September 2016

Tax Services

IntroductionWelcome to a specialedition of our non-domnewsletter.

Here we share ourthoughts and practicaltips on what clients andadvisers may wish tostart considering now,following the release ofthe consultationdocument.

If you would like todiscuss any of the issuesraised in this Newsletter,please get in touch – forcontacts, click here.

The non-domnewsletter

Eleventh edition

29 September 2016

Question timeClients and their advisers have now had the opportunity to digest theconsultation document issued by HMRC on 19 August. Very helpful andconstructive meetings have been held with HMRC as part of the consultationprocess which closes on 20 October.

The landscape is much clearer. It seems certain that 6 April 2017 will indeedbe D Day. While the final form of the changes remains uncertain and we stillawait a lot of detail, the clock is ticking and if one waits, D Day will be here andthere may be no time to act.

The most common question being fielded by EY at the moment is, ‘What do wedo?’. Clients, trustees and bankers are all seeking guidance on what to do andwhen to do it.

This is not an easy question (are there any easy questions anymore?).By acting now, one has the risk of moving too early. By delaying, there maynot be time to restructure.

In this edition of the non-dom newsletter, we try to answer this question.We share some thoughts in each of the main areas. We would be pleased tohear your thoughts too as HMRC, tax payers and advisers all move forwardtogether cautiously.

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Act now: Press go in JanuaryThis edition of the non-dom newsletter must carry a health warning! The landscape is muchclearer than it was at the start of the summer, but it may change again. However, we believethat the August consultation document represents a firm signpost and that action is, in manycases, now appropriate and necessary. Therefore, in the articles in this edition, we share ourthoughts on the type of issues and actions which must be on the agenda.

The health warning is that there could be more twists in the plot. Individuals and trusteestaking action need to be aware of the risk of moving too early and balance this against the riskof delay. For example, at the time of writing, there is a suggestion that the CGT tainting rules(whereby you need to deep freeze the trust or lose its protected status forever) will be modified.

It will almost certainly (in the normal case) be wrong to do nothing. Structures and assets mustbe reviewed. Questions like ‘What do I do with my UK residential property?’, ‘What do I do withthe Spanish villa?’, ‘Have I got a ‘taint or take’ problem?’ must now all be asked and draftanswers prepared. In most cases, the sensible course will be to write the answer to the examquestions now, but not to hand in your answers until the syllabus has finally been settled.But don’t daydream and only pick up your pen in January!

Based on the articles in this special edition of the non-dom newsletter, click here for a list.

Useful links► Further consultation document published 19 August 2016

► Joint CIOT, ICAEW, STEP and the Law Society discussion paper – click here

► Policy document and draft income tax and capital gains tax legislation published 2February – click here

► Policy document and draft IHT legislation published 9 December – click here

► Consultation document published 30 September – click here

► Previous versions of this newsletter are available - click here

► HMRC’s Technical Briefing on the main changes to non-dom regime – click here

► HMRC’s Technical Briefing on changes to IHT for UK property – click here

► HMRC’s 15 October 2015 announcement on loan collateral - click here

► Questions – for contacts click here

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Expected timetable of main provisions

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Act now: Press go in January

Rebasing and mixed funds

► Review existing assets and investments in detail in the context of future needs.

► Determine which assets are likely to qualify for rebasing. Are they comprised of clean capital?

► Analyse accounts to see if cleansing is appropriate. Are sufficient records to hand to achieve this or mustrecords be sought out?

► Consider how future lifestyles are to be funded.

► If remittance basis charge was not previously paid, consider paying the charge for 2016/17 or amendingprevious year’s tax return to pay the charge.

► Will there be sufficient clean capital from rebasing and cleansing? Can funds be borrowed against cleancapital? This can be particularly attractive if linked with a purchase of UK property.

► Consider obtaining valuations of assets.

Non-resident trusts

► It is difficult to think of a trust scenario which will not have to be reviewed.

► If a trust owns UK residential property, the impact of the new IHT rules must be assessed. Is there a Giftwith reservation of benefit (GROB)? How should this be addressed? The exclusion of the settlor may beundesirable so life assurance may be an easier solution. Will there be liquid funds to pay 10 year charges?

