25 October 2013
(SUPER)ATED – 10 Strategies
I want a house that has got over all it’s troubles…
– Jerome K Jerome They and I (1909)
superated: adjective (archaic) overcome, surmounted, surpassed
– Collins English Dictionary
This is article on a speech I delivered at the M5 Conference at Oxford in October 2013 titled A-Ten: Ten Strategies for ATED. This article will be completed here after the KeyHaven Conference in December 2013.
General Observations
1. All summer long I observed with some unease the deluge of solutions which followed the introduction of ATED. It seemed to me that the knee-jerk reaction in many cases was to liquidate and for corporate ownership to be supplanted with packaged solutions. There were two reasons for this unease. First, because even though it is mostly with approbation that I regard some of the solutions which have now obtained common currency, it appears to me that there other solutions which are not being considered and which would be far more efficacious in many cases (and I discuss some – but not all – of these solutions below). Second – and this really is the gravamen here! – is that one fundamental question which is being overlooked is whether anything really needs to be done at all. Or rather, the question more properly put is: whether the advantages hoped for from the entering into arrangements can really be said to outweigh the loss of the IHT and SDLT advantages which, we can say with relative confidence, have already been secured. I have considered what factors must be found to exist in a certain case before we reach for liquidation and I find that in many cases these factors may simply not be present.
2. One of the features of ATED is that even though it is, for the most part, a thorn in the side, to properly address it, one needs to know everything about everything if one is to preserve the overall position. The tax itself is, in simple terms, a tax on owner-occupied high value residences. I discuss the provisions in detail (and we shall even dabble in some algebra when we turn to consider ATED-related gains – you have been warned!) but I mention two salient points: It is not a tax on wealth – in an economy in which things proceed on credit and in a culture in which home ownership is perhaps the most prized investment, there ought not to be any inference which can safely be made about a person from the value of the house he or she resides in – and if there is one, I would submit that it be more to do with his or her aspirations and tastes rather than his or her wealth. It is more an indirect charge on non-domiciliaries, something which they must now effectively bear to secure certain IHT advantages (akin to the remiitance basis charge which they must pay to secure income tax advantages).Second, if you are pragmatic enough to leave the property which is in the structure and rent out another property, you can escape the tax. If you are romantic and resolve to stay in the property, then you need to consider further options. ATED is really a tax on sentimentality.
3. For the avoidance of doubt, the opinions expressed below are just that – opinions expressed in the spirit of academia. The gist of this speech is that things need to be looked at closely in each case. We start with considering the ATED provisions in detail first. Beautifully packaged solutions in PDF documents, that comes later. Before beauty, first comes blood and sweat. From Malcolm Gladwell’s David and Goliath (2013) which I just finished:
“You know there’s something about solving a math problem that’s very satisfying,” Randolph said at one point, and an almost wistful look came over his face. “You start with a problem that you may not know how to solve, but you know there are certain rules you can follow and certain approaches you can take, and often during this process, the intermediate result is more complex than what you started with, and then the final result is simple.And there’s a certain joy in making that journey.”
First, we dissect this new creature before us!
The Charge
4. Part 3 of the Finance Act 2013 introduces the ATED regime. The conditions governing applicability are found in section 94. This provides:
94 Charge to tax
(1) A tax (called “annual tax on enveloped dwellings”) is to be charged in accordance with this Part.
(2) Tax is charged in respect of a chargeable interest if on one or more days in a chargeable period—
(a) the interest is a single-dwelling interest and has a taxable value of more than £2 million, and
(b) a company, partnership or collective investment scheme meets the ownership condition with respect to the interest.
(3) The tax is charged for the chargeable period concerned.
(4) A company meets the ownership condition with respect to a single-dwelling interest on any day on which the company is entitled to the interest (otherwise than as a member of a partnership or for the purposes of a collective investment scheme).
(5) A partnership meets the ownership condition with respect to a single-dwelling interest on any day on which a member of the partnership that is a company is entitled to the interest (as a member of the partnership).
(6) A collective investment scheme meets the ownership condition with respect to a single-dwelling interest on any day on which the interest is held for the purposes of the scheme.
(7) If a company is jointly entitled to a chargeable interest (as a member of a partnership or otherwise), then regardless of whether the company is entitled as a joint tenant or tenant in common (or, in Scotland, as a joint owner or owner in common) the ownership condition is regarded as met in relation to the whole chargeable interest.
(8) The chargeable periods are—
(a) the period beginning with 1 April 2013 and ending with 31 March 2014, and
(b) each subsequent period of 12 months beginning with 1 April.
