We highlight the latest news impacting international clients based both in the UK and overseas.
UK – Excluded property added to or transferred between trusts
Draft legislation has been published, outlining the tax implications where property is added to or transferred between ‘excluded property’ settlements. It affects trusts with non-UK domiciled settlors and holding non-UK assets. Such assets are generally outside the scope of UK inheritance tax.
The draft legislation confirms that where foreign assets are held in trust, excluded property status is dependent on the domicile status of the settlor at the time property is added, rather than their domicile when the trust was first created.
The legislation also introduces new tests to determine the excluded property status of property transferred between trusts. Where there is a transfer of foreign property from one trust to another, and at that time the original settlor is domiciled in the UK, the property will cease to be excluded property. This remains the case even where the transfer is being made for non-tax reasons.
As the legislation is currently drafted, it appears that transfers between trusts where the settlor has become ‘deemed domiciled’ by reason of long-term residency in the UK, but still retains a foreign domicile under general law, will not be caught by the new rules. However, the legislation is subject to consultation and may therefore change.
This measure will take effect in relation to settlements and transfers from the date of Royal Assent of the Bill (expected to be summer 2020).
UK – Third-party information notices held to have global reach
HMRC has legislative powers (known as ‘Schedule 36’) to request information from a taxpayer or a third-party that is reasonably required to check the taxpayer’s tax position. Until recently, it was thought that a Schedule 36 notice does not give HMRC the power to compel disclosure by a non-resident.
In the case of Jimenez v HMRC, the Court of Appeal held that information notices issued to taxpayers resident abroad are allowed, but did not make clear the position regarding third-party notices.
In the case of HMRC v Mr and Mrs PQ, the First Tier Tribunal (FTT) found that third-party notices issued to non-resident individuals are valid, provided the recipient is a British national and has taken the decisions leading to the alleged tax liability.
There remains uncertainty about the circumstances in which third-party information notices can be issued to other non-residents.
UK – Registration of Overseas Entities
A pre-legislative scrutiny report has been released on the Draft Registration of Overseas Entities Bill, which will introduce a publicly accessible register of foreign entities owning UK land and property, and their controlling individuals. The report highlights a concern that trusts could be used to circumnavigate the Bill, and recommends that the register is introduced at the same time as the UK implements the 5th Anti-money Laundering Directive, in order to ensure trusts do not “slip into any gaps”.
UK – Company residence
A recent tax case made a ruling on company residence. As part of arrangements to achieve increased capital losses, Development Securities Plc (a UK company) incorporated three Jersey resident subsidiaries, each of which had a Jersey-based board of directors. The subsidiaries then acquired group assets at overvalue via a call option, after which the subsidiaries became UK resident. The FTT previously held that the companies were UK resident, as the arrangements had been planned in advance by the UK resident parent, and the directors were acting in accordance with this plan. In addition, the Jersey companies had not acted commercially in acquiring the assets at overvalue.
The Upper Tribunal allowed the taxpayers’ appeal, finding that the subsidiaries had been Jersey resident. The acquisition of the assets was uncommercial when viewed solely from the point of view of the Jersey companies, but not when viewing the transaction as a whole. The Jersey directors had acted in the best interests of their shareholders – Development Securities Plc. They understood their duties and spent time considering the transactions, including taking professional advice.
UK – Offshore receipts in respect of intangible property
Following a consultation, HMRC has published amended draft legislation on the extension of income tax to offshore receipts in respect of intangible property, where the receipts are referable to the sale of goods or services in the UK.
UK – SDLT anti-avoidance case: Hannover Leasing v HMRC
Hannover, a German fund manager, set up a new German fund to invest in UK real estate. The fund made an offer to purchase a UK commercial property. The vendor responded that the property was held in a limited partnership (LP) and unit trust, and Hannover could instead acquire the units without an SDLT charge. Since no SDLT would be payable, a higher offer could be made, which the vendor accepted. Before the unit sale, and in order to avoid any risk of liabilities in the LP, Hannover instructed the seller to transfer the property from the LP into the unit trust, and then to wind up the LP. Once under Hannover’s control, the property was moved from the unit trust into the new German fund.
HMRC argued that all of the steps comprising the pre-sale restructuring, unit sale and post-sale restructuring were interdependent, and therefore ‘scheme transactions’ under the SDLT anti-avoidance rules, with SDLT therefore due to be paid in respect of the notional land transaction.
Hannover agreed that all the steps needed to happen in sequence, but denied that there had been any tax avoidance motive. It had been a fundamental commercial objective for them to acquire a ‘clean’ property with no involvement in the seller’s LP or unit trust.
The FTT held that the lack of any tax avoidance motive behind the arrangements did not prevent the anti-avoidance legislation from operating, and as such SDLT was due on the transfer of the property from the LP to the unit trust. SDLT was payable on the maximum amount paid by any party to the transactions, which in this case was the amount paid for the units in the unit trust. The FTT acknowledged that, had the steps been carried out in a different order (in particular, if Hannover had purchased the units before the property had been transferred out of the LP), there might have been a different SDLT result. However, in the words of the Tribunal: “The parties made a deliberate and considered decision as to the order of the steps, and have to live with the consequences that follow.”
EU – 12 remain on tax haven blacklist
The EU has removed Aruba, Barbados and Bermuda from its list of non-cooperative tax jurisdictions. As a result, 12 jurisdictions remain on the list: American Samoa, Belize, Dominica, Fiji, Guam, the Marshall Islands, Oman, Samoa, Trinidad and Tobago, the United Arab Emirates, the US Virgin Islands and Vanuatu. The list will continue to be revised during 2019, after which it is expected to be updated twice a year. Transactions with blacklisted jurisdictions will be reportable in 2020 under the EU Council Directive 2011/16 in relation to cross-border tax arrangements.
Italy – Non-dom regime
Italy’s special tax regime for wealthy individuals has been bolstered by new measures specifically aimed at retirees. The new rules are targeted at individuals with foreign pensions and provides for a 7% flat tax rate on foreign source income for the next six years. There are also exemptions from wealth taxes on foreign assets.
Germany – Fixed place of business
Germany’s Supreme Tax Court has held that a locker can constitute a fixed place of business for the purposes of the UK-German double tax treaty. In this case, an aerospace engineer worked in both the UK and Germany, and had a locker for his exclusive use at a German airport, where he kept his tools. The court found that this indicated a connection between his business and the place where the business activity was being carried out – the locker kept his tools, which he needed for his business, safe during the periods he was not working, and therefore served the business even when he was not there.
Switzerland – Corporate tax reform
Following a referendum, the Swiss electorate has approved draft legislation that will bring tax benefits including reductions in corporate income taxes to an effective rate of 12%-18% (total tax burden including cantonal and direct federal tax). The tax privileges for holding, mixed, domiciliary and principal companies, as well as for finance branches, will be abolished. A patent box will also be introduced at the cantonal level, reducing the tax burden on earnings from patents and comparable rights (tax relief is limited to 90%). Research and development expenditure incurred in Switzerland will be deductible for tax purposes at the cantonal level (at up to 150%), if the canton provides for this new measure. Swiss permanent establishments of foreign companies will be able to claim the lump sum tax credit if they are subject to tax in Switzerland. The changes are likely to take effect from 1 January 2020.