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• Update on draft clauses
• HMRC Stakeholder Meetings
• The Legislation – excluded property
• The two year rule
• Exit charges
• TAAR
• DTA Override
• Enforcement
• Valuation
• Planning
2
• Para 1 Schedule A1 IHTA provides:
• Property is not excluded property by virtue of section 6(1) or 48(3)(a) [non-UK situate property] if and to the extent that any of paragraphs 2 to 4 apply to it.
• Paragraphs 2-4 apply to 5 categories of property.
• Para 2 - rights and interests in a close company
• Para 3 - interests in a partnership
• 4(1)(a) - rights of a creditor in respect of a “relevant loan”
• 4(1)(b) - money/money’s worth provided as security
• 4(2) - loan interests through company/partnership
3
Individual or trust
│
Company
│
UK residence
4
• Para 2 Schedule A1 IHTA provides:
• 2(1) This paragraph applies to the right or interest that a participator in a close company has in that company, if and to the extent that the value of the right or interest is directly or indirectly attributable to a UK residential property interest.
• Does this include the interest of a loan creditor? If so, when is the value of the loan indirectly attributable to a UK residence?
• “Participator” widely defined, what about position of guarantor?
5
• Para 9 Schedule A1 IHTA (based on section 102 IHTA 1984) provides:
• 9 In this Schedule-
• “close company” means a company within the meaning of the Corporation Tax Acts which is (or would be if resident in the United Kingdom) a close company for the purposes of those Acts;
• “participator”, in relation to a close company, means any person who is (or would be if the company were resident in the United Kingdom) a participator in relation to that company within the meaning given by section 454 of the Corporation Tax Act 2010;
• references to rights and interests in a close company include references to rights and interests in the assets of the company available for distribution among the participators in the event of a winding-up or in any other circumstances.
6
Individual or trust
│
Holding Company (TopCo)
│
Subsidiary Company (SubCo)
│
UK residence
• TopCo’s shares non-excluded property – its value is attributable to the land.
• Shares in SubCo also non-excluded property, but only relevant if TopCo makes a transfer of value.
7
• Possible to read new paragraph 2(2) as having the effect that if the widely held company (say an interest in a residential property fund) is not directly held by TopCo (being a close company) but is held via a sub-holding company, the interest in the top company will no longer be excluded property.
• Because value of the interest in TopCo is still indirectly attributable to UK residential property by virtue of a “qualifying interest”. Remedy?
• Possible that a commercial lender (Swiss private banks) could be a close company for these purposes. Would impose IHT on the owners of the lender. Intended? Remedy?
8
• Para 3 Schedule A1 IHTA provides: 3 (1) This paragraph applies to an interest in a partnership, if and to the extent that the value of the interest is directly or indirectly attributable to a UK residential property interest.
• Interest in a partnership set up to hold a UK home is likely to be UK situate property on general principles. Para 10 Schedule A1 IHTA provides::
• 10 In this Schedule “partnership” means
• (a) a partnership within the Partnerships Act 1890,
• (b) a limited partnership registered under the Limited Partnerships Act 1907,
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• (c) a limited liability partnership formed under the Limited Liability Partnerships Act 2000 or the Limited Liability Partnerships Act (Northern Ireland) 2002, or(d) a firm or entity of a similar character to either of those mentioned in paragraph (a) or (b) formed under the law of a country or territory outside the United Kingdom.
• Why is an interest in a closely held partnership not excluded like a closely held company?
• If a residential property fund is structured as a partnership rather than a company, the holders of the interests in the fund (i.e. the partners) will still be exposed to inheritance tax whereas if they had held shares in a company, they would not.
10
• The original proposal in August consultation paper was that connected party loans would not be deductible in calculating the value on which tax is charged under the new rules.
• The draft legislation however takes a different approach and allows loans to be deducted but brings the benefit of the debt within the scope of the new rules.
