Substance over Form

Last week, I had a meeting with a dear friend and client who I will call Fred. Over the three decades I have known him, he has had good luck and bad, in about equal measures, but in recent years his commercial property interests have rocketed. He came to me, because he was looking to ‘take profits’.


Fred came to live in the UK from Australia some fifteen years ago and bought residential property in the UK, which did very well. About seven years ago, I told him, that I thought the UK government would start to attack the tax benefits of UK residential property. He took my advice and sold the UK residential property, switching into commercial property which he held in offshore special purpose vehicles in BVI and trusts which he set up in Guernsey about the same time.


I said he needed to review his entire structure the mood of the world had changed and offshore structures had to change with it, to reflect substance over form. For example, the governance of the special purpose vehicles which held the commercial property interests needed to be carefully looked at; in particular who was on the board, where board meetings were held, what the board members discussed and how everything was recorded.


I reminded Fred that ‘The key advantages of using BVI companies to hold the commercial property portfolio are they are outside the scope of UK capital gains tax provided the company is non-UK resident, which means that the central management and control of the company must be outside the UK.


I touched on the leading case on this issue – Wood v Holden last week.


Fred looked smug, he was ‘well acquainted with the rules of central management and control’. His BVI companies had a majority of Guernsey resident directors, he was not on the board, they met at least twice a year in Guernsey at which board meetings were held and minutes properly taken which were kept at the offices in Guernsey,


I asked what the minutes recorded, after all Fred was the brains behind the business empire? The majority of directors maybe resident in Guernsey, but what experience did they have in buying and selling UK commercial property? Furthermore, how in practice did Fred convey his business decisions to the Guernsey board?


He said that informal meetings and discussions were being held continuously in the UK, but when a decision had to be made, his CEO would fly to Guernsey to have a formal meeting at which the decisions would be taken.


I asked whether the minutes conveyed the business discussions? Fred said yes, his CEO would go through the properties held by the SPVs, and explain the proposals to the board at which point discussions would be held, and then the board would resolve to agree the proposals.

I asked whether these discussions were recorded and the time taken to come to these decisions? If the directors had no real knowledge of commercial property were these discussions meaningful?  These factors could now come under greater scrutiny.


The First Tier Tribunal case last year of Development Securities is unusual, but is a salutary reminder that substance trumps form.


In this case, three Jersey companies, ultimately owned by Development Securities PLC, were used as part of a tax structure designed to increase the group’s available capital losses. The offshore companies bought real estate at an artificially high price with a view to selling them on, at a loss, shortly afterwards. This loss would then be available to set off against the profits of Development Securities PLC.


The boards of the Jersey companies held at least four meetings between the date the companies were incorporated in June 2004, and the date the Jersey directors retired about six weeks later in July 2004.


At these meetings, the Jersey board considered the steps proposed, gave approvals to the entry into and subsequent exercise of the call option and set out all the related administrative steps needed to complete the transaction, - in accordance with directions from a UK tax accountant.


The First Tier Tax Tribunal wanted to look at the facts and took everything into account; all correspondence, minutes, hand written notes, telephone calls and in particular the advice given by the accountant who orchestrated the whole thing, which was not privileged.


The Tribunal came to the conclusion on the facts, that, at the time the Jersey companies were incorporated and the directors appointed by Development Securities, the decision to undertake the transactions had already been taken (by Development Securities) and that the directors of the Jersey companies, in agreeing to be appointed, in effect were also agreeing to carry out the transactions, subject only to confirmation that it was lawful in Jersey for them to do so.


What was of particular relevance in this case, was the fact that the boards of the Jersey companies did not discuss in any detail the transactions which they were to take, and in fact were not qualified to do so!


My advice to Fred, was put in place a structure so that real decisions are taken by people with real qualifications, which is not in the UK – if that means hiring a private jet once every three/four months’ – that is a small price to pay for a saving capital gains tax!


If you would like to find out more about setting up and running headquarter structures call Caroline on 020 3740 7422 or e mail on