Prior to 2013 it was fairly common for an offshore company (Offco) to hold UK residential property. Whilst rental income was taxable, the company would not be liable to capital gains tax (CGT) nor would the non-domiciled shareholders be liable to IHT.
Even taking into account the high costs of running an Offco, this was a cost effective way of arranging property ownership.
Issue
Following various changes in legislation over the years, the company is now also liable to capital gains tax and the shares subject to Inheritance Tax. There are no advantages to having an Offco and the client wanted advice on transferring ownership to a UK company tax efficiently and to save significant ongoing admin costs.
How we solved it
We advised the client to set up a new UK limited company and for the Offco to become UK resident. By complying with the relevant legislation the properties could be transferred to the UK company with no CGT or SDLT costs.
The outcome
The overseas shareholders now own a UK company owning the properties at their original base cost and the shareholders have considerably less annual admin costs.
Note however the value of the shares is potentially liable to UK IHT, regardless of the shareholders’ domicile status.
Next Steps
If you have a case similar to the above or would like more information on re-domicile of a company please get in touch.
A few minutes after half past 12 on 30th October 2024, Rachel Reeves stood up and delivered Labour’s first budget in over 14 years.
Prior to the budget there was much speculation as to the contents of the budget, with Labour remaining fairly tight lipped on likely changes in the budget.
Below we have provided a brief summary, of the changes announced in the 2024 Autumn Budget.
Increases to Living Wage / National Minimum wage
The Living Wage is set to be increased by 6.7% Increase to £12.21 per hour for those aged 21 and above. This increase aims to support workers amidst rising living costs, particularly given recent inflation and accounts for an increase in gross income of circa £1,500 per year (for a full time worker working 37.5 hours per week)
The National Minimum wage (payable to people aged 18-20) will increase substantially by 16.3% to £10 per hour.This substantial rise aims to address youth wage disparity and ensure young workers can keep pace with the cost of living. This will be equivalent to an increase in gross income of £2,730 per year (for a full time worker working 37.5 hours per week)
These increases will account for an increase in tax revenues as the more people earn, naturally the more tax they will ultimately pay, however these changes do come with a greater wage cost for employers which could put a strain on smaller businesses particularly those in sectors with large numbers of minimum-wage employees. These changes could result in employers altering their recruitment strategies to remain profitable.
National Insurance Changes
During the budget, Ms Reeves made it very clear that she would not increase taxes for individuals. She did however, announce an increase in employers NIC from 13.8% to 15% from April 2025 as well as decrease the threshold from which employers are required to pay NIC down from £9,100 per employee, to £5,000 per employee.
These changes mean employers will need to pay considerably more NIC for their employees.
Capital Gains Tax (‘CGT’) rates
Due to Labours manifesto promise not to increase tax rates for income tax, corporation tax and VAT, it was highly speculated that the chancellor would target other taxes such as CGT.
Currently, gains on Residential Property have higher CGT rates of 18% for gains within the basic rate band, and 24% for higher rate gains.
All other disposals (apart from Carried Interest) attract CGT rates of 10% and 20% respectively.
Rachel Reeves confirmed in the budget that CGT rates would be increased (from today) to 18% and 24% for all gains going forward.
Carried interest gains, would attract a new rate of 32%
These increases will see individuals who are disposing of capital assets pay a larger percentage of their gain in tax than before with the rate in basic rate gains increasing by a staggering 80% and higher rate gains increasing by a more modest 20%.
Capital Gains Tax (‘CGT’) – Business Asset Disposal Relief (‘BADR’)
Individuals who dispose of business assets can currently benefit from a rate of 10% CGT on their gains providing the disposals meet certain criteria.
In line with CGT increases, there will be an staggered alteration for gains eligible for BADR from the current 10% rate to 14%, and then a further increase to 18%.
The lifetime limit of BADR will be kept at the current level of £1m of gains.
These changes will see individuals who are disposing of business assets that qualify for BADR exposed to an increase in their tax liabilities of 80% on the first £1m of gains…!