► The tainting provisions require all trustees to look at existing benefits. Should overseas assets beextracted from trusts now (balancing the IHT position against the future CGT charges)? Should rent becharged for the use of UK residential property? Trustees need to review all actual and future charges inlight of any 2008 rebasing etc.

► Trustees should also think about new solutions, eg, if the CGT tainting rules are to be introduced, would itbe preferable to hold capital assets via an offshore bond so as to access income tax rather than CGTcharges?

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► How are assets to be held once the deemed domicile rules bite? Are we set to see an even bigger growthin family investment companies?

IHT changes

► If an individual is not yet deemed domiciled, consider establishing a pre-2017 trust.

► Review the IHT and succession strategy.

► Trustees will need detailed record-keeping to track their settlor’s residence status and movements.Should Settlors take a holiday every 10 years?

De-enveloping

► Consider the detailed checklist in our article.

► No de-enveloping relief so balance the pros and cons before April 2017.

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Rebasing and mixed funds:much to doFor personally owned assets the key provisions inthe trust consultation document were those aroundrebasing of assets and the cleansing of mixed funds.For both ‘reliefs’, we are still awaiting the draftlegislation. As a result, we only have a few shortparagraphs in the consultation document to help usunderstand how they will work. Much remainsunclear.

RebasingThis relief will allow individuals who becomedeemed domiciled in 2017/18 (under the 15 out of20 rule) and who have paid the remittance basischarge in at least one tax year to rebase their nonUK assets to April 2017 values. This means thatwhen the asset is subsequently sold, only theincrease in value will be subject to UK tax. Therecent consultation document confirms that theuplift from base cost to April 2017 values will befree of UK tax on a subsequent remittance of thesale proceeds to the UK once the asset is sold.Nevertheless individuals must take care if the assetwas originally acquired with non UK income orgains. Here the mixed fund relief (see below) mayassist.

The relief is not available for those who becomedeemed domiciled in a year after 2017/18. Inaddition, we are informed that this relief will not beavailable to those individuals with a UK domicile oforigin who have a non UK domicile of choice andwho become deemed domiciled in 2017/18.Such individuals, who are married (or in a civilpartnership) to someone with a non UK domicile oforigin may wish to see if the new legislation allows atransfer to their partner to give the uplift (but seebelow).

The consultation document makes clear that therelief is only available for assets held personally(and not, for example in non UK structures such astrusts or companies). However, where the companyis held direct, the relief should be available for thecompany shares and this may facilitate breakingsuch structures on 6 April 2017 if they are nolonger required (although section 13 TCGA mustalways be kept in mind).

It seems that the assets must have been held at thetime of the summer budget 2015 (i.e., 8 July2015). This is not entirely clear, as the consultationdocument simply requires the asset to be non UKsitus at that date. So it is not certain if the exchangeof one asset for another between 8 July 2015 and 6April 2017 (eg, the exchange of non UK shares forother non UK securities where CGT deferral isavailable) will qualify. Or whether the exercise of anon UK share option to obtain non UK shares in thesame company will qualify. However, it seems thatit will not be possible to move an asset such as apainting, which was in the UK in July 2015, outsidethe UK in order to rebase.

Individuals who can avail of this relief may now wishto consider obtaining market valuations of their nonUK assets. This will assist with future tax-freeremittances to the UK once the asset is sold. Inaddition, the rebasing relief may make it attractiveto set up new holding structures for investments on6 April 2017 rather than in the current year.Rebased assets may, in some circumstances, also beused as collateral for UK loans in a tax efficient way.

While there are still some uncertainties regardingthis relief (and we would advise waiting for thelegislation before taking any steps), the relief is tobe welcomed for those who become deemeddomiciled in 2017/18.

Mixed funds – cleansingThis new relief was announced in the most recentconsultation document. Unlike the rebasing relief, itwill be available to any non-domiciled individual (notonly those who become deemed domiciled in2017/18). However, it will not be available to thosewho were born in the UK with a UK domicile oforigin. It is not clear, but seems unlikely, that thelegislation will allow such individuals who have anon-dom spouse to transfer funds to their spousefor segregation.