• Under original proposal, it would have been very difficult to determine which loans should be deductible and which should not.
• Problem with the present proposals – risk of double taxation there is no link between the taxability of the debt and the availability of a deduction for the debt.
11
• Deceased is RND. Buys UK residential property for £2 million.Borrows the £2 million from an offshore trust which he hasestablished.
• When dies estate includes property subject to the debt due to thetrust.
• Under section 103 FA 1986 likely that debt due to the trust notdeductible. The £2 million value of property subject to IHT.
• The benefit of the debt will also be subject to the new rules. Asdeceased is both settlor and a beneficiary of the trust, there is aROB and so the trust assets will be treated for IHT purposes asbelonging to the deceased on his death.
• The £2 million value of the loan made by the trust to the deceasedwill therefore also form part of his taxable estate on his death.Inheritance tax will be payable on £4 million in total.
12
• Para 4 Schedule A1 IHTA provides:
• (4) For the purposes of this paragraph a loan is a relevant loan if and to the extent that money or money’s worth made available under the loan is used to finance (directly or indirectly)-
• (a) the acquisition of a UK residential property interest by an individual, a partnership or the trustees of a settlement,
• (b) the maintenance, or an enhancement, of the value of a UK residential property interest, where the UK residential property interest is the property of an individual, is partnership property or is comprised in a settlement, or
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• (c) the acquisition by an individual or the trustees of a settlement of a right or interest in a close company, or of an interest in a partnership, if and to the extent that money or money’s worth made available under the loan is used to finance (directly or indirectly)-
• (i) the acquisition of a UK residential property interest by the close company or partnership, or
• (ii) the maintenance, or an enhancement, of the value of a UK residential property interest, where the UK residential property interest is the property of the close company or is partnership property.
14
• Note - if a company borrows to acquire a property, the loan not a relevant loan.
• If an individual borrows to acquire a company which holds a residence, this is not a relevant loan.
• Query the position where a company (owned by a trust) sells the house and allows the purchase price to remain outstanding.
• Query also how to identify whether the rights of a creditor relate to a “relevant loan” for the purposes of paragraph 4(1)(a).
• Requires an analysis as to whether the money which has been lent has been used (broadly speaking) to acquire, maintain or improve UK residential property.
15
• What is the position here:
– A borrows £1 million from B.
– The proceeds of the loan are transferred into A’s bank account which already holds £500,000.
– A buys a UK residential property for £750,000 using the funds in the bank account.
– B dies.
• How much of the loan made by B is a “relevant loan”? The possible answers are:
– £250,000 being the shortfall A has when comparing the purchase price (£750,000) with the amount of money he already had (£500,000).
– £750,000 (on a last in, first out basis).
– £500,000 (taking the funding for the purchase as being provided pro rata out of the loan and A’s existing funds).
16
• Paragraph 4 Schedule A1 IHTA provides:
• 4 (1) This paragraph applies to-
• (a) the rights of a creditor in respect of a relevant loan
• (b) money or money’s worth held or otherwise made available as security, collateral or guarantee for a relevant loan.
• “Money or money’s worth” means “property”.
• Collateral is a synonym of security.
• 4(1)(b) aimed at back to back financing but is wider and as drafted will result in tax being charged on amounts which significantly exceed the value of the UK residential property.
17
• A, resident and domiciled in Malaysia wishes to buy an investment property in London for £2 million.
• He borrows £1 million from his local bank which is secured on the portfolio of £5 million which he holds with the bank.
• On A’s death, his estate pays tax on the whole value of the property (the debt is not deductible as it is not secured on the UK property) and is also taxable on the value of the collateral after deducting the debt.
• The total amount on which tax is payable is therefore £6 million when the property is only worth £2 million.
18
• B, RND, purchases a property in the UK for £5m. Borrows £3m from the London branch of his Swiss bank secured on property.