(9) See also section 95.
So, one looks at the time slot of 12 months beginning the 1st April. One then asks of a chargeable interest, whether on one or more days within that period:
(1) that interest is a single-dwelling interest;
(2) has a taxable value of more than £2 million; and
(3) a company, partnership or CIS meets the ownership condition in respect of that interest.
Chargeable interests
5. The definition of chargeable interests at section 104 is similar to that adopted for SDLT. The following are not chargeable interests:
(3) An exempt interest is not a chargeable interest for the purposes of this Part.
(4) The following are exempt interests—
(a) any security interest;
(b) a licence to use or occupy land;
(c) in England and Wales or Northern Ireland, a tenancy at will.
(5) In subsection (4) “security interest” means an interest or right (other than a rentcharge) held for the purpose of securing the payment of money or the performance of any other obligation.
Entitlement
6. ‘Entitlement’ is central to the ownership conditions and is defined at section 95:
95 Entitlement to interests
(1) In this Part “entitled” means beneficially entitled—
(a) whether solely or jointly with another person, and
(b) whether as a member of a partnership or otherwise.
This is subject to subsection (2).
(2) References in this Part to entitlement to a single-dwelling interest (or any other chargeable interest) do not include—
(a) entitlement in the capacity of a trustee or personal representative, or
(b) entitlement as a beneficiary under a settlement.
(3) Subsection (1)(b) does not apply where the contrary is specified.
(4) In this section “settlement” has the same meaning as in Part 4 of FA 2003 (see paragraph 1 of Schedule 16 to that Act).
7. It follows from sub-paragraph (2) that in the case of a company holding as trustee of a settlement of which another company (or that company) is a beneficiary, none meets the ownership condition. For instance, A Co holding as trustee of settlement in which B Co has an interest in possession should mean that the ownership condition is not met. ‘Settlement’ does not include bare trusts.
8. In the context of the partnership ownership condition at section 94(5), a company must be a member of the partnership and must be entitled to the interest as a member of the partnership. This particular condition will not be met where the company is not so entitled.
Entitlement to the income should not suffice either for the purposes of the partnership condition. Suppose A, an individual, and Co, are in partnership. Co is not entitled to the interest as a partner or otherwise, so that A holds the interest. The partnership condition is not met.
Single-dwelling Interest and Merging
9. A ‘single-dwelling interest’ is defined at section 108(2) as:
A chargeable interest that is exclusively in or over land consisting (on any day) of a single dwelling is a single-dwelling interest (on that day).
In circumstances where the chargeable interest is in two or more single dwellings, then the person is deemed to have a separate chargeable interest over each dwelling, with each constituting a single-dwelling interest. They are not merged: tax is quite really a tax on expensive residences.
In circumstances where the chargeable interest is in land consisting of dwellings and non-residential land, then the person is deemed to have a separate single-interest dwelling in each dwelling and a chargeable interest in the rest.
It follows from the wide definition that a single-dwelling can harbour multiple single-dwelling interests. Section 109 caters for this:
109 Different interests held in the same dwelling
(1) Subsection (2) applies if on one or more days in a chargeable period—
(a) a company is entitled to two or more single-dwelling interests in the same dwelling, or
(b) two or more single-dwelling interests in the same dwelling are held for the purposes of the same collective investment scheme.
(2) This Part has effect with respect to that chargeable period as if those separate interests constituted just one single-dwelling interest, the taxable value of which on any day is the sum of the taxable values of the separate interests.
(3) In calculating the taxable values of the separate interests for the purposes of subsection (2), the market value of each interest is determined, under the provisions of TCGA 1992 applied by section 98(8), on the assumption that the other interest or interests are placed on the open market with that interest (on the valuation date appropriate to that interest).
The section therefore provides for the merging of separate single-dwelling interests held by the same person in certain circumstances. Where a company is entitled to several single-interest dwellings in the same dwelling, they are treated as one. The same where they are held for the purposes of the same CIS. Two points to make:
(1) This does not apply for the purposes of a partnership. So, suppose a partnership has three single-dwelling interests in a dwelling. Each is separate.
(2) It is also worth noting that there is no merging for individuals (relevant to below).
Section 110 provides for the further merging of single-dwelling interests in cases where different but connected persons have single-dwelling interests in the same dwelling. In the case of a company and a connected person, the company is deemed to be entitled to both of their interests:
(a) Where the connected person is a company, then the same applies to that company.
(b) Where the connected person is a CIS, then the company’s interest is also deemed to include the scheme interest (and the scheme interest is also deemed to include the company interest).
