In Hood v HMRC, the grant of a sublease was treated as a gift with reservation of benefit. The requirement of a ‘settled purpose’ to be ordinarily resident was applied in Ward v HMRC. HM Treasury has launched a consultation on proposals to simplify the gift aid donor benefit rules. The compatibility with EU law of the CGT export charge on trust migration under TCGA 1992 s 80 of the has been referred to the CJEU in the case of Trustees of the P Panayi Accumulation & Maintenance Settlements v HMRC.
Andrew Goldstone and Jeffrey Lee (Mishcon de Reya) review recent private client tax developments that matter.
In Hood v HMRC [2016] UK FTT 059 (TC), Lady Diana Hood had granted a sublease to her three sons (to take effect in 15 years), out of a long lease of which she was the lessee. The sublease was subject to the same terms, covenants, provisos and conditions as were contained in the head lease. Lady Hood, as sublessor, and her sons, as sublessees, respectively covenanted to perform and observe those provisions as if they had been repeated in the sublease.
The First-tier Tribunal (FTT) held that the creation of a sublease where the donor enjoyed the benefit of the sublessees’ covenants was a gift with reservation of benefit under the second limb of FA 1986 s 102(1)(b), as the donee’s enjoyment was not exclusive of any benefit to the donor by contract or otherwise.
The Court of Appeal case Buzzoni and others v HMRC [2013] EWCA Civ 1684, which had similar facts, was considered. In Buzzoni, the court held that there was no reservation of benefit under s 102(1)(b). In that case the benefits the donor derived from the underlease covenants did not affect the donee’s enjoyment of the underlease because the sublessee was party to the headlessor’s licence to sublet. The sublessee had covenanted directly with the headlessor in the licence to observe and perform the covenants.
The sublease in Hood was distinguished. It could not be said to be property enjoyed to the entire exclusion of ‘any benefit’ to Lady Hood, as she did obtain a benefit, i.e. the sublessees’ covenants to her in the sublease to observe certain provisions of the headlease. The sublessees had not covenanted directly with the headlessor. In effect, Lady Hood was provided with an indemnity from the sublessees for the performance of her covenants as lessee under the headlease. This was a benefit which she did not enjoy before the sub-lease was granted.
Why it matters: Although the use of lease reversion schemes for IHT planning is now far less common following the introduction of purported blocking legislation in 1999 and pre-owned assets tax in 2005, this decision is not merely of academic interest as it will still be relevant for some older cases. It highlights the risk of a reservation of benefit where the sublease includes covenants in favour of the donor.
In Ward v HMRC [2016] UKFTT 114 (TC), Mr Ward was seconded to the UK from Australia from July 2006 to March 2009. At the end of the secondment, he asked his employers if he could remain in the UK until June 2009, for personal reasons. His intention then was to move back to Australia after taking some holiday.
However, a series of events out of his control, including the ill-health of his girlfriend’s parents, the birth of their child, and marriage, meant that he remained in the UK until January 2011.
In his self-assessment tax return, he had mistakenly assumed that he was non-resident in the UK for tax purposes during this time as he thought he ceased to be resident in the UK after he was moved on to the Australian payroll from April 2009. The FTT found he was UK tax resident as he had spent more than 183 days in the UK in each of the two tax years. The tribunal considered whether Mr Ward was also ordinarily resident in the UK during this time.
The tribunal held that to be ordinarily resident, the residence must be voluntarily adopted, and there must be a degree of settled purpose. In Mr Ward’s case the circumstances requiring his extended stay in the UK meant that he did not acquire a sufficiently settled purpose to be part of the ordinary pattern of his life.
The tribunal accepted Mr Ward’s evidence that he had a clear intention to return to Australia after his secondment as he had arranged for his furniture and personal effects, including the car he bought in the UK, to be sent back to Australia at the end of his secondment. Also, his employment arrangements changed so that the focus of his work had moved from dealing with issues for the UK and the rest of the Europe, to a group level.
Why it matters: Although the concept of ordinary residence was abolished for UK tax purposes with the introduction of the statutory residence test from 6 April 2013, the concept of ordinary resident is still relevant when considering tax status for tax periods before that date. Although the concept of ‘settled purpose’ is necessarily fact-specific, its application to the facts in Ward provides useful guidance on what a tribunal will consider.
HM Treasury launched a consultation on proposals to simplify the gift aid donor benefit rules on 18 February 2016. The consultation will close on 12 May 2016.