The relief will allow non-doms to separate out theirmixed non UK bank accounts (i.e., bank accountscontaining a mixture of non UK income, gains andcapital, from one or more years) into different bankaccounts outside the UK. This will enable the non-dom to select particular funds for remittances tothe UK, rather than have to use the current mixedfund legislation, which latter may be moreunfavourable from a UK tax perspective. It appearsthat the relief will be available throughout 2017/18

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and, while the relief is only available for cash inbank accounts, the consultation document statesthat it will be possible to sell non UK assets duringthis year and segregate the proceeds.

This relief, combined with the rebasing relief, shouldallow individuals to sell a rebased asset on 6 April2017 and separate the proceeds into its constituentelements for future tax efficient remittances to theUK. This may include setting up new investmentstructures, either outside or in the UK, in a taxefficient manner.

At present, it seems that the relief is only availablefor cash held personally and not, for example, forcash held in personal structures such as trusts orinvestment companies. It may be appropriate tocombine distributions from these structures, eitherthis tax year, or next year, with the mixed fund reliefas a way of preparing for future remittances to theUK.

Taxpayers should now be identifying mixed fundswhich may be analysed for this relief (there is noreason why this analysis could not be started now)and also assets which may be sold in 2017/18 forseparation of proceeds. The consultation documentstresses that the relief will only be available wheretaxpayers can identify the constituent elements of amixed fund. It remains to be seen whether anability to identify elements for the most recentyears will be enough to allow these to be separated,leaving a rump mixed fund behind, although weunderstand this may be possible. Should this be thecase, this will open up the relief to more taxpayers.

The 2017 regime brings new tax charges to long-term UK resident non-doms. These two reliefs,where available, may help soften the tax burden andprovide a more gentle introduction into the new era.

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Non-resident trusts:changes and consequences

Pre-change trustsThe UK personal tax system as it applied to non-domiciled individuals very much encouraged theholding of personal wealth via overseas trusts.Specifically it offered a regime of capital gains onlybeing taxed if matched with a trust benefit remittedto the UK and foreign assets being outside of theinheritance tax charge.

For UK domiciled individuals, trusts which they canbenefit from have largely become tax transparentin terms of income, gains and ownership of assets.There is no real tax incentive for such individuals toset up a family trust.

Post-change trustsAccordingly where individuals, after becomingdeemed domiciled under the proposed changes, setup trusts, they may well find that overseas trustsand any underlying companies are UK taxtransparent. This raises two immediate issues:

► UK tax charges on the newly deemeddomiciled individual on income, gains andassets in the structure without necessarilythere being any cash distributed oravailable to the individual; and

► Gathering information by 31 January aftera tax year end in order to complete a UKself-assessment tax return.

The approach of the consultation is that trusts setup after becoming deemed domiciled should notenjoy any special tax privileges and thus will betaxed in a similar way to those set up by UKdomiciled individuals. As such there may be specifictypes of trusts that still have merit but trusts willnot generally appeal for tax purposes. It is likelythat deemed domiciled individuals will thereforeconsider the same opportunities as UK domiciledindividuals such as family investment companiesand tax privileged investments. Trusts will remainimportant for non-tax reasons such as assetprotection.

Pre-change trusts – protectionsHowever the consultation does propose certain taxprotections for trusts set up before becomingdeemed domiciled. It is therefore important thatbefore 6 April 2017 individuals who will be caughtby the deemed domicile proposals carefullyconsider setting up trusts to benefit from theprotections, otherwise the opportunity will be lost.It is also important that existing trusts andunderlying companies are reviewed before 6 April2017 as the protections can be easily be lost ordiminished if certain events happen after deemeddomicile status is achieved.

There are certain trusts where the changes haveless effect eg, if the settlor died not UK domiciledbefore 6 April 2017 or the settlor and close familymembers cannot benefit from the trust. The mostimpacted trust is where the settlor, spouse, civilpartner or minor children can benefit from thetrust. The following comments concentrate on thattype of overseas trust. We shall look at the incometax, capital gains tax and inheritance taxprotections proposed.