(c) However, where the connected person is an individual, then there is no merging unless the company is entitled to a single-dwelling interest in the dwelling that is a freehold or leasehold interest with a taxable value of more than £500,000
In the case of two CISs, the single-dwelling interests are also merged both ways.
Some observations:
(1) One important point about merging here – it can work both ways, with seemingly punitive consequences. One would have thought that in such cases (once my interest has merged with that of another, it would no longer constitute my interest. The position is actually the opposite). However, this should not result in a double charge:
104 No double charge
Tax in respect of a given single-dwelling interest is charged only once for any chargeable day even if more than one person is “the chargeable person” with respect to the tax charged.
Though there will be joint liability – section 97 provides:
97 Liability of persons jointly entitled
(1) Subsection (2) applies if—
(a) a company is within the charge for a chargeable period with respect to a single-dwelling interest by virtue of section 96(2)(a), and
(b) one or more other persons are jointly entitled to the interest on the first day in that period on which the company is within the charge with respect to it.
(2) The company and the other person or persons are jointly and severally liable for the tax charged for that period with respect to the interest (whether or not those other persons are also within the charge with respect to the interest on the day in question).
(2) If A Co, A and B each have single-dwelling interests and A Co and A are connected and A and B are connected but not A Co and B, then only the interests of A are merged with those of A Co. This is relevant to valuation.
(3) There is no merging under these rules where the single-dwelling interests are in separate dwellings. One structure which therefore suggests itself is for unconnected parties to have shares in separate residences.
(4) In order for there to be merging of A and B’s interests, each must have single-dwelling interests in the same property. There is no suggestion that if A has an interest and B does not, then for the purposes of the ATED applicability conditions and, in particular, the ownership conditions, B will, by reason of connection to A, be deemed to have A’s interest (or any interest) where B does not otherwise have one. So, if A and A Co enter into a partnership and A Co has no entitlement to the property, then the ownership condition will not be met. Merging does not really affect the question of entitlement but more the computation of the tax. The object is really to avoid interest-splitting. However, it can affect applicability as it affects the taxable value of the interest.
Dwelling
10. The meaning of ‘dwelling’ is provided for at section 112:
112 Meaning of “dwelling”
(1) A building or part of a building counts as a dwelling at any time when—
(a) it is used or suitable for use as a single dwelling, or
(b) it is in the process of being constructed or adapted for such use.
There are more extensions which I do not discuss here.
ATED is only concerned with expensive single residences, rather than with the value of the property as a whole. Little reliance can be placed on this in general planning, though in appropriate circumstances, ATED considerations might result in partitioning one dwelling into multiple dwellings.
An odd point which I encountered is that if suitability is a test, then there are many converted offices (or should that be converted homes?) which inhabit former Georgian residences in the Mayfair area which might be subject to ATED! In Lincoln’s Inn, some floors are used as chambers and others as residences for judges. As far as suitability is concerned, there may not be much between them. Unfortunately, in such circumstances, it would appear that one has to place reliance on the reliefs (an in-out solution) instead of being able to discount ATED altogether.
Amount chargeable
11. Under section 99, the amount of chargeable tax is the annual chargeable amount in cases where the person chargeable is within the charge to tax on the first day of the chargeable period. In any other case, it is a relevant fraction of the annual chargeable amount, this fraction being by reference to the first day on which the chargeable person is within the charge to tax with respect to the interest. The annual chargeable amount is:
£15,000 £2 million to £5 million
£35,000 £5 million to £10 million
£70,000 £10 million to £20million
£140,000 More than £20 million
In addition to this, there is, at section 105, the ‘adjusted chargeable amount’ which is a fraction of the annual chargeable amount, calculated on a pro rata basis for each day on which the chargeable person is within the charge to tax – most relevant to cases where the chargeable person does not hold the property all throughout the chargeable period. Relief needs to be claimed at section 106.
It is important to note that the column on the right represents the taxable value of the interest. The taxable value is defined at section 102 by reference to the market value on the 1st April 2012, the 1st April every 5 years and on the dates of substantial acquisition and substantial disposition:
(3) The following are also valuation dates in the case of any single-dwelling interest to which a company is entitled on the relevant day (otherwise than as a member of a partnership)—
(a) the effective date of any substantial acquisition by the company of a chargeable interest in or over the dwelling concerned;
(b) the effective date of any substantial disposal of part (but not the whole) of the single-dwelling interest.