• Has a portfolio of £10m with the bank in Switzerland not given as security for the loan. But under the bank’s standard terms and conditions, B has given a pledge in favour of the Swiss bank of all of the assets he holds with the bank worldwide to secure any liability which he owes to the bank at any time. Portfolio is therefore collateral (indirectly) for the loan taken out to purchase the property.
• On B’s death, bank debt will be deductible pro rata from the property and the portfolio as the loan is an encumbrance on both (section 162(4) IHTA 1984). His estate will therefore be taxed on the net value of the property (£4 million) plus the net value of the collateral (£8 million).
19
• Para 4 Schedule A1 IHTA provides:
• (2) This paragraph also applies to-
• (a) the right or interest that a participator in a close company has in that company, if and to the extent that the value of that right or interest is directly or indirectly attributable to property within sub-paragraph (1)(a) or (b);
• (b) an interest in a partnership, if and to the extent that the value of that interest is directly or indirectly attributable to property within sub-paragraph (1)(a) or (b).
20
• C RND. Purchased UK residential property for £10m. He has settled a non-UK resident trust which, through its wholly owned company, has a portfolio of £15m. C borrows £5m from the bank in Switzerland which manages the portfolio held by the company which is owned by the trust. The bank cannot take security over the property as it does not have the right regulatory permission to enter into a regulated mortgage. Instead, the company gives the bank security over its portfolio.
• On C’s death, the bank debt is only deductible from the value of the UK property to the extent that it exceeds the value of any non-UK assets which he holds. C has £3m of overseas assets and so £2m of the debt is deductible from the value of the UK house.
21
• The collateral is caught by the new rules and so the value of the shares in the company owned by the trust are not excluded property to the extent of the value of the collateral.
• C’s estate will therefore be taxable on the £15m value of the collateral as well as on the net £8m value of the property.
• The trustees will also be subject to ten year charges on the value of the £15m of collateral.
• If the main purpose of bringing collateral within the scope of the new rules is to prevent people side-stepping tax on the value of a relevant loan by entering into a back-to-back arrangement with a bank, could this objective could be achieved without the above?
22
• This term is used in
• (1) the de minimis rule
• (2) the definition of “indirectly attributable” .
• Para 2 Schedule A1 IHTA defines qualifying interest:
• (3) In this paragraph “qualifying interest” means-
• (a) a right or interest in a close company, or
• (b) an interest in a partnership.
23
• Para 2 Schedule A1 IHTA provides a very strict de minimis rule:
• (4) For the purposes of sub-paragraph (3), disregard a qualifying interest if-
• (a) in the case of a qualifying interest which is a right or interest in a close company, its value is less than 1% of all the rights or interests in that close company;
• (b) in the case of a qualifying interest which is an interest in a partnership, its value is less than 1% of all the interests in that partnership.
• Para 3 Schedule A1 incorporates the de minimis rule for partnerships:
• (3) Paragraph 2(3) and (4) (meaning of “qualifying interest” and disregard of minor qualifying interests) apply for the purposes of sub-paragraph (2).
• Para 4 Schedule A1 incorporates the de minimis rule for loans/securities:
• (5) Paragraph 2(3) and (4) (meaning of “qualifying interest” and disregard of minor qualifying interests) apply for the purposes of sub-paragraph (3).
24
• For close companies, para 2 Schedule A1 IHTA provides:
• (2) For the purposes of sub-paragraph (1) the value of a right or interest in a close company is indirectly attributable to a UK residential property interest only if it is attributable to such an interest by virtue of one or more qualifying interests (which need not be owned directly by the close company).
• Similarly, for partnerships, para 3 Schedule A1 IHTA provides:
• (2) For the purposes of sub-paragraph (1) the value of an interest in a partnership is indirectly attributable to a UK residential property interest only if it is attributable to such an interest by virtue of one or more qualifying interests (which need not be owned directly by the partnership).
