively incurred for the purposes of LLP1's trade.
Trigg - Court of Appeal - Whether sterling debt instruments were qualifying corporate bonds (and therefore exempt from CGT) despite the fact that their terms and conditions provided for automatic conversion into euros should the UK join the euro currency union.
The Court of Appeal has allowed the taxpayer's appeal in this case, holding that sterling debt instruments were qualifying corporate bonds (and therefore exempt from capital gains tax) despite the fact that their terms and conditions provided for automatic conversion into euros should the UK join the euro currency union.
The Court held that the provisions of the loan note determining the currency of the loan note in the event the UK were to adopt the euro as its lawful currency were not provisions for the conversion as such of the loan note (as is required in s117(1)(b)) because they operate after there has been a change from sterling to the euro and so only deal with the administrative consequences of a legislative change which precedes their operation.
Khan Properties (FT) – Whether a determination of a penalty for late filing is valid where the determination was made automatically by a computer with no decision from an officer from HMRC
The First-tier Tribunal (FT) held that an automatic determination of a penalty by a computer, with no decision from an officer from HMRC, cannot be a valid determination for the purposes of the penalty determination legislation in section 100 TMA1970.
The Tribunal found that the automatic making of the determination does not fulfil the requirement for "an officer of the Board authorised by the Board" (being an officer of HMRC) to authorise the determination. The judgment also suggests the officer should be named in the notice otherwise the recipient will not know to which officer to address the appeal.
It is noted that the involvement of a computer or automated system within the process would not invalidate all penalty determinations. However the authorisation of an officer of HMRC is considered necessary for penalty determinations arising under section 100(1) in relation to late filing penalties within Schedule 18 Finance Act 1998.
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