A substantial acquisition or disposal is where the consideration is £40,000 or more. In the case of connected persons, the consideration is the market value. In the case of linked transactions, the consideration for the various acquisitions or disposals is merged.
(6) For the purposes of subsection (2) the market value of the chargeable interest acquired is taken to be the sum of the market values of that chargeable interest and any chargeable interest in or over the same dwelling that is acquired in a linked transaction.
(7) For the purposes of subsection (3) the market value of the part of the single-dwelling interest disposed of is taken to be the sum of the market values of that chargeable interest and any chargeable interest in or over the same dwelling that is disposed of in a linked transaction.
The test of linkage is the same as in SDLT. The legislation doesn’t appear to me to answer the relevant question of when the two transactions become linked. For instance, if I buy a share in property in 2012-13 for £35,000 and then another for £50,000 two years later (assuming that there is no arrangement but still a series of transactions), then it is not clear whether there is a substantial acquisition in 2012-13. Whichever rule applies (i.e. whether the linkage is retrospective or not) must apply uniformly to acquisitions and disposals. So, in appropriate cases it may be possible to accelerate or postpone the date of valuation within the obligatory 5 year frame.
Reliefs
12. The reliefs apply on a day-by-day basis. They include:
(A) rental property business relief;
(B) property trade relief;
(C) property to provide accommodation to an employee;
(D) financial institutions;
(E) farmhouses;
(F) a relief for dwellings open to the public.
13. I do not intend to cover all the reliefs here, but I do discuss one. Section 133 provides:
133 Property rental businesses
(1) A day in a chargeable period is relievable in relation to a single-dwelling interest if on that day the interest—
(a) is being exploited as a source of rents or other receipts (other than excluded rents) in the course of a qualifying property rental business carried on by a person entitled to the interest, or
(b) steps are being taken to secure that the interest will, without undue delay, be so exploited in the course of a qualifying property rental business that is being carried on, or is to be carried on, by a person entitled to the interest.
(2) A day is not relievable by virtue of subsection (1) or section 134 in the case of a single-dwelling interest if on that day a non-qualifying individual is permitted to occupy the dwelling.
(3) In this Part “qualifying property rental business” means a property rental business that is run on a commercial basis and with a view to profit.
…
This provides a very significant caveat to the charge – it takes out in one stroke all pure investment residential properties. It is important to note that under (1)(a) the business must be carried on by the person entitled to the interest. In addition, if arrangements are structured to qualify for this relief, then it is worth noting that the income tax charge on the rent may be more than the ATED charge (though the rent may be required to be paid in any event in light of the benefits-in-kind charge).
14. A problem will arise here in relation to the occupation by non-qualifying individuals:
(a) the relief not available on the day of such occupation;
(b) the relief is not available for any subsequent day in that chargeable period or subsequent three chargeable periods on which the same person is entitled to the interest unless there is a day of ‘qualifying use’ in the interim: section 135(2) – i.e. a day on which relief can be claimed under section 133(1)(a);
(c) a similar restriction applies to the earlier days in that chargeable period under section 135(5);
(d) occupation by a NQI also restricts other reliefs – such as property trader relief at section 141: section 141(2).
15. Section 171 is worth noting:
171 References to the state of affairs “on” a day
In determining for the purposes of any provision of this Part whether or not a state of affairs obtains on a particular day, it is to be assumed that the state of affairs obtaining at the end of the day persisted throughout the day.
This may provide a let-out in certain circumstances.
16. To me ‘occupy…the dwelling’ also sets a high threshold and arguably denotes exclusivity throughout the dwelling. This is consistent with the exclusion of licenses from the definition of chargeable interests. Section 135 provides an extension of ‘occupation’ for these purposes:
(8) For the purposes of this section—
(a) “day of qualifying use”, in relation to a single-dwelling interest, means a day that is relievable in the case of the interest by virtue of section 133(1)(a);
(b) occupation of any part of a dwelling is regarded as occupation of the dwelling.
The extension there indicates the intention here. This thus may also provide another let-out.
17. A third let-out may be found in the meaning of ‘non-qualifying individual’ itself. This is at section 136:
136 Meaning of “non-qualifying individual”
(1) In sections 133 and 135 “non-qualifying individual”, in relation to a single-dwelling interest, means any of the following—
(a) an individual who is entitled to the interest (otherwise than as a member of a partnership),
(b) an individual (“a connected person”) who is connected with a person entitled to the interest,
(c) if a person is entitled to the interest as a member of a partnership, an individual who is, or is connected with, a qualifying member of that partnership,
(d) an individual (“a relevant settlor”) who is the settlor in relation to a settlement of which a trustee is (in the capacity of trustee) connected with a person who is entitled to the interest,
(e) the spouse or civil partner of a connected person or of a relevant settlor,
(f) a relative of a connected person or of a relevant settlor, or the spouse or civil partner of a relative of a connected person or of a relevant settlor,
(g) a relative of the spouse or civil partner of a connected person or of a relevant settlor,
(h) the spouse or civil partner of a person falling within paragraph (g), or
(i) an individual who is a major participant in a relevant collective investment scheme or is connected with a major participant in a relevant collective investment scheme.