• Similarly, for loans, para 4 Schedule A1 IHTA provides:
• (3) For the purposes of sub-paragraph (2) the value of a right or interest in a close company, or an interest in a partnership, is indirectly attributable to property within sub-paragraph (1)(a) or (b) only if it is attributable to such property by virtue of one or more qualifying interests (which need not be owned directly by the close company or partnership).
25
• Para 2 Schedule A1 IHTA concerns deduction of liabilities:
• (5) In determining the value of a right or interest in a close company for the purposes of sub-paragraph (1), liabilities of the close company are to be attributed to all of its property rateably (whether or not they would otherwise be attributed to any particular property of the company).
• This is only relevant if the company holds UK residential property and other property.
• The rule does not, at present, apply to a partnership.
26
• Surprise addition (to prevent deathbed planning)
• Para 5 Schedule A1 IHTA provides:
• 5(1) This paragraph applies to the following property-
• (a) property which constitutes consideration in money or money’s worth for the disposal of-
• (i) property to which paragraph 2 or 3 applies, or
• (ii) property falling within paragraph 4(2);
• (b) any money or money’s worth paid in respect of a creditor’s rights falling within paragraph 4(1)(a);
• (c) any property directly or indirectly representing property within paragraph (a) or (b).
27
• Paragraph 5 does not include the proceeds of a sale of a residence held directly or securities interests.
• Para 5 Schedule A1 IHTA provides:
• (2) If and to the extent that property is property to which this paragraph applies and is not relevant settled property-
• (a) it is not excluded property by virtue of section 6(1), (1A) or (2),2
or section 48(3)(a), (3A) or (4)3 for the two-year period, and
• (b) if it is held in a qualifying foreign currency account within the meaning of section 157 (non-residents’ bank accounts), that section does not apply to it for the two-year period.
• This includes property in an estate IP trust.
28
• Para 5 Schedule A1 IHTA defines the two year period:
• (3) The two-year period is the period of two years beginning with-
• (a) the date of the disposal referred to in sub-paragraph (1)(a), or
• (b) the date of the payment referred to in sub-paragraph (1)(b).
• Two year “tail” during which proceeds remain non-excluded property.
29
• A genuine sale to 3P of a UK residential property owned by a company within 2 years of the death of the owner of the company will not result in any charge to IHT on the owner’s death.
• If owner sells the company rather than the company selling the property, there will be an IHT charge if death occurs within 2 years. Why?
• Better if 2 year liability only applies where there is a sale (whether of the property or of the interest in the company/partnership) to a connected person.
• Similarly, the 2 year tail should not apply to the repayment of a loan where the repayment results from the sale of the property in question to an unconnected person.
30
• Para 5 Schedule A1 IHTA provides:
• (4) If and to the extent that property is property to which this paragraph applies and is relevant settled property, section 65(7), (7A) and (8) do not apply to it.
• (5) In this paragraph “relevant settled property” means property which is “relevant property” within the meaning given by section 58(1) (but ignoring section 58(1)(f)).
• The intention is to impose an exit charge on residence proceeds. No 2 year period. Another surprise – tackle 10 year charge avoidance.
• If a trust sells residence and receives UK situate residence proceeds no exit charge at that point.
• 5 years later trust uses the proceeds and acquires non-UK situate property. There is in principle an exit charge at that point. Harsh.
31
• The provisions relating to property which is within the relevant property regime are very harsh.
• Seem to be based on the fact that, without any changes to the existing relevant property regime, there will be an exit charge at the time of any disposal of the UK residential property or the interest in the company or partnership which holds the UK residential property or a repayment of any relevant loan or release of collateral in respect of any relevant loan.
• This is because, on the occurrence of any of those events, property in the trust will cease to be relevant property but the exemption in section 65(7) will not apply as the property does not become excluded property by virtue of ceasing to be situated in the UK.