Inheritance Tax (‘IHT’)
A very unpopular tax we have in the UK is Inheritance tax. While consecutive governments have been eager to point out that only 6% of estates will ever pay inheritance tax, it remains a highly criticised tax as it’s an additional tax on assets acquired during lifetime from already taxed income.
The freeze on IHT thresholds will continue and there will be no change to the rate of IHT which currently stands at 40%.
The government will however increase IHT takings by taking measures to include inherited pensions within the scope of IHT as well as to restrict the valuable reliefs of Business relief (‘BR’) and Agricultural relief (‘AR).
Currently, on death, shares in closed trading companies, as well as farmlands meeting certain criteria benefit from 100% BR / AR against IHT meaning the full value of those shares / agricultural land does not attract IHT.
Under new rules, a combined £1m limit will be placed on BR and AR qualifying assets with only 50% relief being available on value above the limit. This results in an affective IHT rate of 20% on those assets.
The same applies to shares in Alternative Investment Market (AIM shares) which will also see a 100% relief replaced with a 50% relief.
Closure of the Non-Dom regime
The tax regime designed to benefit non-domiciled individuals who leave their income and gains offshore has proven to be an unpopular one with scandal hitting the headlines over Rishi Sunak’s wife domicile status.
Initially, Labour had pledged to close the Non-Dom tax regime and replace it with a residency based scheme designed to be fair to people coming to the UK temporarily, but to capture UK taxes on overseas income and gains on individuals who call the UK their home.
The chancellor reaffirmed this position in the budget, exclaiming that she will close the perceived ‘tax loophole’ created by the non-dom regime.
Freeze on Income Tax and NI Thresholds
The departed conservative government put a freeze on Income Tax thresholds which results over time in larger tax takings (increases in pay with inflation leads to higher tax liabilities with no increase to tax free allowances / basic rate bands etc).
Rachel Reeves confirmed that the current freezes would remain in place, but then we should expect to see increases in these thresholds.
VAT on Private School Fees
Another area which was largely speculated to be changed in the budget was VAT on private school fees.
Currently, private school fees are not within the scope of UK VST. The chancellor confirmed that from January 2025, VAT will be chargeable on school fees increasing costs by 20%
This measure is said to be done to boost the ability to finance public schools which 96% of children in the UK attend.
Autumn budget conclusion
There are clearly a number of significant changes from the budget, most notably the hikes in liabilities for employers who will have to take into account increases to staff wages as well as higher levels of national insurance.
Hikes on CGT payable on the sale of assets, as well as IHT payable on business and agricultural assets which were previously exempt.
It will be interesting to see how the changes to the non-dom rules are drafted in the legislation to try and offer a fair system
Next steps with life after the Autumn budget
These rules will affect different taxpayers in different ways. If you are affected by any of the rules and need any help, our specialist team can help guide you along the way, providing solutions to the problems you may face. Please do get in touch
Why not join us at our next live webinar click here to find out more.
Inheritance Tax (IHT) is a concern for many individuals planning their estates, especially those with significant wealth. While several strategies are available to reduce inheritance tax liability, the ‘Rysaffe principle’ is one of the lesser-known but highly effective methods.
This strategy helps mitigate the IHT burden through the use of multiple trusts.
Here’s a detailed explanation of the Rysaffe principle and how it can benefit you if you’re looking to optimise your estate planning.
What is the Rysaffe Principle?
The Rysaffe principle originates from a 2003 tax case, Rysaffe Trustee Company (CI) Ltd v Inland Revenue Commissioners, where the court ruled on the structure of multiple trusts and their tax treatment.
The key takeaway from this case was that setting up multiple trusts on different days could result in more favourable treatment for IHT purposes. The ruling clarified that each trust would be treated independently and not as a collective group allowing for a more manageable inheritance tax position as each trust is taxed separately.
So how does it work?
At the basis of the Rysaffe principle is the creation of multiple discretionary trusts, rather than a single one.
Inheritance tax law stipulates that when calculating tax charges, the value of all property settled in a trust within a 10-year period may be aggregated. This aggregation can push the value of the trust into a higher tax bracket, increasing the IHT charge.