Income tax:It is proposed that a trust’s UK income will beimmediately taxable on the settlor, as is generallythe case now. Non-UK source income of the trustwill be taxed on the settlor if benefits are receivedby the settlor or close family members. The chargewill involve matching the benefit with such income.Benefits received by others will be taxed on thembased on their tax status. The protection istherefore that foreign income is only taxed as andwhen a benefit is received.

Settlements and income taxIf the trust has an investment or interest in anoverseas company then protection will only beavailable if the company dividends its foreignincome to the trust. If the company retains foreignincome that income will be taxed on the settlorunless they can show certain existing safe harboursapply. These are the exclusions from the transfer ofassets abroad charge, which are claimed in self-assessment tax returns.

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Therefore, as currently proposed, no protection isbeing given for foreign income retained in overseascompanies, although we understand this positionmay be being reviewed. UK income of the companywill be immediately taxed on the settlor. Income ofUK companies would not generally be subject toattribution to the settlor.

Post 2017 (for protectedsettlements► UK source income arising to a non-

resident trust will continue (as at present)to be taxed on a deemed dom settlor.

► Section 624 etc. will not apply to adeemed dom settlor on foreign income ina trust set up before he was deemed dom– if the income is retained within thetrust.

► However – if the settlor, spouse, minorchildren or other relevant person receivesa distribution of relevant foreign incomearising in a year when the settlor wasnon-dom and the trust was protected thatdistribution will be taxed on the settlorunder s. 624 if matched against relevantforeign income.

► Remember this only applies to income attrust level and when the settlementlegislation is applicable.

The tax protection afforded to foreign sourceincome of trusts is lost if any property is added tothe trust after 5 April 2017 and once deemeddomiciled. Property added for trustees expenses incertain circumstances is permissible.

Capital gains tax

It is proposed that trust gains (including gainsattributed to the trust from underlying closecompanies) will not be taxed on the settlor oncedeemed domiciled provided:

1. The settlor and close family do not receiveany benefit from the trust or underlyingcompany and

2. No property is added to the trust other thanin certain limited circumstances.

The protection is therefore that trust gains(whether from UK or non-UK assets) are notimmediately taxed on the settlor so long as 1. and2. above are observed. If either of theserequirements are breached the settlor becomesimmediately taxable on trust gains from that taxyear onwards.

Section 86► Section 86 will be extended to apply to all

those who are deemed dom.

► Settlement will be protected (so s.86 doesnot apply) where the trust was set upbefore the settlor became deemeddomiciled and no additions of propertyhave been made since that date. Noteadditions for expenses of administrationare permissible.

► However – if funds are added to thesettlement or the settlor, their spouse ortheir minor children receive any actualbenefits from the trust then the protectionwill not apply.

► Thus, lose privileged status if you take ortaint.

As currently proposed these requirements placeconsiderable pressure on trustees to ensure theyare not breached and CGT protection lost. If theyare breached, even as to £1, the protection goes- itmakes no difference that the benefit is taxable. Thisis why it is of paramount importance for trustees toreview trusts and their companies before 6 April2017 to ensure there are no ongoing benefits eg,use of a house that after midnight on 5 April 2017causes the loss of protection.

Section 87► Settlors who become deemed dom will not

be taxed under s.87. – they will either betaxed under s.86 or the trust will remainprotected.

► For beneficiaries who receive capitalpayments and who are deemed dom theywill be subject to CGT under s.87,regardless of where the benefits arereceived.

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Inheritance tax

The current situation is that trusts funded beforebecoming UK domiciled retain their status of beingexcluded from inheritance tax so long as the trustcomprises non-UK assets. Therefore the trust itselfdoes not suffer a charge nor are trust assetsdeemed to be in the settlor’s personal estate.If property is added to a trust after becoming UKdomiciled (either in law or by deeming) then thatproperty is not excluded from charge but it doesnot taint the earlier settled property.It is clear that non-UK property settled beforebecoming deemed domicile under the proposals willenjoy the exclusion from a charge to inheritancetax. It is less clear whether this is a new protectionwhich will be lost if property is added to the trustafter 5 April 2017 when deemed domiciled.