32
• Para 7 Schedule 13 FA 2017 provides:
• 7(1) The amendments made by this section have effect in relation to times on or after 6 April 2017.
• (2) But for the purposes of paragraph 5(1) of Schedule A1 to IHTA 1984 as inserted by this Schedule-
• (a) paragraph (a) of that paragraph does not apply in relation to a disposal of property occurring before 6 April 2017, and
• (b) paragraph (b) of that paragraph does not apply in relation to a payment of money or money’s worth occurring before 6 April 2017.
• Pre-2017 disposals do not give rise to taxable proceeds. Consider disposals before 6 April 2017.
33
• The usual IHT exemptions apply. The 2015 IHT residential property paper provided:
• 16. It is intended that the same reliefs and charges will apply as if the property was held directly by the owner of the company. Hence a deceased individual who owned the company shares directly will have the benefit of spouse exemption if the company shares are left to a spouse.
34
• Para 6 Schedule A1 IHTA provides:
• 6 (1) In determining whether or to what extent property situated outside the United Kingdom is excluded property, no regard is to be had to any arrangements the purpose or one of the main purposes of which is to secure a tax advantage by avoiding or minimising the effect of paragraph 1 or 5.
• (2) In this paragraph-
• “tax advantage” has the meaning given in section 208 of the Finance Act 2013
• This is a new style of TAAR. Very wide.
35
• If an individual sets up a company to invest in UK residential property and arranges for the company to borrow from a bank in order to reduce the value of the property for IHT purposes, even though the individual had funds available to fund the company himself, this appears to fall foul of the TAAR.
• Straightforward choice which any taxpayer could make?
• If the taxpayer had instead acquired the property in his own name with the assistance of bank debt secured over the properties, no question that the debt would be deductible and that tax would only be paid on the net value of the properties when the taxpayer died. No TAAR, use GAAR, restrict to “tax avoidance”.
36
• The residence value and proceeds are not excluded property but property remains movable rather than immoveable property, so it could qualify for IHT DTA relief.
• Para 7 Schedule A1 IHTA provides a treaty override:
• 7(1) Nothing in any double taxation relief arrangements made with the government of a territory outside the United Kingdom is to be read as preventing a person from being liable for any amount of inheritance tax by virtue of paragraph 1 or 5 in relation to any transfer of value if under the law of that territory-
• (a) no tax of a character similar to inheritance tax is charged on that transfer of value, or
• (b) a tax of a character similar to inheritance tax is charged in relation to that transfer of value at an effective rate of 0%.
37
• Effective rate
• Para 7 Schedule A1 IHTA provides
• (2) In this paragraph...“effective rate” means the rate found by expressing the tax chargeable as a percentage of the amount by reference to which it is charged.
• If property falls within a foreign equivalent of the nil-rate band, the effective rate will be nil. If it exceeds it slightly the effective rate will be just above nil, and the treaty override will not apply. Sometimes some planning to ensure an above nil rate may be possible.
• India, Pakistan, Italy, France, USA, Switzerland, Netherlands, South Africa and Sweden
38
• The 2016 consultation paper provided:
• The government believes HMRC should have an expanded power to impose the IHT charge on indirectly-held UK residential property so that the property cannot be sold until any outstanding IHT charge is paid. In addition, a new liability will be imposed on any person who has legal ownership of the property, including any directors of the company which holds that property. This will ensure that IHT is paid, though only when HMRC are aware that a charge has arisen and have taken steps to collect the liability.
• Con Response provides:
• The government accepts that there might be cases where making the directors of a company liable for unpaid IHT would be impractical in some circumstances, particularly where they might not be aware that there is an IHT charge on a residential property in the UK. It therefore does not propose to proceed with this suggestion. The government will instead consider what alternative approaches would be appropriate for ensuring that the extended charge can be effectively enforced.
39
• The proposed rules are restricted to residential property. The 2015 IHT residential property paper provides:
• 9. The government does not intend to change the IHT position for non doms or excluded property trusts in relation to UK assets other than residential property, or for non-UK assets.
