- An individual who has outstanding loan liabilities as part of their estate planning?
- A partner in a Limited Liability Partnership?
- A trustee or settlor of a discretionary trust?
- married with interests in real estate held through a company, or a lender with security on company property?
If so, read on!
(a) Inheritance Tax and Deduction of Loans
In the 2013 Budget, the government announced that it would restrict the deductibility of certain loans for inheritance tax purposes.
The restrictions apply to the following types of loans:
- Loans remaining unpaid at the date of death;
- Loans to finance the acquisition, maintenance or enhancement of excluded property; and
- Loans to finance the acquisition, maintenance or enhancement of relevant business property or agricultural property.
The draft legislation is currently being reviewed by Parliament, and it is anticipated that amendments will be made at report stage before any of the provisions become law.
We are keeping matters under review, but it is likely that many will need to review their debt position to see whether they will be allowable in the future as deductions for the purposes of inheritance tax.
(b) Limited Liability Partnerships
LLPs are a popular vehicle for professional practices due to their flexibility for allocating profit and ownership, with the benefit of limited liability. Corporate LLP members have also been used to structure partnership capital requirements and to defer compensation.
HMRC feels that tax revenues have been lost because of the difference in tax rates applicable to companies and individuals and a consultation on the tax treatment of LLPs and partnerships was launched on 20 May 2013, with a focus on the self-employed status of LLP members and profit and loss allocation schemes. Any legislation is likely to take effect from 6 April 2014.
- Self-employed status of LLP members
Where individual members would otherwise normally be treated as employed under the terms of their service contract, or where they bear no economic risk and are not entitled to a share of the profits of the LLP, it is proposed they will now be taxed as employees and employer's NICs will be applied to their remuneration.
- Corporate members of partnerships and LLPs - profit and loss allocations
HMRC are also seeking to challenge "mixed partnership structures" (where members include both corporate entities and individuals) where they believe the profit sharing arrangements have been set up to avoid tax, or where the structure appears to have been used to allocate upfront losses to one category of partner with future profits passing to another category.
The proposed changes are wide reaching and are likely to affect commercial structures as well as the tax avoidance schemes the proposed changes are designed to attack.
(c) Inheritance Tax and Discretionary Trusts
On 31 May 2013, HMRC launched a consultation on simplifying the calculation of Inheritance Tax ("IHT") on relevant property trusts at ten-yearly intervals ("periodic" charges) or when assets are transferred out of the trust ("exit" charges). The consultation also seeks views on proposals to align payment and filing dates for these charges and makes proposals concerning the treatment of accumulated income.
The calculation of periodic and exit charges under the relevant property regime involves complex calculations and the time spent is usually disproportionate compared to the tax that is actually payable.
The proposals suggest abandoning the current method of calculation and, instead, splitting the nil-rate band (currently £325,000) between the number of settlements created by the settlor and using a flat rate of 6% for periodic and exit charges.
The proposals will be of particular interest to those who, as part of their estate planning, have set up a number of trusts because the suggestion to split the nil-rate band across the total number of settlements created by a settlor will have a tax impact for future charges on the trusts.
(d) Petrodel v Prest
Mr and Mrs Prest were married in 1993 and had four children. Mrs Prest petitioned for divorce in March 2008. In the course of the financial proceedings, Mr Prest claimed that certain properties could not be transferred to Mrs Prest because they did not belong to him. He argued that the properties belonged to a number of companies, each with their own separate legal personality.
The unanimous Supreme Court decision was that, on the facts presented, the properties were held on bare trust for Mr Prest and that his beneficial interest could be transferred to Mrs Prest.
Although the Supreme Court confirmed the legal principle of the separate identity of companies, they made it clear that that the circumstances in which the corporate veil can be pierced will be very limited, and on the facts of Petrodel, no case to pierce the corporate veil was made out.
The court held that, if a person is under an existing legal obligation or liability, or is subject to an existing legal restriction which he deliberately evades, or whose enforcement he deliberately frustrates by interposing a company under his control, the court may then pierce the corporate veil to negate the advantage that would otherwise have been obtained by the company's separate legal personality.
Shareholders, lenders, insolvency practitioners and auditors may well need to look far more rigorously at corporate property portfolios to establish whether there are competing claims from a spouse, whether it is safe to lend on the security of property held within the company but possibly subject to a trust in favour of the proprietor, and may also feel the need to assess the matrimonial situation generally.