However, by setting up multiple trusts on different days, each trust is viewed as a separate entity for IHT purposes. This means that each trust benefits from its own nil-rate band (NRB) threshold, which is currently £325,000 (for the 2024/2025 tax year). As a result, a significant amount of wealth could be sheltered from IHT using this method.
Example – Mr Jones
Mr Jones wishes to place shares in his Family Investment Company (FIC) into trust for his children.
Mr Jones anticipates the value of the growth shares he will be placing intro trust will grow significantly during his lifetime.
If Mr Jones places £100 worth of shares into a single trust, there will be no IHT on the way in, as the £100 would only use up £100 of his personal NRB. If by the time the shares are distributed from the trust the shares are worth say £1,000,000. Only £325,000 of that would be covered by the Trusts NRB and the rest will be subject to IHT.
If however Mr Jones were to place 5 x 20 shares into 5 different trusts set up on different days, there would still be no IHT on the way in as the same £100 is covered by his personal NRB, however on exit each trust would have £200,000 of value and a NRB of more or less £325,000 [1]to cover it, leaving no IHT liability at all.
While the process of setting up multiple trusts may involve more complexity and professional advice, the potential IHT savings can be substantial.
Advantages of the Rysaffe Principle
1. Maximising the Nil-Rate Band: By dividing assets across multiple trusts, each trust can benefit from its own NRB, reducing or eliminating the IHT charge.
2. Avoiding Aggregation: As each trust is created on a different day, the assets in each trust are not aggregated for tax purposes, allowing more flexibility in estate planning.
3. Flexible Gifting: This strategy provides flexibility in how assets are distributed among beneficiaries, allowing different trusts to be tailored to different family members or purposes.
4. Long-Term Savings: Over time, the Rysaffe principle can significantly reduce the periodic IHT charges that apply to discretionary trusts during their lifetime.
Considerations and Potential Pitfalls
While the Rysaffe principle offers notable tax advantages, it’s important to consider some of the practical and legal challenges:
1. Trust Complexity: Setting up multiple trusts increases the administrative burden and may incur additional legal and trustee fees.
2. Careful Timing: To benefit from the Rysaffe principle, it’s crucial that the trusts are set up on different days. Failure to do so could result in the aggregation of assets, nullifying the tax benefits.
3. Professional Guidance: The Rysaffe principle is a sophisticated tax strategy that requires careful planning. Consulting with a tax professional or estate planner is essential to ensure compliance with UK tax laws and to optimise the structure.
Won’t HMRC challenge the arrangements?
Because of the potentially significant IHT savings, it would be natural to be wary of a challenge from HMRC.
There is a General Anti-Abuse Rule (GAAR) which allows HMRC to “look through” artificial arrangements which are only put in place to achieve a tax advantage and have no commercial basis.
However, the use of multiple trusts was reviewed by the GAAR Advisory Panel some years ago. It commented:
“The practice was litigated in the case of Rysaffe Trustee v IRC [2003] STC 536. HMRC lost the case and having chosen not to change the legislation, must be taken to have accepted the practice”.
Conclusion
The Rysaffe principle is a valuable tool for individuals seeking to reduce their inheritance tax liability using multiple discretionary trusts. When applied correctly, it can help maximise the nil-rate band and avoid the aggregation of assets, leading to significant IHT savings.
However, due to its complexity, it’s crucial to seek professional advice to ensure the trusts are structured correctly and in line with current tax regulations.
With careful planning, the Rysaffe principle can be an integral part of a comprehensive estate planning strategy, ensuring more wealth is passed on to beneficiaries rather than the taxman.
Next Steps
If you are looking for specialist, expert IHT advice then ETC Tax is the right place to be. Our team has a vast amount of experience in planning for IHT including the use of the Rysaffe principle should that be the best option for you as part of your wider IHT plan.
We have supported our Tax Partner Pro members via email and call-back service. Here’s an overview of some of the more recent questions we have answered during October 2024
Q
Our client incorporated a rental portfolio into a limited company but had a latent gain during incorporation due to remortgaging properties.