Responses were sought for the following proposed simplifications:
In relation to the relevant value test, HM Treasury suggested the possibility of removing the monetary thresholds altogether. This could mean that charities would no longer need to calculate the market value of benefits provided to donors but instead would determine the actual cost and deduct this from the gross donation before claiming gift aid. Alternatively, the monetary thresholds could be abolished such that gift aid can only be claimed according to the split payments rule. This allows the charity to deduct the known market value of the benefit from the gross value of the gift and claim gift aid on the balance.
Alternatively, as it was recognised that the current three thresholds for determining the permissible value of benefits can be confusing for some charities, a proposed simplification would be to reduce the number of thresholds from three to one. This would mean that for donations of any amount, as long as the value of the benefit did not exceed a fixed percentage of the donation, and was less than a prescribed maximum value, gift aid could be claimed on the entire value of the donation. The government was not consulting on a particular percentage threshold at this stage.
In addition, three additional simplifications to supplement either of the above two options were suggested, namely:
Why it matters: Gift aid is one of the most important reliefs available to the charitable sector. Smaller charities, in particular, had felt that the administration costs associated with understanding and complying with the current donor benefit rules have prevented them from claiming gift aid on some donations. It is hoped that simplifications would remedy this.
The FTT has referred the case of Trustees of the P Panayi Accumulation & Maintenance Settlements v HMRC (Case C-646/15) (OJ 2016 C 48/22) to the CJEU for a preliminary ruling on whether the export charge on trust migration under TCGA 1992 s 80 is compatible with the freedom of establishment, freedom to provide services and free movement of capital respectively under articles 49, 56 and 63 of the Treaty on the Functioning of the European Union.
Section 80 deems there to be an immediate disposal of trust assets at market value and charges capital gains tax to the trustees if they cease to be UK resident. The CJEU held in National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam (Case C-371/10) that a state cannot collect tax at the time of migration i.e. losing residence, with no option to defer payment.
Why it matters: In FA 2013, the government introduced deferred payment provisions for export charges on company migration to EEA states but did not introduce similar provisions for other export charges. The referral of s 80 appears to reflect the government’s piecemeal approach in dealing with the compatibility of export charges with EU law. If the law does change, this will be a very welcome relief for trustees, beneficiaries and professional advisers in those cases where a section 80 charge inadvertently arises.
In Hood v HMRC, the grant of a sublease was treated as a gift with reservation of benefit. The requirement of a ‘settled purpose’ to be ordinarily resident was applied in Ward v HMRC. HM Treasury has launched a consultation on proposals to simplify the gift aid donor benefit rules. The compatibility with EU law of the CGT export charge on trust migration under TCGA 1992 s 80 of the has been referred to the CJEU in the case of Trustees of the P Panayi Accumulation & Maintenance Settlements v HMRC.
Andrew Goldstone and Jeffrey Lee (Mishcon de Reya) review recent private client tax developments that matter.
In Hood v HMRC [2016] UK FTT 059 (TC), Lady Diana Hood had granted a sublease to her three sons (to take effect in 15 years), out of a long lease of which she was the lessee. The sublease was subject to the same terms, covenants, provisos and conditions as were contained in the head lease. Lady Hood, as sublessor, and her sons, as sublessees, respectively covenanted to perform and observe those provisions as if they had been repeated in the sublease.
The First-tier Tribunal (FTT) held that the creation of a sublease where the donor enjoyed the benefit of the sublessees’ covenants was a gift with reservation of benefit under the second limb of FA 1986 s 102(1)(b), as the donee’s enjoyment was not exclusive of any benefit to the donor by contract or otherwise.
The Court of Appeal case Buzzoni and others v HMRC [2013] EWCA Civ 1684, which had similar facts, was considered. In Buzzoni, the court held that there was no reservation of benefit under s 102(1)(b). In that case the benefits the donor derived from the underlease covenants did not affect the donee’s enjoyment of the underlease because the sublessee was party to the headlessor’s licence to sublet. The sublessee had covenanted directly with the headlessor in the licence to observe and perform the covenants.
The sublease in Hood was distinguished. It could not be said to be property enjoyed to the entire exclusion of ‘any benefit’ to Lady Hood, as she did obtain a benefit, i.e. the sublessees’ covenants to her in the sublease to observe certain provisions of the headlease. The sublessees had not covenanted directly with the headlessor. In effect, Lady Hood was provided with an indemnity from the sublessees for the performance of her covenants as lessee under the headlease. This was a benefit which she did not enjoy before the sub-lease was granted.