• Para 8 Schedule A1 IHTA provides:
• 8(1) In this Schedule “UK residential property interest” means an interest in UK land if-
• (a) the land consists of or includes a dwelling, or
• (b) the interest subsists under a contract for an off-plan purchase.
40
• Change of use: 2016 Con Doc “property will be within the charge to IHT where it has been a dwelling at any time within the two years preceding a transfer”.
• Withdrawn in the con response: what matters is use at the time of the transfer of value.
• Mixed residential/non-residential use
• The 2016 Con Doc: “... there will be the need for an apportionment where a property has been used for residential and for other purposes at the same time, such where it consists of a flat above a commercial premises. Provided the property has wholly or partly met the definition of a dwelling at any time in the previous two years, it will be chargeable to IHT. However, the tax liability which arises will be determined by the extent to which the property has a residential use”.
41
• The 2016 Con Doc:
• In a simple example, a non-dom is the sole shareholder of an overseas company whose sole assets consist of a UK residential property. The company has no liabilities. At the individual’s death, their estate will consist of the overseas shares which have an open market value of £950,000. At the same time, the UK property has an open market value of £1 million. In such a situation, the value of the estate is £950,000, and this is derived wholly from the UK residential property. This would mean that IHT would be charged on the entire estate which has an open market value of £950,000. This is broadly the treatment which would apply in the case of an individual who is domiciled in the UK.
• Not straightforward. How do you value a guarantee?
42
• A purchase by a company has the advantages of SDLT and CGT tax saving on a sale of the company.
• The general rule will be not to purchase by a company because of ATED and ATED-SDLT and shadow director issues. If quick sale intended?
• A corporate purchase of a property worth under £500k is currently outside ATED, but one needs to consider the likelihood of a rise in value, lowering of threshold and/or administrative costs.
• Insurance.
43
• Wind up or retain? No express relief for de-enveloping.
• Keep – in return for paying ATED you may be able to sell the company rather than the land (SDLT advantage if prompt sale).
• CGT advantage of possible selling shares without CGT.
• A purchaser may want a discount for purchasing the company – if to be used as a residence, if an investment may be different.
• Evaluate tax charges – what is the 10 year/exit charge going to be?
• Deduction of loans. Watch 75A FA 2003. Treatment of companies de-enveloping apply to trusts?
• Watch timetable for de-enveloping.
44
• Base level now £500k – ATED payment £3,500 up to £218,200 for properties £20m plus.
• Rates carefully calibrated to match IHT charges in ‘relevant property’ trusts Foundations not within the ATED charge.
• Part of international drive against anonymous offshore companies? What will G20 do next? – but how will trusts be affected? CRS and UBO difficulties?
• Drive towards trusts at odds with disclosures required by UK SBEEA 2015 - ‘persons with significant interest
• FA 2016 provisions regarding property developer’s profits if not within ATED.
45
• Individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest - except where the property meets all the criteria to be a furnished holiday letting) no longer get full relief for finance costs - restricted to BR IT. Introduced gradually from 6 April 2017.
• Includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief for capital repayments of a mortgage or loan. Relief restricted to:
• 2017/2018 restricted to 75% of finance costs, remaining 25% BR IT
• 2018/2019, 50% finance costs deduction and 50% BR IT
• 2019/2020, 25% finance costs deduction and 75% BR IT
• 2020/2021 all financing costs incurred by a landlord BR IT
• This measure will have effect for finance costs incurred on or after 6 April 2017.
46
• DISCLAIMER Neither these notes nor the talks based on them nor anything said in the discussion session(s) constitute legal advice. They are simply an expression of the speaker's views, put forward for consideration and discussion. No action should be taken or refrained from in reliance on them but independent professional advice should be taken in every case. The speaker does not accept any legal responsibility for them.
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