(2) In subsection (1)(c) “qualifying member”, in relation to a partnership, means a member of the partnership who is entitled to a 50% or greater share—
(a) in the income profits of the partnership, or
(b) in the partnership’s assets.
Let us consider partnerships. For the purposes of subsection (1), section 1122(7) and (8) CTA 10 do not apply – section 136(6), so that there is no connection simply by virtue of partnership. The ATED guidance says at 36.11:
Exception to Connected Persons rule – the normal rules for connected persons contains, in section 1122(7) CTA 2010, a rule that a partner in a partnership is connected with:
(a) any partner in the partnership
(b) the spouse or civil partner of any individual who is a partner in the partnership, and
(c) a relative of any individual who is a partner in the partnership
For ATED this rule will not apply when identifying a non-qualifying individual. However, it should be noted that this is an express exception to that rule and it is only in relation to interests owned by partnerships that meet the ownership condition in section 94(5) FA 2013.
However, it is not clear to me that this is what section 136(6) says:
(6) For the purposes of subsection (1), section 1122 of CTA 2010 (as applied by section 172) has effect as if subsections (7) and (8) of that section (application of rules about connected persons to partnerships) were omitted.
It seems to me that partnership connection does not apply at all for the purposes of the NQP definition, irrespective of whether the partnership condition is met or not.
18. So, if Co holds the interest (but not as a member of the partnership) but still is in a partnership with A, an individual, then provided that there is no other connection between them, A is not connected with Co and does not fall within (b). A does not fall within (a) either. (c) is not satisfied either. A can live in the property. In what circumstances would A wish for the land to be owned and profited from by an unconnected company? It would not be a company which was in a settlement of which he was the settlor or a relative of the settlor – else he might fall within (d) to (h). It could be a company the shares of which he had absolutely given away by way of (say) PET.
19. This thus presents a solution to the NQI restriction involving unconnected companies. I next consider whether things might be pushed even further and whether there may be a solution involving connected companies.
20. There appears to be a strain between (1)(b) and (c), which you pick up the first time you are reading those sub-paragraphs, even if doing so quickly! If A is connected with another person who is entitled to the interest, then he, on a technical level, falls within (b). However, (c) suggests that in the case where a person is entitled by reason of partnership, the other person with whom the individual is connected must be a qualifying member of the partnership – in other words, the other person must not just be entitled to the interest but must also be a ‘qualifying member’ (with the requisite 50% interest). It could be that the bar is being raised at (c). But if this is the case, then it must also be true that (b) only applies where the interest is not held by the connected person as a member of a partnership.
21. There are three ways to look at this.
First, it might be that (c) is really catching circumstances other than those at (b) i.e. where the other connected person does not have an entitlement to the interest but still has a 50% share of the profits or partnership assets. However, if the aspiration was to widen the scope of NQP, it seems strange that ‘qualifying member’ (which is introduced only for this purpose) would be defined so as to set so high a standard. If the other connected person has a 50% share of the partnership assets then he ought to have some interest in the property. (If (c) is to apply, then, according to its opening words, the property ought to be a partnership asset.) In other words, a person falling within (c) should, on a literal basis, already fall within (b). So, the argument that the purpose of (c) is to extend the scope of NQP has flaws.
Second, that in (c) the legislator is really raising the bar in the context of partnerships. The ATED Manual provides (regarding the restriction of the partnership connection test in this context) at 34.11:
Its effect is to ensure that connection between persons otherwise with no familial or trust connection is not established through business partnerships.
HMRC appear to believe that in the context of partnerships any connection will suffice – including section 1122(7) partnership connections. They state at 34.4:
If a person is entitled to the chargeable interest as a member of a partnership, any person who is connected with a partner in that partnership
Example two: A partnership has several members, including Mr A and B Ltd.
B Ltd is entitled to a single-dwelling interest as a member of that partnership (but, for whatever reason, Mr A is not so entitled). As Mr A is connected with B Ltd, he will be a non-qualifying individual for these purposes. Note that this specific rule is not affected by the provisions in sections 136(6).