Next stepsExisting trusts and any related companies should bereviewed to see whether they are impacted by thechanges and whether any pre 6 April 2017remedial work is required. Particularly whether anybenefits are currently being provided that mightcause a loss of protection.Individuals who will become deemed domiciled on 6April 2017 should carefully consider whether a prechange trust is appropriate in order to benefit fromthe protections vis-à-vis retaining assets personally.This article relates to individuals who becomedeemed domiciled due to meeting the 15 out of 20year test of becoming deemed domicile and notthose born in the UK who are deemed UK domicilewhatever their residence history.

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IHT changes for non-doms:Pitfalls and opportunitiesThe proposed changes to the taxation of non-domiciled individuals (non-doms) in the UK bringforward the point at which a resident non-dombecomes deemed-domiciled for IHT. The effect ofthese reforms is that an individual will becomedeemed-domiciled for IHT at the start of their 16thconsecutive year of UK residence, rather than atthe start of their 17th year of residence. For mostnon-doms, this means that they need to startplanning their succession strategy sooner than theywould have done in the past.Individuals who have left the UK to re-set theirdeemed domicile clock under the existing IHT ruleswill also have to change their plans to ensure thatthe clock is also re-set under these new proposals:there will not be a transitional relief for peoplewhose planned absences under the existing 17/20rules will not satisfy the requirements of the new15/20 rules. However, for IHT purposes, anindividual will only retain an exposure to UK IHT ontheir worldwide assets for five consecutive UK taxyears after they leave (although based on thecomments in the consultation document, this maybe intended to be four years). However, they willneed to remain non-UK resident for six consecutiveyears to avoid being caught within the IHT net againif they return to the UK. The spousal election fornon-domiciled spouses is now proposed to beunchanged.On becoming deemed-UK domiciled, an individual’sworldwide estate becomes liable to UK IHT.However the rules which apply to excluded propertytrusts where a person has become deemed –domiciled will not change. Consequently offshoretrusts that are set up by an individual who is notdeemed domiciled in the UK under either theexisting 17/20 or the new 15/20 rule will remainoutside the scope of UK IHT, even after thatindividual becomes deemed-UK domiciled.

It is not currently clear whether or to what extentthis protection will be lost, if any property is addedto the trust or if a benefit is received by the settlor,his spouse, or a minor child. Setting up such a trustbefore becoming deemed domiciled may thereforeform an essential tool in planning the IHT strategyfor many non-doms and these trusts could form auseful mechanism to freeze assets including anygrowth in value where the settlor and his family do

not intend to access the trust funds while residentin the UK. Given the value of these trusts goingforward, trustees will need to monitor their termsand activity very carefully in order to preserve theirprotected status.

The position for individuals born in the UK with a UKdomicile of origin (returning doms) is far lessfavourable; although the consultation confirms ashort grace period for IHT only. This means that areturning dom will be subject to IHT on hisworldwide estate if he is resident that tax year andhas been UK resident for at least one of the two taxyears.The protected status of excluded property truststhat applies to non-doms does not apply toreturning doms. Trusts settled by a returning domwhile non-domiciled will be within the relevantproperty regime while the returning dom is UKresident. The trust’s inheritance tax status willfollow the residence status of the settlor, and couldchange from one year to the next if the individualmoves in and out of the UK.

Returning doms and their trustees will thereforeneed to keep careful records of any periods of UKresidence so that they can reconstruct the valueand transactions in the trust over a 10 year period.Many will need to monitor when the 10 yearlyinheritance tax charge falls and some may evenconsider leaving the UK to avoid a charge in therelevant year. The good news is that if the settlor isresident in the year of the 10 year charge, thecharge is apportioned to reflect any periods duringwhich he was non-resident or before he wasdeemed domiciled.

Individuals who believe they are affected by thisrule will need to take advice early, including acomplete review of their family background, toavoid the significant risk that they come back to theUK without appreciating the adverse taxconsequences until it is too late.

