The aim of the new benefits provisions is to address areas not covered by existing legislation which allow taxpayers some leeway to avoid or reduce any tax payable for the use of such benefits. What are the proposed valuation principles and how can the tax charge be managed?
Included in the proposed changes of the Finance (No2) Bill (the "Finance Bill") to be introduced in full on 6th September 2017 and intended to take effect from 6th April 2017 are those provisions relating to the proposed new rules for Offshore Trusts and those affecting the taxation of benefits received by UK resident beneficaries.
The December 2016 Response Document to further consultation on the Reforms to the taxation of non-domiciliaries originally proposed a fixed valuation procedure which would apply to all UK resident Beneficiaries receiving benefits from Offshore Trusts, whether monetary (in the form of say loans) or non-monetary. Proposed legislation now deals with the quantification of those benefits and amends the existing rules applying to both CGT and the income tax benefits charge. For these purposes this Article addresses non-monetary benefits or movable property, as below.
Use of Movable Property
For the purposes of the Finance Bill “movable property” means any tangible movable property other than money so will apply principally to assets, such as works of art, classic cars and yachts and planes.
The amount of the benefit is based on a formula, which involves multiplying the following:
- The price paid by the Trustees when they acquired the relevant asset or, if greater, the market value of the asset when it was acquired;
- By HMRC’s the official rate of interest (currently 2.50% from 6 April 2017);
- For the number of days in the tax year in which the property is made available to the beneficiary (the relevant period).For these purposes it is noted the tax charge could be relatively low if the asset was acquired some time ago.
The amount of the benefit is reduced by the following:
- Anything paid by the Beneficiary to the Trustees for the use of that asset and also
- By any amount paid by the Beneficiary in respect of the repair, insurance, maintenance or storage of the movable property. These costs can obviously be significant in terms of any asset, particularly yachts and planes.
If the official rate of interest changes during the relevant period, then the rate of interest is the average official rate of interest for the period.
A working example of this might be the following:
John is resident in London and is the Principal Beneficiary of the Blanco Trust, a discretionary trust administered in Guernsey;
- The Trust purchased a painting ‘The Duchess of Seville’ at market value for £100,000 on 5 April 2015;
- The painting is made available to John for a period of 12 months from 6 April 2017 to 31 March 2018;
- He does not pay the Trustees for the benefit of the use of the painting and there are no relevant costs paid by him in the period.
Using the formula provided the charge to tax would be £2,500, the calculation is as follows:
£ Cost (£100,000) x Official Rate of Interest (2.50%)
x Number of days available to him (365)
Days of the year (365)
If there are costs to record of say, 5% or £5,000 there would in fact be a loss to confirm of £2,500.
Margaret is resident in London and is the Principal Beneficiary of The Rojo Trust, a discretionary trust administered in the Isle of Man;
- The Trust purchased a twin engine jet on 6 January 2013 for £30 million;
- Margaret has use of the plane for a period of 12 months from 6 April 2017 to 31 March 2018;
- She does not pay the Trustees for the benefit of the use of the plane and there are no relevant costs paid by her in the period.
Using the formula provided under the Finance Bill, the calculation is as follows:
£ Cost (£30m) x Official Rate of Interest (2.50%)
x Number of days available to her (365) = £750,000
Days of the year (365)
If the Beneficiary pays any of the relevant costs and/or a fee for the use of the asset the charge can be significantly reduced or eliminated. For instance, if the running costs in terms of repair, insurance, maintenance or storage are broadly equivalent to the likely tax charge and the Beneficiary pays the costs instead of the Trustees, there will be no tax charge. Obviously the Beneficiary would have to have the funds available though to meet the charge. It is also worth noting, of course, that for more valuable works of art the figures would be much higher.
If the repair, insurance, maintenance or storage costs paid by the Beneficiary are not significant in themselves to reduce or eliminate the charge payable, the charge can be quite sizeable and would accumulate rapidly over time. Where appropriate, as an alternative or in addition to the running costs, a fee might be appropriate for the use of the asset, to reduce the charge further but neither option may be practical for the Beneficiary who may not have such a large amount of cash available to him or her for these purposes. Such a fee is not ideal of course since it would be treated as UK source income in the hands of the Trustees and taxed accordingly. For most practical situations the costs will no doubt be material for any of the relevant assets under consideration. On the facts above, if we assume running costs of 10% or £3m in the relevant period, this would also eliminate the tax charge. With some careful planning over a period of years the charge could feasibly be managed so that the charge to tax is at least minimal.
No doubt all costs and expenses will be scrutinised by HMRC and records should be kept. To the extent such property was transferred historically at an undervalue this may result in a significant change to the overall calculation. For instance, using the example above of the painting of the ‘Duchess of Seville’, if the painting was transferred into trust for no charge on the same date and it emerges the painting indeed had a market value of £100,000 at the time of transfer, then this would result in the charge to tax of £2,500, so all structures do indeed need to be reviewed in this way to ensure there are no unexpected surprises.
Room for Doubt?
The tax is intended to be applied by reference to the number of days on which the relevant asset is “made available” to the Beneficiary. With no guidance available to confirm whether this means the number of days on which the asset is actually used by the Beneficiary or whether it includes any days where the Beneficiary could have used the asset even though he, or she, did not do so.
HMRC will probably argue the latter, although with assets such as yachts and planes, it may well be possible to argue to the contrary, especially if they are also chartered to third parties. It will be of great importance therefore to ensure such arrangements are comprehensively covered by the relevant documentation so there is less room for doubt.
It may be appropriate to obtain professional third party valuations in instances where the Trustees have purchased the relevant asset at less than market value. Each case will need to be reviewed to assess the impact of the charge and what may be the most cost effective way to deal with it. The sooner this is addressed, the better.