This appears to me to be wrong on both counts! Note that this discussion is in the context of (c) and not (b) (see the bold italicized part – also, the manual provides a separate example for (b) at 34.3). This analysis which is italicized is clearly not correct – or at the very least misleading. The truth is that under (c), B Limited would need to be a qualifying member in order to render A a NQP. Also, as seen above, it does not appear that the underlined parts are correct either – the restriction of partnership connection applies for all the purposes of subsection 136(1). Furthermore, if the partnership connection restriction were not applied here, then it is hard to see why there is at (c) a requirement for connection with a particular kind of partner, as the individual would be linked with all of them.
Third, that the legislator has simply gone for the shot-gun approach and has attempted to describe as many classes without concern for the overlap between them. Whilst this cannot be discounted as a matter of policy, the points made above in relation to the two other approaches argue against this.
22. If it really is the case that the bar is being raised at (c), then the implication must be that (b) should only apply in cases where the other connected person is not entitled as a member of a partnership. The opening words of (c) corroborate this. So, too, does the parenthesis at (a). It would highly anomalous if there was an individual, P, who:
(1) was entitled to the interest as a partner (and so did not himself fall within (a)); and
(2) who was not connected to a qualifying member (and so did not fall within (c)); and
(3) so was not an NQI;
but another individual, N, connected to P, fell within (b) by reason of N’s entitlement as a member of partnership and therefore constituted an NQI. Not only would N be an NQI but so too would all his relatives, his spouse or civil partner and their relatives. (P might be caught by reason of this, though it seems a roundabout and uncertain way to bring him within the definition).
23. If the second approach is correct, then a possible structure would be where there were three corporate members of a partnership who were each entitled to a third of the interest in the property by reason of partnership. None of the companies constitute qualifying members. But they are each connected to the individual. (a) is not satisfied as the individual does not have any entitlement himself. (b) does not apply on this construction. And there is no qualifying member for the purposes of (c). Relief from ATED is possible whilst at the same time, corporate ownership allows for IHT relief.
ATED DOTAS
24. The attractiveness of any of the planning routes may depend on whether a disclosure is required under DOTAS. It is therefore worth bearing the following points in mind as we consider the strategies.
25. The draft DOTAS Regulations provide:
Citation and commencement 1.— These Regulations may be cited as the Annual Tax on Enveloped Dwellings Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2013 and come into force on 1 October 2013.
Prescribed description of arrangements in relation to annual tax on enveloped dwellings 2.—
(1) For the purposes of Part 7 of the Finance Act 2004 (disclosure of tax avoidance schemes) the arrangements specified in paragraph (2) are prescribed in relation to annual tax on enveloped dwellings.
(2) The arrangements are prescribed if they do not comprise excluded arrangements under the Schedule to these Regulations and as a result of the arrangements, or any element of the arrangements—
. (a) a company, partnership or collective investment scheme ceases to meet the ownership condition in respect to the chargeable interest;
. (b) the taxable value of the chargeable interest is reduced to £2 million or less; or
. (c) the taxable value of the chargeable interest is reduced with the consequence that the chargeable interest falls within a lower tax band than it otherwise would.
…
26. The Schedule provides a definition of ‘excluded arrangements’:
Arrangements are excluded from being prescribed arrangements for the purposes of these Regulations if they comprise a transfer of the chargeable interest from a company, partnership or collective investment scheme (a “transferor”) to a transferee where—
(a) the transferor and transferee are not connected persons, and the transfer is on arm’s length terms;
(b) the transferor and the transferee are members of the same group of companies, the transfer is on arm’s length terms and the transferee meets the ownership condition;
(c) the transfer constitutes a company distribution, and the transferee is an individual, a corporation sole or a person who meets the ownership condition; or
(d) the transfer constitutes a settlement.
However, I understand that the following changes are forthcoming:
Definition of distribution now amended so that distributions by companies in liquidation will be excluded from disclosure (previously it relied on CTA definition which didn’t include a distribution by a company in liquidation);
Distributions to trustees will be excluded;
Transfers on arm’s length terms will be excluded (previously only if between unconnected persons);
No retrospection at all.
27. As for timing, paragraph 2 of the draft regulations provide:
Time for providing information: transitional provisions
3.—(1) Where paragraph 2 applies, the period or time (as the case may be) to be found in accordance with regulation 5 of the Tax Avoidance Schemes (Information) Regulations 2012(3) shall end on 30 November 2013 instead of the day on which it would end by virtue of that regulation.
