Summary of recent private client and Entrepreneurial Business direct tax cases – summer 2019

Tue 15 Oct 2019

This article summarises a number of recent private client and entrepreneurial business tax cases. For a further discussion of the implications of these cases for your circumstances, please get in touch with a member of the Mazars personal tax or corporate tax teams.

Rebates of investment fund annual management charges by brokers are annual payments subject to deduction of income tax at the basic rate

The Upper Tribunal UT in Hargreaves Lansdown has held that loyalty bonuses for private investors (a rebate of the annual management charge routed from the investment manager through Hargeaves Lansdowne to the private investor) was an annual management charge subject to deduction of income tax at the basic rate and not a rebate of investment management charges.

Those private clients who have not declared this income on their self assessment tax returns will need to amend any incorrect tax returns and ensure future tax returns include these rebates.

Financial services businesses might want to review their contractual terms regarding rebates and bonuses, to confirm that the contractual terms match the substance of the arrangements and that the business tax issues are correctly dealt with.

SDLT case on garden and grounds of a residence

In the case of David and Sally Hyman, the FTT held that a barn, meadow and bridleway, forming part of the appellants’ 3.5 acre property and not used by the appellants for private or recreational purposes, nevertheless constituted part of the garden or grounds and the property was thus wholly residential. 

HMRC’s latest guidance on the scope of garden or grounds for SDLT was covered in TTH recently (see a Mazars Blog here). The distinction between garden and grounds and non-residential property is important for SDLT as non-residential SDLT rates and SDLT rates for mixed use properties can be significantly lower than for residential property.

Entrepreneurs’ relief and disposal of trust assets

In the case of the Quentin Skinner 2005 Settlements L, R and B, The FTT has held that entrepreneurs’ relief is available on the sale of shares in which a beneficiary held an interest in possession for less than 12 months, but where that individual otherwise met the conditions for shares in the company being his personal company for the required 12 month period (the disposal was in 2015). HMRC tried to contend that the legislation required the beneficiary to be a ‘qualifying beneficiary’ for a full 12 month period, not just at the date of sale.

As the decision in this case goes against HMRC’s interpretation, it will be interesting to see whether the case is taken further.  Those who have been denied entrepreneurs relief on similar lines to the issues argued in this case, may like to review their position.

Whether a company was a trading company for the purposes of entrepreneurs’ relief

The FTT case of Jacqueline and Neil Potter examined whether a company through which an LME metals trader operated, was a trading company in a period when it only had income from investment bonds with a six year term, and when the expenses were relatively minor. The FTT found in favour of the taxpayers but the case is very fact specific.

The company’s income from metals trading and advisory fees ceased in 2009. Despite the effort of Mr Potter over the next six years, and following the 2008 financial crisis, he was unable to obtain new business. During this period he suffered from a number of health and personal problems. The company was wound up using a members’ voluntary liquidation in 11 November 2015. HMRC contented that the company effectively ceased trading in March 2009, and even if there were trading activities after this, those activities were not sufficient to indicate the company’s business was not substantially non-trading.

While the facts of this case are quite specific, the FTT’s examination of what ‘substantial’ is (paras 64-86 of the decision) in determining whether activities are substantially trading or not, is useful.

Offshore trust set up to hold shares in a company as part of an exit strategy did not trigger a transfer of assets abroad charge

In the case of Rialas, the FTT has held that Mr Rialas was not a transferor for the purpose of the transfer of assets abroad legislation. He set up a family discretionary trust in Cyprus to hold the shares of his business partner through an intermediary holding company. This was in the context of an exit plan for the company in which he also held shares. The offshore trust holding company received £2.73m dividends before the company was sold and made a significant gain when the underlying company was sold.

It had not been necessary for the FTT to consider the motive defence to reach its decision. However, it considered this anyway. Although the sale of the company was completed in 2007, the FTT considered that a motive of seeking to avoid IHT using an offshore trust would constitute seeking to avoid a tax liability for the purpose of the transfer of assets abroad legislation and so the motive defence was not available.

Where individuals are setting up offshore business or investment structures, it is important to consider whether the transfer of assets abroad anti-avoidance legislation could create a UK tax charge.