Why it matters: Although the use of lease reversion schemes for IHT planning is now far less common following the introduction of purported blocking legislation in 1999 and pre-owned assets tax in 2005, this decision is not merely of academic interest as it will still be relevant for some older cases. It highlights the risk of a reservation of benefit where the sublease includes covenants in favour of the donor.
In Ward v HMRC [2016] UKFTT 114 (TC), Mr Ward was seconded to the UK from Australia from July 2006 to March 2009. At the end of the secondment, he asked his employers if he could remain in the UK until June 2009, for personal reasons. His intention then was to move back to Australia after taking some holiday.
However, a series of events out of his control, including the ill-health of his girlfriend’s parents, the birth of their child, and marriage, meant that he remained in the UK until January 2011.
In his self-assessment tax return, he had mistakenly assumed that he was non-resident in the UK for tax purposes during this time as he thought he ceased to be resident in the UK after he was moved on to the Australian payroll from April 2009. The FTT found he was UK tax resident as he had spent more than 183 days in the UK in each of the two tax years. The tribunal considered whether Mr Ward was also ordinarily resident in the UK during this time.
The tribunal held that to be ordinarily resident, the residence must be voluntarily adopted, and there must be a degree of settled purpose. In Mr Ward’s case the circumstances requiring his extended stay in the UK meant that he did not acquire a sufficiently settled purpose to be part of the ordinary pattern of his life.
The tribunal accepted Mr Ward’s evidence that he had a clear intention to return to Australia after his secondment as he had arranged for his furniture and personal effects, including the car he bought in the UK, to be sent back to Australia at the end of his secondment. Also, his employment arrangements changed so that the focus of his work had moved from dealing with issues for the UK and the rest of the Europe, to a group level.
Why it matters: Although the concept of ordinary residence was abolished for UK tax purposes with the introduction of the statutory residence test from 6 April 2013, the concept of ordinary resident is still relevant when considering tax status for tax periods before that date. Although the concept of ‘settled purpose’ is necessarily fact-specific, its application to the facts in Ward provides useful guidance on what a tribunal will consider.
HM Treasury launched a consultation on proposals to simplify the gift aid donor benefit rules on 18 February 2016. The consultation will close on 12 May 2016.
Responses were sought for the following proposed simplifications:
In relation to the relevant value test, HM Treasury suggested the possibility of removing the monetary thresholds altogether. This could mean that charities would no longer need to calculate the market value of benefits provided to donors but instead would determine the actual cost and deduct this from the gross donation before claiming gift aid. Alternatively, the monetary thresholds could be abolished such that gift aid can only be claimed according to the split payments rule. This allows the charity to deduct the known market value of the benefit from the gross value of the gift and claim gift aid on the balance.
Alternatively, as it was recognised that the current three thresholds for determining the permissible value of benefits can be confusing for some charities, a proposed simplification would be to reduce the number of thresholds from three to one. This would mean that for donations of any amount, as long as the value of the benefit did not exceed a fixed percentage of the donation, and was less than a prescribed maximum value, gift aid could be claimed on the entire value of the donation. The government was not consulting on a particular percentage threshold at this stage.
In addition, three additional simplifications to supplement either of the above two options were suggested, namely:
Why it matters: Gift aid is one of the most important reliefs available to the charitable sector. Smaller charities, in particular, had felt that the administration costs associated with understanding and complying with the current donor benefit rules have prevented them from claiming gift aid on some donations. It is hoped that simplifications would remedy this.
The FTT has referred the case of Trustees of the P Panayi Accumulation & Maintenance Settlements v HMRC (Case C-646/15) (OJ 2016 C 48/22) to the CJEU for a preliminary ruling on whether the export charge on trust migration under TCGA 1992 s 80 is compatible with the freedom of establishment, freedom to provide services and free movement of capital respectively under articles 49, 56 and 63 of the Treaty on the Functioning of the European Union.
Section 80 deems there to be an immediate disposal of trust assets at market value and charges capital gains tax to the trustees if they cease to be UK resident. The CJEU held in National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam (Case C-371/10) that a state cannot collect tax at the time of migration i.e. losing residence, with no option to defer payment.
Why it matters: In FA 2013, the government introduced deferred payment provisions for export charges on company migration to EEA states but did not introduce similar provisions for other export charges. The referral of s 80 appears to reflect the government’s piecemeal approach in dealing with the compatibility of export charges with EU law. If the law does change, this will be a very welcome relief for trustees, beneficiaries and professional advisers in those cases where a section 80 charge inadvertently arises.