Whilst a great deal in the consultation remainsunclear, three golden rules are emerging for non-doms for IHT purposes:

► Plan early► Act before you arrive or before you become

deemed domiciled► Keep excellent records

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Residential property -pushing the envelope?

Go back five years or more and it was standard UKtax planning for non-UK domiciliaries to hold theirUK residential property in an overseas company,the shares of which were held by the trustees of anoffshore trust. This gave inheritance tax protection;the UK property is held by a company and so notdirectly within the inheritance tax regime and thetrustees would only be within the inheritance taxregime if they held UK situs assets – they wouldn’tas the only assets they hold are non-UK shares. Aslong as certain conditions were satisfied at theoutset, these structures were effective forprotecting UK property from inheritance taxcharges.

The government’s proposals which were initiallyannounced in the Summer Budget 2015 mean thatthis planning will no longer offer the protectionsthat it used to. And to highlight the impact of this,we must first go back to the UK residential propertytaxation changes which were introduced in April2013.

The Finance Act 2013 introduced the Annual Taxon Enveloped Dwellings (ATED). This imposes anannual charge on UK residential property owned bynon-natural persons (generally corporates) wherethe value is at least £500,000. Relief is available incertain circumstances, such as when the property isrented out to an unconnected person on acommercial basis, but generally it imposes anannual charge at a minimum of £3,500 and amaximum of £218,500 (based on current rates anddependent on which valuation bracket the propertyfalls into).

When ATED came into force, many peopleconsidered unwinding their structures to removethe annual charge imposed; however in manycases, this was not the best answer from a taxperspective in the long run.

For example, if we consider a UK residentialproperty valued at £7mn. The potential inheritancetax charge on this property if held directly by anindividual at the time of their death would be£2.8mn. The ATED charge for a property in thevaluation bracket between £5mn and £10mn is

IHT changes – residential propertychecklist

► From 6 April 2017 the changes bringresidential properties in the UK within thecharge to IHT where they are held withinan overseas structure.

► This is achieved by removing UKresidential properties owned indirectlythrough offshore structures from thedefinition of excluded property in section48 IHTA 1984

► From April 2017 not excluded to theextent the value of any interest in theentity is derived, directly or indirectly,from residential property in the UK.

► Similar position if member of anyoverseas partnerships which holds aresidential property.

► Applies to all IHT chargeable events

► Will apply to a property even if it is a mainresidence or let on commercial terms.

► IHT charge will apply where the propertyhas been a dwelling at any time in the twoyears preceding a transfer.

► Tax will be charged on the open marketvalue of the property at the time of theIHT event. The IHT liability will bedetermined to the extent the propertyhas a residential use.

► Responsibility for tax on the trustees

► New liability for legal owners of theproperty including directors.

► HMRC can impose a charge on theproperty.

► No de-enveloping relief

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£54,450 per annum. Say the property remains inthe corporate and trust structure, the potentialATED charges over a 20 year period are£1,089,000 (although admittedly the charges dogenerally increase with inflation but, so do propertyprices and thus inheritance tax charges). Usingthese figures the ultimate owner would still benefitfrom the structure from a tax perspective even ifthey were to survive 50 years.

Because of this, and of course the many additionalconsiderations and tax charges on winding up anddistributing from a trust, many chose not to unwindtheir structures.

Current developments mean that the inheritancetax benefit of these structures will disappear. Thegovernment has announced that from April 2017,property held through companies by non-UKdomiciliaries will no longer be out of the scope ofinheritance tax. We are therefore back in theposition where de-enveloping needs to be seriouslyconsidered, which comes with a lot of taxconsiderations. And, it has been confirmed thatthere will be no transitional provisions to allowindividuals to unwind property holding structureswithout a tax charge.

If changes are to be made to the structures, such asextracting the property so that it is held direct, it isimportant that this is considered in detail well inadvance of 6 April 2017, as the other changes fornon-UK domiciliaries that will commence at thesame time could make extraction even moredifficult.

Property held by corporate in trust

There is potential inheritance tax for the trustees topay at each 10 year anniversary of the date ofsettlement under the relevant property regime. Inaddition, exit charges will come into play if theshares/property are distributed out of the trustpost April 2017. The trustees will haveresponsibility for paying and reporting for thesecharges.

