The Law Society's response. January The Law Society. All rights reserved. PERSONAL/IAD-EU /8

Transcription

1 HMRC and HM Treasury: Clause 42 and Schedule 13 of the Draft Finance Bill 2017: Inheritance tax on overseas property with value attributable to UK residential property The Law Society's response January The Law Society. All rights reserved. PERSONAL/IAD-EU /8

2 Introduction This response has been prepared by the Capital Taxes Sub-Committee of the Tax Committee of the Law Society of England and Wales ("the Society"). The Society is the professional body for the solicitors' profession in England and Wales, representing over 170,000 registered legal practitioners. The Society represents the profession to parliament, government and regulatory bodies and has a public interest in the reform of the law. 1. Valuation 1.1 Subparagraph 2(1) - The response document of 5 December 2016 suggests (para 3.5) that it is the residential property that is to be valued and not the shares in the close company. HMRC should clarify that it is the shares that are to be valued and HMRC should confirm that the general valuation provisions of ss160 IHTA apply in respect of the shares. 1.2 We are concerned that para 2(1) might extend to the interest of a company (C) which is a loan creditor in a property owning company (P). C may be considered to be a participator in P and we are concerned that HMRC seek to argue that the value of C's loan is indirectly attributable to a UK residential property. Quite apart from the par 4 relevant loan provisions, we are also concerned that the consequence of C s loan being regarded as an indirectly attributable to UK residential property is that the value of the shares in C would also be regarded as attributable to the value of residential property. It would follow that the shares in C itself could not be excluded property in the hands of its participators. We consider that the scope of this provision is too wide and too unclear there has been no guidance on when the value of a loan could be considered to be indirectly attributable to a UK residential property. 2. Close companies 2.1 Subparagraph 2(2) - We are concerned that paragraph 2(2), as drafted, will result in excluded property status being denied in respect of 1. shares in a close company 2. which close company owns another close company 3. which close company itself owns a widely held company 4. which widely held company holds a UK residential property This is because the value of the interest in the shares at 1 above is attributable to UK residential property by virtue of a qualifying interest (being the shares at 2 above). We consider that having a widely held company at any level in the structure should prevent the shares at 1 above being denied excluded property treatment. 2.2 Subparagraph 2(4) we consider that a qualifying interest should be disregarded if its value is less than 10% of all the rights or interests in that close company rather than 1%. The de minimis level of 1% is too low to be meaningful. 2.3 Subparagraph 2(5) the interaction of sub-para 2(5) with existing sections 162(4) and (5) must be considered. 2.4 Provision should be made for how apportionment is to be made where a property has been used for residential and other purposes at the same time, for example, where it consists of a flat above a commercial premises. PERSONAL/IAD-EU /8 2

3 3. Partnerships 3.1 Subparagraph 3(1) - We consider that interests in 'widely held' partnerships which own UK residential property should not be denied excluded property status. There is no reason for a difference in treatment between widely held companies and widely held partnerships. 4. Relevant loans 4.1 Subparagraph 4(1) - An IHT charge could arise both on the value of a relevant loan in the hands of the creditor under subparagraph 4(1) and where debt is not deductible in the hands of the debtor (eg due to s103(5) FA 1986 or s162(5) IHTA). Moreover there are enforceability issues as the creditor may not know that he has non-excluded property and is chargeable to UK IHT. There should be an express exemption for money lending businesses. 5. Subparagraph 4(1)(b) - We are concerned about the provision provides that 'money or money s worth held or otherwise made available as security, collateral or guarantee for a relevant loan' will not be excluded property. Firstly there needs to be a clearer definition of the meaning of 'available as security, collateral or guarantee'. Does it extend to a bank's usual contractual right of set-off against all property that a person has with that bank, so making all such property chargeable to IHT? 5.1 Secondly, we consider that the collateral on which IHT is payable should be capped at the amount of the (if, and if so to the extent, deductible) loan used to acquire or maintain a UK residential property or UK residential property structure. 5.2 Thirdly, this provision effectively means there is scope for double taxation as both the lender and the guarantor could be chargeable to IHT (and possibly triple taxation if the loan is not deductible in the hands of the debtor as mentioned at 4.1 above). Furthermore, should para 4(1)(b) refer only to collateral security, otherwise there is scope for double-charging where a relevant loan is secured on the residential property or on the close company shares. We do not understand the policy need for charging to IHT the value of the security, collateral or guarantee as well as the loan itself. 6. Subparagraph 4(4) - It appears that a loan used to acquire an interest in a close company which already owns a UK residential property will not be a relevant loan (unless the loan could be regarded as indirectly financing the acquisition of a property by an individual). Is this what is intended? 7. Two year tail/exit charge 7.1 Subparagraph 5(2) - The effect of para 5(2) is that property (which is not 'relevant settled property') which is consideration for the disposal of an interest in a close company or an interest in a partnership or of a "relevant loan" will not be excluded property for a two-year period. This two year hangover is unfair and unwarranted given that property which is consideration for the disposal of a directly held UK residential property would not give rise to a two year hangover period during which the consideration could not become excluded property. We see no policy purpose of this given that a disposal achieves an effective 'de-enveloping' of the structure, which is what the government is seeking to achieve. It is also likely to be unenforceable inasmuch as the estate of a non-uk resident and non-uk domiciled person who died without any UK assets is unlikely to know of a requirement to investigate whether any non-uk assets represent consideration for the disposal within 2 years of death of an interest in a close company which held a UK residential property. 7.2 Para 3.6 of the response document suggests that the two year tail will apply to the proceeds of sale where a residential property is sold but it appears from subparagraph 5(1) of the draft PERSONAL/IAD-EU /8 3