I understand the latent gain is subject to CGT, but is the gain reported as normal CGT rates (10/20%) or residential property rates (18/28% in the year they did it)? Additionally, how is the CGT reported? I assume if the latent gain is based on the incorporation of a business and at 10/20% then it would be done via a tax return, but if it is done as a property, do we need to complete a property return within 60 days of incorporation, and is it one return for the whole portfolio or an individual return for each property involved?
A
From your email my understanding is that here the equity in the property rental business was not sufficient to cover the capital gains and therefore left outstanding gains payable on the transfer.
Here the individual will be disposing of the assets of their business which, as they are residential properties, will be subject to the residential property rates of 18/28%. Therefore would follow the usual CGT obligations of disposing the properties, such as the 60 day reporting.
Q
I noted an error on a new Ltd co client’s submitted accounts as follows:
20k Sale in turnover was in fact for a disposal of plant.
Journal Required was:
Dr 20000 Sales
Cr 20000 Disposal
Cr 25000 Plant
Dr 5000 Depn on Disposal
Dr 20000 Disposal
Company is loss making in all years – so would be a slight adjustment to CT loss cf.
Looking to File 31/12/23 this month
Should we re state all 31/12/22 and re file with Co house /HMRC
Or can we post some restatement in 2023 accounts for 2022 and file that (adjusting tax comp loss where necessary this year)
Would prefer not to have refile if that is an option.
A
We can’t comment from an accounts perspective in regards to Companies House filings but we can comment from a Corporation Tax perspective/HMRC.
Essentially from what I understand of your email below is that the accounts submitted with the CT600 for the y/e 31 Dec 2022 were incorrect.
As the CT600 was submitted with an incorrect loss figure originally, you will need to amend the original return to reflect the correct loss figure to carry forward. You are not able to make adjustments in future Tax Return’s for previous errors.
Q
We have a client that is a limited company with income mainly coming from property (plus a small amount of income from shares).
The company, several years ago, made a loan to another company. I’m not sure of all the details as it was before our time, however it was definitely a loan of money, total £120,000k. The other company is not connected in any way (I think it was effectively an ‘investment opportunity’ structured as a loan).
They may get back a small amount c£20,000 but not the rest, so we are writing off the 100K in this year’s accounts.
I just wanted to check if the amount written off is allowable a an NLTR debit or not? I can’t tell from what I’m reading if only banks etc would be able to claim, or if any loan of money not to a connected party is covered?
The client had a capital gain in the year as they sold some properties so it is relevant in terms of whether the NTLR loss could be offset against the gain.
A
We assume that the entities are all UK resident for tax purposes.
I would recommend that you ask for a copy of the loan agreement between your client company and the third party to ensure that this was a formal loan.
Additionally, I think I would seek confirmation from the client company as to whether they complied with company law, Financial Conduct Authority regulations and Anti-Money Laundering regulations when they made the loan in the first place. As this loan was made before your appointment as agent of the Company, you want to ensure that these matters were covered.
From a tax perspective, if the companies are not connected, the waiver of the remaining debt would ordinarily mean that the lender would have a non-trading loan relationship debit. Whether this is allowable for corporation tax depends on the commercial justification for making the loan and for waiving the loan. The loan relationship regime contains various anti-avoidance rules- which can be found in Chapter 15 Part 5 CTA 2009. For ease of understanding (as tax law can be unnecessarily complex) here is a link to HMRC’s summary CFM38000.
If the non-trading loan relationship debit is allowable and if this results in the company having a non-trading loan relationship deficit in the accounting period, a claim can be made to offset this loss against total profits (including chargeable gains) of the company.
Assuming the shareholder is not involved with the third party in any capacity, it may be difficult for HMRC to argue that the write off creates an indirect distribution, taxable in the hands of the shareholder.
If the loan appears uncommercial, then there could be other issues such as a benefit on the director under s.201 ITEPA 2003 or fall within the Disguised Remuneration regime under Part 7A ITEPA 2003 so I am hopeful this is not the case.
Q
My client operates a restaurant and charges a discretionary service charge on the gross amount of the bill, which includes VAT. We want to ensure that we are only paying income tax on the tronc for the employees. Could you please advise if this approach is accurate, or do we need to calculate the service charge on the net amount excluding VAT?