Further, if the trust is settlor interested (which isoften the case for offshore trusts) then because itnow holds property subject to the relevant propertyregime, the gift with reservation of benefit rules willapply. This means that the value of the sharesattributable to the property will be regarded asforming part of the settlor’s estate for inheritance

tax. The charge will be at 40% on death, althoughnormal double charge relief rules mean that anylifetime inheritance tax paid by the settlor ortrustees (eg, the 10 yearly charges) will bedeductible from the amount due in respect of thesame asset.

ATED continues to be payable annually, unlessrelief applies.

Removing the property from the structure requiresconsideration of the tax impact firstly of getting theproperty out of the company and into the trust, andnext extracting the property from the trust.Additional complications are brought in from thechanges announced in relation to the taxation ofoffshore trusts settled by non-UK domiciliaries.

Shares held direct

The value of the shares attributable to the propertywill from April 2017 form part of the shareholdersestate for inheritance tax purposes. The charge willbe at 40% on death.

ATED continues to be payable annually, unlessrelief applies.

Removing the property from the structure requiresconsideration of the tax impact of getting theproperty out of the company, which can be costly.

Valuing the shares attributable to the UKresidential property

The value of any shares which represent UKresidential property will once the changes arrive bewithin the scope of UK inheritance tax. There maybe potential discounts to valuations where theshares are not as valuable as the property itself.Debt will be deductible, but only to the extent thatthe debt relates exclusively to the property, forexample, a mortgage taken out to purchase theproperty.

The proposals note that debts to related parties willbe disregarded. This means that loans from a trustto a company or between trusts, for example, arelikely to be disregarded.

Where the company owns other assets in additionto the UK residential property, it will be necessaryto value all of these assets to determine the extentto which the shares are subject to UK IHT.

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Debts

Debts reduce value -

► has to be a relevant debt – i.e. onewhich relates exclusively to theproperty such as a fee used topurchase the property;

► any debts not related to the propertywill not be taken into account;

► pro-rata approach will be adopted;

► loans between connected parties willbe disregarded.

De-enveloping

When considering de-enveloping a structuredpractical approach is needed and ultimately a costbenefit analysis of retention versus ‘de-envelop’ isrequired. Stage one will be to collate data andreview precise structure and for example thefollowing questions will need to be assessed.

► What structure do we actually have?Identify legal status from a UK taxperspective, eg, Trust, Companypartnership, foundation, etc. butacknowledging UK tax rules have differentdefinitions for different taxes (so if settlorexcluded for income tax may not be settlorexcluded for capital gains tax).

► Why was structure established? Revisitobjectives and see if they are still valid andwhat has changed (Tax law, residence anddomicile status of settler, beneficiaries).The overarching purpose may still exist, eg,asset protection or avoid forced heirshiprules. Check overseas tax position (eg,relatively recent changes of law or practice– US, France, Israel – that may seek toadversely tax all potential beneficiaries inthat jurisdiction).

► Precisely what assets does structure own –directly and indirectly? A simple question

but not always one that can be easilyanswered.

► What is the tax history of the assets and thestructure– date of purchase, transactioncosts, and any rebasing elections.

► What is market value of assets and are theytransferable and/or costs of transfer, eg,local transfer taxes or additional SDLT maybe too high (and require real cash now) toeven contemplate de-enveloping.

► What would the ideal structure be now totake into account revised non taxobjectives, current position of settlor andbeneficiaries and current tax rules andproposed rules?

► What alternative structures may achievesimilar or majority of objectives. Is there aneed to de-envelop everything?

► What is cost (CGT, IT, transfer taxes,transfer costs) of achieving new structure.Is that a real cash cost?

► What are annual and ongoing cost savingsof proposed structures?

► What is cost of doing nothing? Coulddouble tax arise in the future?

Once the above information is collated (and do notunder estimate the time taken to gather suchinformation and answer these questions) thequestion of whether to de envelope couldpotentially be answered.

Unfortunately without a complete or almostcomplete set of answers one runs the risk ofshooting completely in the dark and ending up witha nasty surprise.

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