Important (and unexpected) changes to HMRC's view on loan collateral
HMRC has unexpectedly changed its position on loan collateral for non-UK domiciled individuals who use the remittance basis. Historically, before 4 August 2014, the concessionary position was that foreign income or gains which were used as collateral for a relevant debt were not taxed as a remittance if the funds were borrowed by the remittance basis user on normal commercial terms. However on 4 August 2014, HMRC withdrew this concessionary treatment, although transitional provisions applied and some 'grandfathering' was permitted.
However in May of this year, HMRC unexpectedly changed its stated view on the tax position where foreign income and gains are used as collateral for loans where the full value of the loan is remitted to the UK. Previously, if the full loan amount was remitted to the UK (and foreign income and gains were used as collateral) the remittance would be capped at the level of the loan. The examples in HMRC's manual have now been changed to indicate that if the collateral is of higher value than the loan, the taxable remittance is not capped, but can be the value of the full collateral. Whilst not all sections of the manual have been updated to show this change in stance, this is potentially very concerning for remittance basis users, as it is not unusual for the collateral to significantly exceed the amount of borrowing.
In a slightly nonsensical twist, the situation is different if less than the full amount of the loan is brought to the UK, as provisions in the legislation expressly cap the extent of the collateral amount classed as remitted to the amount of the loan which has been partially brought to the UK.
The change in stance also has potential ongoing implications as HMRC (in Appendix 5 of the Residence, Domicile and Remittance Basis Manual) are also now taking the position that future income and gains which accrue on the assets held as security (e.g. interest received by a bank account) will also be remitted as they arise if they are held in the account over which the bank has security.
Equally significantly, HMRC has potentially significantly broadened the scope to include those remittance basis users who may not have offered formal security, but whose bank's standard terms and conditions contain a general pledge so that the bank can use those sums covered by the general pledge to repay the loan in the event of default. If the loan or repayment terms are conditional on the availability of those foreign income or gains, then HMRC consider that they have been 'used' as part of the debt, as informal security and are remitted when the loan is brought to the UK. No 'positive action' is needed in this regard for the taxpayer to be caught.
These represent unexpected and potentially significant changes for remittance basis users. Private Client professional bodies are urgently seeking a meeting with HMRC to clarify the position. However in the meantime, we would recommend seeking advice before borrowing is incurred.
Significant Entrepreneurs' Relief case - sale of shares by a trust
The Upper Tribunal has overturned, in HMRC v The Quentin Skinner 2005 Settlements, a September 2019 First Tier Tribunal decision in relation to a claim for Entrepreneurs’ Relief on the sale of shares by a trust.
In July 2015, Mr Skinner created three separate family settlements, with the beneficiaries each being given an interest in possession in the whole of the respective trust funds. In August 2015, Mr Skinner gifted ordinary shares in a limited company to each of the trusts. The beneficiaries had each previously held shares (in the same limited company) which granted voting rights, and the company was therefore a 'personal company' for each of them.
The three trusts then sold their shares in December 2015 and claimed Entrepreneurs' Relief (known since 6 April 2020 as Business Asset Disposal Relief) on the sale proceeds. HMRC denied the Entrepreneurs' Relief claim, stating that each beneficiary had not been a qualifying beneficiary within the Entrepreneurs' Relief conditions for one year before the shares were sold.
The trustees appealed to the First Tier Tribunal, who allowed the appeal – on the basis that the focus of the concept of qualifying beneficiary was to identify whose personal company it was and that the individual only needed to be a qualifying beneficiary at the time of the trust's disposal of the shares.
HMRC appealed the First Tier Tribunal's decision. The Upper Tier Tribunal found in HMRC's favour, on the basis that section 169J(4) TCGA 1992 required beneficiaries to have been a qualifying beneficiary throughout the one year period (ending not earlier than three years prior to the disposal). They found that the expression "the qualifying beneficiary" was not merely used to identify the relationship between the individual and the qualifying beneficiary.
As this decision confirms HMRC's view of s169J(4) (as stated in its Capital Gains Manual), the result is not unexpected. However it will no doubt be a disappointment to those taxpayers who have fallen short of the complex conditions for this relief – and is a salutary tale for taxpayers to examine share structures in advance of any planned disposals.
The Office of Tax Simplification has published its much awaited second report on Capital Gains Tax
The Office of Tax Simplification has completed its review into Capital Gains Tax as requested by the Chancellor in July 2020. In acknowledgement of the breadth of the topic, the review was split into two parts. The first report, which was published in November 2020, focused on policy and design considerations.
The second, much anticipated report, was published in May 2021 and considered the practical, technical and administrative improvements that CGT could benefit from, to allow this tax to be modernised. There were 14 recommendations, split into 7 main areas.
Awareness and Administration
The OTS recommended that HMRC should integrate the different ways of reporting and paying CGT into the single customer account and that the administrative arrangements for the 'real time' Capital Gains Tax service should be formalised. From a calculation perspective, the OTS suggests that the government should consider treating individuals holding the same share or unit in more than one portfolio as holding them in separate share pools to ease calculations. The OTS also recommended extending the deadline for reporting capital gains on UK residential property to 60 days (rather than the current 30 days).
Main Homes
The OTS recommended that the practical operation of Private Residence Relief nominations should be reviewed and that raised awareness of how the rules operate was needed. There was also a recommendation that the government considers adjusting Private Residence Relief to cover situations where a taxpayer occupies a property that they have developed in their own garden. On a topical point, the report recommended updating the guidance on non-residential use of a property – including home working.
Divorce and separation
The current length of time given to separating couples to make no gain/no loss transfers can often be inadequate. The OTS recommended that the government should extend this window to the later of (i) the end of the tax year at least two years after the separation event or (ii) any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland.
Business issues
In relation to the treatment of deferred consideration for the disposal of business assets, the report recommended consideration as to whether CGT should be paid at the time the cash is received in such situations (while preserving eligibility to existing reliefs). It also suggested considering enabling an irrevocable provision in the documentation for a corporate bond to specify that it is subject to CGT, and for the absence of such a provision to mean that it is exempt.
Investor issues
The enterprise investment schemes requirements are strict and can be difficult to comply with. The OTS suggested that the government should review the rules, with a view to ensuring that procedural or administrative issues do not prevent their practical operation.
In relation to foreign assets, the OTS suggested that the government should consider whether gains or losses should be calculated in the respective foreign currency and then converted into sterling.
Land and property issues
The OTS suggested that the government should expand the specific rollover relief rules which apply where land and buildings are acquired under compulsory purchase orders. The OTS also suggested that the government should consider exploring ways of removing inappropriate corporation tax or CGT charges for leaseholder-owned flat management companies where a freeholder is in effect only extending their own lease.
HMRC guidance
The OTS also identified specific areas of guidance where it believes HMRC guidance should be improved.
Reviewing and modernising CGT is a considerable task. We await with interest to see how the government will take this forwards.