4 legislation that the tail will only apply to the proceeds of the sale of the close company shares or partnership interest or repayments of relevant loans. Again, is this what is intended? 7.3 Subparagraph 5(4) provides that, where paragraph 5 applies to relevant settled property, sections 65(7), 65(7A) and 65(8) IHTA are disapplied, with the effect that an exit charge will arise: (a) where trustees dispose of: the UK residential property (if directly held) or the interest in the close company, where the proceeds are received in the UK and subsequently cease to be UK property or are invested in authorised unit trusts etc. There is no time limit on this charge. (b) where trustees dispose of: the UK residential property (if directly held) or the interest in the close company where the proceeds of such a disposal are received outside the UK, such that they cease to be relevant property (the exit charge arising immediately), (the exit charge arising in the context of under section 65(1)(a) immediately on disposal of the UK residential property, s65(7) offering no protection because the company does not cease to be situated in the UK, because it never was situated in the UK (and not by virtue of the disapplication of s65(7) by para 5(4))), or (c) where a close company held in trust disposes of the UK residential property interest such that it becomes (or reverts to) excluded property, irrespective of where the company deposits the proceeds of the disposal there will be an exit charge (the exit charge arising under section 65(1)(a) immediately on disposal of the UK residential property, s65(7) offering no protection because the company does not cease to be situated in the UK, because it never was situated in the UK). But if a personally held close company or company in a qualifying interest in possession trust disposes of the UK property there is no charge. If such a person sold the company, the two year hangover will apply. 7.4 Where the non-excluded property is a loan owed to trustees, or a close company owned by trustees, similar charges arise, whether on the repayment of the loan to the trustees or company or the disposal of the loan owning company. If the loan owning company was owned by an individual or a settlement with a recognised IIP, there would be no two year tail on the loan repayment. 7.5 These provisions can lead to double taxation. Say trust A makes a loan to trust B which uses the money to buy a UK residential property. Trust B later sells the property triggering an exit charge as set out above. Trust B uses the money to repay the loan to Trust A, triggering an exit charge in Trust A. We submit that there should be only one exit charge in these circumstances. Further, both trusts would have a relevant property asset which would be taxable on a ten year anniversary whilst the arrangement continues. Again we submit there should be one charge only in these circumstances (and the equivalent cases where the loan and /or property is held in a close company). The provisions apply in an inconsistent manner. We think that the application of these provisions is unfair and unwarranted given that an effective 'de-enveloping' of the structure has occurred, which is what the government is seeking to achieve. PERSONAL/IAD-EU /8 4

5 These provisions seem to be aimed at preventing avoidance by a trust selling the company or the company selling the property to a related entity shortly before the ten year anniversary. We cannot see that such avoidance is likely to be widespread. If a company owned by a trust sold the property there would be an SDLT charge at a rate likely to be more than the IHT. Although a sale of the company would not incur SDLT, it would incur other professional cost in selling the company especially where there is borrowing involved. More importantly a sale would also trigger a disposal for CGT purposes which would trigger a gain and that and any other gains might be matched with occupation benefits or other benefits received by a beneficiary, triggering a CGT charge. In other words, the other tax costs of avoiding the IHT charge in this way would be substantially higher than the IHT charge itself. 8. Targeted anti-avoidance rule 8.1 Paragraph 6 - We consider that the targeted anti-avoidance rule is too widely drawn. It could arguably catch a decision by a foreign company, on finding out about the IHT residential property rules, to purchase a non-residential UK property instead of a UK residential property. It is not clear what 'minimising' means in this context. We consider that the GAAR provides HMRC with sufficient comfort. If a TAAR is thought to be necessary it should be made clear that it only applies to transactions entered into after 5 April Double taxation relief arrangements 9.1 Paragraph 7 - It seems odd that a DTA will prevent a person from being liable for IHT by virtue of the Schedule where a very small amount of foreign tax is charged on a transfer of value under a foreign law, but would not prevent a charge to IHT where no foreign tax is charged. 9.2 Section 75A FA There is continued uncertainty about the application of s75a in the context of de-enveloping. As we mentioned in our earlier submission on de-enveloping, the CIOT submission Removing barriers to de-enveloping residential property dated 22 June 2016 (the CIOT Note) to which the Law Society contributed and supported, the principal tax charges on a de-enveloping depend on how it is done. For example: (a) (b) Shareholder loans can be repaid by a transfer of the property; or the company can: declare a dividend in specie; or transfer the property during liquidation or winding-up. These routes are likely to result in charges to one or more of SDLT, income tax and CGT. We feel the uncertainty over whether an SDLT charge will be triggered (especially where there is third-party debt) has still not been addressed. The CIOT Note proposed a statutory relief from SDLT where the property is mortgaged, (potentially with a sunset clause) or a clearance facility for SDLT, again time limited, dealing with the particular uncertainties arising in relation to the potential application of Finance Act 2003 sections 75A-C and Schedule 4, para 8(1A) where there is third party secured debt. 9.3 We again propose this is by way of a backdated statutory relief rather than a clearance facility and that this applies from, say, the publication date of the draft legislation following the Autumn Statement on 5 December PERSONAL/IAD-EU /8 5