(2) This paragraph applies in respect of proposals or arrangements (as the case may be) that are notifiable by virtue of regulation 2 where—
. (a) for the purposes of section 308(1) of the Finance Act 2004 the relevant date in relation to a proposal falls within the period beginning with 13 December 2012 and ending on 30 September 2013;
. (b) for the purposes of section 308(3) of the Finance Act 2004 the date on which the promoter first becomes aware of any transaction forming part of the arrangements falls within the period beginning with 13 December 2012 and ending on 30 September 2013; or
. (c) for the purposes of section 309 and 310 of the Finance Act 2004 the date on which any transaction forming part of the arrangements is entered into falls within the period beginning with 13 December 2012 and ending on 30 September 2013.
So, does anything need to be done?
29. When considering solutions, one has to start with the question as to whether there is a problem in the first place. If there is no problem, then nothing needs to be done. The rule of thumb for any advisor has to be: do no harm!
30. In many cases of corporate ownership, ATED will not result in a charge – for instance, where reliance can be placed on rental business property or property trade relief.
31. Problems may, however, arise where occupation by an NQI is permitted. In addition, the ATED regime brings with it administrative burdens, the need for five-yearly valuations and the prospect of disputes with HMRC. ATED is subject to counteraction by GAAR – section 206(3)(g), so a structural change with fundamental economic consequences might be preferable in cases where the ambition is to mitigate the charge by simply falling outside its scope.
32. In addition to those problems, the charge under ATED may not be the worst aspect of falling within the ATED regime. Schedule 25 of the FA 2013 introduces a 28% charge on ‘persons’ (effectively including companies – both resident and non-resident (see the exception to section 2 TCGA inserted in the form of subsection (7A)) and those in a partnership – and certain CISs) on ATED-related gains on ‘relevant high value disposals’. In simple terms:
(a) there is a ‘relevant high value’ disposal where a chargeable interest is disposed of which includes a single-dwelling interest, where the consideration exceeds £2 million and the person was within the ATED charge with respect to that interest on one or more days and those days were not relievable under the ATED reliefs;
(b) the ‘ATED-related gain’ allows for rebasing from the 5th April 2013 (unless an election is made or the property is acquired after that date) and also allows for pro rata relief to the extent that a day was day on which the person was not within the charge to ATED or was a relievable day.
(c) the new section 2F also allows for marginal taper relief. One considers the difference between the sale price and the £2 million threshold and increases this gap this by 5/3. The extent by which the ATED-gain exceeds this amount is then relieved. If only a percentage of the relevant reference period comprises of ATED chargeable days, then this amount is then reduced to that percentage of itself. (If the property was held on the 5th April 2013 and no election is made, then the references period looks to post-5th April 2013 days which are ATED chargeable days. In any other case, one simply looks to the entirety of the period of the ownership.) The ATED-gain is reduced by this amount. So, (say) if one acquires a property for £X million and then sells it for £Y million. The gain is £(Y-X) million. The amount of available relief is (Y-X million) – [£(Y-2 million) * 5/3] (assuming that all the ownership days are ATED chargeable days). This can also be expressed as:
[10-2Y-3X]/3
If this is to be a positive figure, then the following must also be greater than zero:
[10-2Y-3X]
In such circumstances:
2Y+3X must be not more than 10.
We also know that Y must be at least 2. If Y is 2, then X can be up to 2. If Y is 3, then X can be just over 1. If Y is 4, then X must be 2/3 of a million. So, the relief will be limited to cases where Y is just under 5.[1] Interestingly, as Y increases, X must decrease, so that the gain must be larger. The maximum relief will be in cases where Y is just under 5 and X is negligible – in such cases the tax will be on £1.66 million, with the relief peaking there at around £3.34 million (or 66.8% of the gain). However, the problem with taper relief will be satisfying the conditions pertaining to applicability.
To conclude on ATED-related gains, the position is likely to be fact-sensitive. The increase on the tax rates may be 5% (or lower depending on the relief).
33. We have considered the disadvantages. Are there any arguments for staying within the ATED regime?
(A) Many non-domiciled clients will simply be reconciled to the property tax, which is common in other jurisdictions. Client expectations are paramount.
(B) Are there any issues arising from foreign taxes?
(C) The intentions of the client are clearly very important. One would not wish to unravel a structure only for the client to return the following year with the announcement that he no longer wishes or needs to reside in the property! The question to the client should be along the lines of: Are you committed to residing in this property or, in the even that this property is sold and another is held in the same structure, that property?
