In the Finance Act 2014 the Government introduced anti avoidance provisions called Pre Owned Asset Tax which charged an income tax charge on taxpayers who had entered into a ‘double trust scheme’ to avoid an inheritance tax on their own homes. Many of these people had entered these schemes confident that they were within the law, relying on Counsel’s opinions and taking advice from top ranking lawyers.
What shocked me then was not that the Government had closed down an inheritance tax scheme with an income tax charge, but the vindictive tone and attitude of the Government to taxpayers who used the existing law to plan to pay less Inheritance Tax. It took the harsh view that if anyone even tried to minimize their tax, then they deserved what they got if as a result they had to pay more tax to unravel the arrangement than if they had done nothing or taken out life insurance.
It was with this experience in mind that I have been telling everyone who was prepared to listen for many years to own their home directly and not through a company structure. I did not believe the Government, when in the Summer Budget of 2015, it said ‘it would consider the costs associated with de-enveloping of properties’ and would publish a consultation paper setting out its views. It’s in business to collect tax, not to make it easy on those who are trying to avoid it.
What I think however is wrong, is that the Government promised to publish a consultation paper, but then waited a full year before doing so. In its Statement published on the 19th August it starkly states ‘while the Government can see there might be a case for encouraging de-enveloping, it does not think it would be appropriate to provide any incentive to encourage individuals to exit from their enveloped structures’.
The Government recognizes and admits that most owners of residential properties in the UK bought their homes through offshore companies to avoid Inheritance Tax. It also made it very clear in April 2015, that as from April 2017 this advantage would be removed.
The Government to be fair, should have given this statement before April 2016. Home owners could then have decided whether or not to de-envelope. Sadly, having left the decision until gains have increased and ATED has been paid, whatever decision is now taken eye popping taxes have been paid and will be payable, just to stay living in their own home.
Take Bartholomew and his family. He is a wealthy Eastern European who has lived with his wife and family in Belgravia for the last twenty years. Before becoming deemed domiciled he set up a number of trusts in Jersey. One for his operating company and income producing investments and another ‘dry trust’ which owns his home in Belgravia.
In April 2012, his home was worth £8.5m. If he had taken it out of the company and trust structure then, he may have had to pay some capital gains tax under s 87 on the benefit of living in his own home tax free, and some life insurance, but would have saved all other taxes.
He did not. In April 2012 his home was under £10 million so that put it in the under £10 million ATED tax bracket. However, homes need to be revalued every 5 years; in 2017 it will then fall in the bracket above £10million. In April, this year he paid £54,450 in ATED, but next year he will need to pay in excess of £109,050, which was last year’s rate, if he does nothing.
So what can he do and what taxes will he have to pay?
The killer tax in de-enveloping is capital gains tax, which given that there is 100% relief if a home is your main or only residence, which it is for Bartholomew, is galling. The headline tax is ATED related CGT which taxes any gain made since 2012 at 28%. If the property has gone up by £4m and Bartholomew and his trustees liquidate the company which owns his home, the liquidation will crystalize a tax charge of £1,120,000.
As if that was not enough S 87 TCGA is also likely to kick in which charges the settlor on all benefits received from the trust to the extent that a gain has been realized in the trust. S 87 takes the base cost for the gain to the 2008 value and the benefits as the value to Bartholomew and his family of living in their own home rent free.
On top of this is is the prospect of paying inheritance tax on Bartholomew’s death at 40% or at 6% every ten years. The value of this charge is taken as the value of the property. So if the trust was set up in October 2007, and by then the trust is discretionary the trustees will have to pay an additional £750,000.
What is the likelihood of the Government changing its mind? The Government is in business to raise revenue – and it has said it will not grant concessions, so it is unlikely to do so. There are many people who will say that they have enjoyed the privileges of living in the UK as a non dom for many years and therefore do not mind paying a ‘bit’ of tax. However, there are many others for whom these taxes will necessitate a sale at a time when the housing market at the upper end is already soft.
Next week, I will write my note on how the the Treasury has turned the tables on advisors and what tax planning not to do if you own your home through an offshore company. The following week I will share with you my thoughts on what the Treasury should do to extend the Business Investment Relief on which it has asked for comments to be given by 20th October 2016.
If you would like to comment or book an appointment with Caroline with any concern affecting UHNW families please contact firstname.lastname@example.org or call 020 3740 7423