A potential disaster!

keys-300x180I fear I have been neglecting you dear reader.  I have had a busy time since I last wrote to you, as I have had international and assorted UK conferences to attend.  Between such excitement, I have been dealing with lots of interesting advice work, some of which is as follows:

Case 1

Cross-border issues always provide complications, even when the border is quite close and there is a common language (English).

A restructuring of a UK property portfolio owned by an Ireland-resident individual is a case in point.

A mechanism to shelter ongoing rental income from UK and Irish income tax and future capital growth from UK and Irish capital gains tax has been created (with advice from Leading Tax Counsel), which has the added attraction of avoiding a potentially expensive charge to stamp duty land tax (“SDLT”).

The principle is that the property portfolio will be sold to an LLP, the members of which will be the Irish individual and an offshore company.

The LLP’s income rights will vest in the Irish individual but the capital growth will vest in the offshore company.

The LLP’s income will be minimised by it being geared-up so as to enable it to fund the purchase price of the properties, such borrowing to be obtained from a further offshore company controlled by the Irish individual.

The effect is that taxable UK source property income is converted into non-taxable non-UK source interest income, with future capital growth also accruing in a tax-free manner.

However, the Irish advisors are not sure that the structure will fully “work” from an Irish tax perspective (although they seem unable to say exactly why, or why what they had in mind might “work” any better).

A conference call with Leading Tax Counsel is convened and most (probably all) of their fears are allayed.

The Irish advisors need to consider their own rules regarding interest deductions, following which the lawyers can proceed with the implementation.

Case 2

A client has fallen out with his long-term girlfriend, which is sad, particularly as there are children involved.

The client is happy to fund the children’s maintenance and to provide a rather fine residence for them and their mother, but is concerned about ongoing CGT issues in respect of the residence, as he has an equitable interest in it but no longer occupies it as his main residence.

Happily, there is a neat solution.

He and his “ex” have agreed that she and the children will live in the property until the youngest child attains 18 years of age whereupon the property will be sold and the proceeds of sale divided between him and the “ex”.

This arrangement constitutes an “express trust”, a topic commented on by HMRC in their CGT manual.

As the property is held within a deemed trust, and as beneficiaries of that trust (i.e. the “ex” and the children) occupy the property as their main residence, the property will continue to be CGT exempt under the main residence rules as extended to trustees, even though the client lives in a different property, which is his new main residence.

A happy tax ending to an otherwise unhappy tale.

Case 3

A manufacturing client wants to motivate further its key employee with an equity-based incentive scheme.

It’s a no-brainer – the Enterprise Management Incentive (“EMI”) share option arrangement was created just for this purpose.

The company and its trade will qualify, as will the favoured employee.

However, can HMRC be persuaded that the underlying share value is sufficiently low to enable the intended number of options to be issued, within the over-riding limit of £120k of value?

It’s difficult because the company has been in the habit of buying-in shares from shareholders who want to sell, and the price paid has been, let’s say, generous!

Will HMRC accept that the open market value of the shares for EMI option purposes is less that the amount at which shareholders have habitually dealt?

We are aware of other cases where similar arguments have succeeded, so the only course of action is to prepare a valuation report and open negotiations with HMRC, which we do.

Watch this space for developments…

Suppose HMRC will not play ball?

All will not be lost as we have a scheme (Settled by Leading Tax Counsel) which behaves economically like an EMI share option scheme without being a share option scheme at all!

It’s all to do with issuing real shares to the employee, having first burdened those shares with non-recourse debt.

It’s an ideal situation when the technicalities of the EMI scheme cause problems, such as the perceived value being too high (as in the instant case), or the company or the company’s trade not qualifying under the EMI rules.

Case 4

A client receives an unexpected letter from HMRC’s SDLT investigation unit.

It’s to do with a lease that was entered into some three years ago.

The lease was from an LLP to a company that is a member of the LLP and HMRC’s letter indicates that, when the lease was granted, exemption from SDLT was claimed by the lawyers on the basis that group relief applied.

This seems most odd because group relief cannot apply in such circumstances.

A review of the file reveals that advice was given to the clients and the lawyers at the time, the advice being that group relief would not apply, but that the SDLT at stake should be minimal in view of the rather arcane calculation of chargeable consideration when partners, or persons connected with partners, enter into land transactions with a partnership.

In this regard, an LLP is deemed to be a partnership and the grant of a lease is deemed to be a land transaction.

The client is advised to check what the lawyers actually did; someone has got their wires crossed and it’s not clear whether it’s HMRC or the lawyers!

Case 5

A client wants to sell and a senior employee wants to buy – a classic MBO situation.

Will the vendors qualify for entrepreneur relief (“ER”), under which their rate of CGT will only be 10%?

Yes (that’s good)!  Can the employee afford to pay the asking price?  No (that’s bad)!

The new ER rules following the Emergency Budget on 22 June 2010 contain a pitfall for the unwary.

It is that if the vendor takes loan-notes in respect of the deferred consideration, CGT will be deferred, but the encashment of the loan-notes will not qualify for ER, so that rate of CGT might rise to 28%!

A potential disaster!

The clients are warned of the pitfall and realise that they will be better-off in taking sufficient up front cash to fund the CGT at 10%, and then taking the deferred consideration as a debt due to them by NewCo, rather than as a formal loan-note.

In view of the current low interest rates, paying CGT at 10% up-front will be much cheaper than deferring the CGT liability but then paying at 28%.

Interestingly, the purchaser’s advisors did not seem to understand why he should form a new company (“NewCo”) as his acquisition vehicle, so it seems that going forward, he may prefer to receive advice from us.

The weekend arrives; I have the honour of attending the wedding of one of my young dynamic partners (Shen) to one of our bright, young (and beautiful) audit seniors (Ayse).  A fabulous day surrounded by ladies in hats beckons.

And so to bed…

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