Additionally, could you share the rules and regulations from HMRC regarding this, along with relevant links?
A
How the discretionary service is computed is at the discretion of the business, this can be on the NET of VAT amount or VAT inclusive amount. What is key is that, for VAT purposes, the service charge is optional in order to be exclusive of VAT, see VATSC06130 for commentary on this point.
The income tax and NIC treatment is not linked to VAT – for the service charge to be free of class 1 NIC, the gratuity/offering must meet the conditions of the exclusion under para 5 or part 10 of the Social Security Contribution Regulations 2001 – https://www.legislation.gov.uk/uksi/2001/1004/schedule/3 (see below exert).
Under the new legislation, the Employment (Allocation of Tips) Act 2023 which comes into force from October 1 2024, the employer must pass on the total amount of the discretionary service charge to the employees. If using an independent TRONC scheme, this must be passed in full to the Troncmaster in order to retain the NIC free treatment as mentioned above. If paid via the employer PAYE scheme, this will represent earnings for both tax and class 1 NIC (ee & er).
(1) A payment of, or in respect of, a gratuity or offering which—
(a) satisfies the condition in either sub-paragraph (2) or (3); and
(b) is not within sub-paragraph (4) or (5).
(2) The condition in this sub-paragraph is that the payment—
(a) is not made, directly or indirectly, by the secondary contributor; and
(b) does not comprise or represent sums previously paid to the secondary contributor.
(3) The condition in this sub-paragraph] is that the secondary contributor does not allocate the payment, directly or indirectly, to the earner.
(4) A payment made to the earner by a person who is connected with the secondary contributor is within this sub-paragraph unless—
(a) it is—
(i) made in recognition for personal services rendered to the connected person by the earner or by another earner employed by the same secondary contributor; and
(ii) similar in amount to that which might reasonably be expected to be paid by a person who is not so connected; or
(b) the person making the payment does so in his capacity as a tronc-master.
(5) A payment made to the earner is within this sub-paragraph if it is made by a trustee holding property for any persons who include, or any class of persons which includes, the earner.
In this sub-paragraph “trustee” does not include a tronc-master.
(6) A person is connected with the secondary contributor for the purposes of this paragraph if his relationship with the secondary contributor, or where the employer and secondary contributor are different, with either of them, is as described in subsection (2), (3), (4), (5), (6) or (7) of section 839 of the Taxes Act (connected persons).
Prior to 1 April 2013 it was fairly common for individuals who were both non-UK resident and non-UK domiciled to purchase high value UK residential property through an offshore company, with the shares in that company being owned by an offshore trust.
Because the shares were not situated in the UK, there were no UK IHT implications (as there would have been if the property had been purchased directly by the individual).
Over the years the benefits of this type of structure has gradually been eroded:
From 1 April 2013, HMRC introduced an Annual Tax on Enveloped Dwellings (ATED) which is a fixed scale charge based on the value of the property. Properties are revalued every five years for these purposes so the next revaluation date is 1 April 2023. If the property is commercially let, an ATED exemption is available, but an ATED return still needs to be filed.
From 6 April 2015, HMRC introduced capital gains tax for non-residents disposing of UK residential property, which was extended to all UK land and property from 6 April 2019.
From 6 April 2017, HMRC brought UK residential property into the Inheritance Tax net. The rules here are far-reaching and in the structure outlined above, the offshore trust becomes liable to IHT.
In view of the above changes, there is a marked trend to ‘de-enveloping’ UK residential and commercial property from the structure by moving it to a new UK company and here the tax implications have to be carefully considered and planning taken to avoid unnecessary tax charges. We have considerable experience in this area.
From an IHT perspective, offshore trusts will have an IHT charge on each ten year anniversary after 6 April 2017. So if, for example a trust was established on 1 July 2009, the first Ten Year Charge would arise on 1 July 2019 (although the tax payable would only be calculated from 6 April 2017). Where the trust was set up many years ago, the IHT reporting is sometimes overlooked which can lead HMRC charging interest and penalties on the tax due.
HMRC also believes many overseas companies have not declared rental profits and has issued ‘nudge letters’ urging such companies to regularise their UK tax position.
