Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on a loan to a company owned by a trust holding overseas property.
‘My client’s mother owned a property in Spain through a company owned by a trust. She is the settlor of the trust, which was established in Jersey. The mother provided funds to the trustees who, in turn, lent the money to a Gibraltan company 100% owned by the trust.
The Gibraltan company then bought an off-plan property near Malaga that the mother used extensively. She also paid the running costs on behalf of the company. Both my client and the mother are UK-domiciled and resident and have been so since birth. My client was also a beneficiary of this trust.
The trust has been terminated and the trustees transferred ownership of the loan to the Gibraltan company and all the shares in the company to my client who then arranged for the letting of the property with the profits remaining within the company.
I understand that there are Spanish tax issues, but is my client liable under ITA 2007, s 731? If so, is this exposure benchmarked by reference to the value of the property owned by the Gibraltan company as a capital payment?
Readers’ help on this matter would be most welcome.’
Query 19,287– Malaga.
Reply by Terry Jordan: refer to the ‘transfer of assets abroad’ provisions in ITA 2007, s 714 et seq.
‘The client’s mother, who has been UK resident and domiciled throughout, settled a trust in Jersey that lent the money to a Gibraltan company which, in turn, purchased a property near Malaga. Several issues arise as a result.
If a professional other than a barrister was involved in creating the trust it should have been reported to HMRC under IHTA 1984, s 218. If the terms of the trust were discretionary or if it was settled after 21 March 2006 the mother’s transfer would have been immediately chargeable for inheritance tax purposes. When the trust was terminated, the trustees made a disposal of the shares to the son and if a capital gain arose it would have been attributed to the mother under TCGA 1992, s 86 and taxed on her, rather than being matched with the capital payment to the son under s 87. An inheritance tax charge would have arisen if the value was within the relevant property regime – this might have afforded capital gains tax holdover relief on an election by the trustees and the son.
The ‘transfer of assets abroad’ provisions are now in ITA 2007 s 714 et seq. Because the son is now the owner of the shares and the rental profits are retained in the company, on the face of it the mother is not liable and the son would be liable only on taking a dividend or other benefit from the company.’
The full article is also available on the Taxation website.
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