(D) Will the trustees (where any) accede to the unraveling? All too often I hear advisors assume that the trustees would co-operate. Lawyers of all people mustn’t neglect to ask this question as a matter of form!
(E) SDLT is a very material consideration, which I see is being overlooked. The view might (very reasonably) be taken that an increased 5% charge on ATED-related gains is justified by a 7% or 15% reduction on SDLT (i.e. on the whole price of the property) to a prospective buyer. (I include the 15% charge here as the property may be held by the purchaser for investment purposes, in which case ATED and ATED-related gains may not be a concern to him or her. A vast proportion of London properties are brought for investment purposes. Or it may be that the buyer simply doesn’t care about ATED. Or it may be that he values more the 15% saving to the next buyer when he sells!). This argument may appear less attractive with the forthcoming lowering of the main rate of corporation tax from 2014. In addition, as time progresses, a greater part of the gains on the sale of property may constitute ATED-related gains.
But even then, the saving of 15% of the value of the property to the hypothetical future buyer of your house must be a concern. The SDLT on a £20 million house would be £3 million. The ATED would be £140,000.
Question: How many years do you have to pay ATED before you arrive at £3 million?
Answer: More than 20!
(F) The question may be determined by how pressing a concern IHT is in the case at hand – as the IHT position under the existing trust-company structure may be the most secure. Let us assume in the interests of caution that IHT would be payable in the case of the property being held in a settlement. IHT of 6% would be payable every 10 years. If the property was kept in the trust-company structure, ATED would be payable. What would the rates be? I find it curious that this is not covered in the speeches or opinions I have read. As it turns out, the effective rate of ATED really varies – on the value of the property but, more particularly, on where the value is within the relevant threshold. If you are at the lower end of the relevant threshold (whichever it may be), then the effective rate is 0.7%. At the higher end, it is as low as 0.3% (and once one breaches the last threshold, it may even less). So, what must be a consideration is where the property sits on the scale. If I am paying ATED at the rate of only 3% every 10 years, then it might not be worth incurring the risk of IHT at 6% every 10 years to avoid it.
(G) Unraveling existing structures will come with complications. DOTAS may not be as much of a concern in light of the widening of the scope of excluded arrangements. SDLT may be a concern where the property is subject to a charge. HMRC also indicate that where the shareholders assume a debt on liquidation then this ought not to constitute chargeable consideration either: Technical News Issue 5 November 2007. In the case of a transfer between companies on liquidation, section 53 and 54 FA 03 will also be relevant.
(H) In the context of CGT, the GAAR Guidance indicates that conventional methods of washing out gains may be subject to counteraction:
Option 2 – The settlor adds £4m cash to the trust in year 1. In the same year the trust liquidates the company and holds the property direct thus realising the £4m gain. It then pays the £4m cash back to the settlor in the same year.
Year 2 – the property is distributed to the son with a small amount of inheritance tax. The £4m cash payment made in Year 1 washes out the trust gains and so on the distribution of the property to the son there is no capital gains tax.
…
D21.7 Proposed counteraction
D21.7.1 The likely counteraction would be that the addition to the trust and payment of cash to the settlor would be ignored and the son will pay tax as under option 1.
This seems to take an extreme example and is likely to be a million miles away from the solutions which will most often be used.
A simpler solution would be payments to the other domicile (or elsewhere), with fresh payments coming in to fund the new structure.
A second would be for the property to be purchased from the offshore company with borrowing from a bank. In such circumstances, it would be arguable that the receipts by the offshore company constitute excluded property.
In certain cases, a more onerous solution would be for a UK-resident beneficiary to become non-resident for the requisite period.
Ten Strategies
To be published in December 2013.
[1] It is also interesting to note that the taxable amount is purely a function of Y in circumstances where marginal taper relief applies (assuming first that there is the requisite excess). Suppose that the gain is (Y-X). The amount to be reduced from this is the amount by which the gain (Y-X) exceeds the stated difference 5/3(Y-2). So the gain after relief is really:(Y-X) – [(Y-X)-5/3(Y-2)]This is really the same as:Y-X – [Y-X] + [5/3(Y-2)]This is same as:[5Y-10]/3The purchase price does not appear to have a bearing on the deemed amount of the gain. This seems to work with the HMRC example at CGM 73650:ExampleThe consideration for a disposal is £2.6 million and threshold amount for that disposal is £2 million.5/3 of the difference between these figures (£0.6 million) is £1 million. If the whole of the gain on the disposal is ATED-related, the chargeable gain is capped at £1 million.
