HMRC is issuing Accelerated Payment Notices to companies and individuals who have undertaken tax planning such as those that feature Employee Benefit Trusts. Though the planning arrangement may still be subject to future litigation and has a good chance of being successfully defended through the courts, some businesses may decide they wish to settle with HMRC.

Client Challenge

Our client is the director a UK company, which undertook Employee Benefit Trust (EBT) planning some years ago. He was the beneficiary of one of the Employee Benefit Trust sub-trusts. His sub-trust owned the shares of an off-shore company which was loaned monies by his sub-trust to purchase UK property.

Our client wanted to repatriate the property held off-shore to the UK for a number of reasons. Firstly, he could not access the rental profits without incurring a tax charge. Secondly, he was having trouble with off-shore mortgage lenders and was incurring annual trustee’s fees and, finally, the off-shore company was subject to UK income tax under the non-resident landlord scheme.

He asked us to consider how the UK property held off-shore could be repatriated in a tax efficient manner.

How did Bedrock help?

The Bedrock team investigated a number of options for our client. The most tax beneficial way of repatriating the assets involved negotiating a part-settlement with HMRC in respect of the client’s sub-trust. Our team managed all aspects of the part-settlement negotiations. The sub-trust assets were then distributed to the client.

Our team applied for tax clearances from HMRC to restructure the off-shore company such that it became a subsidiary of another UK property investment company wholly owned by the client. The property was then transferred to the existing UK property company and the off-shore company was struck off.

As part of the process the Bedrock team liaised with the trustees, the client’s accountant and both UK and off-shore lawyers in connection with all of these transactions.

Business Impact and Benefits

Our client was able to repatriate the property to the UK and hold it in an existing UK property investment company. As a consequence of our restructuring, the UK company owed our client an amount equal to the original allocation to his Employee Benefit Trust sub-trust. This will allow our client to enjoy a full deduction for mortgage interest and to extract the rental profit tax free via his director’s loan account. 

Financial benefits

As part of the Bedrock team’s part-settlement negotiations, the company will no longer be litigated against nor receive an Accelerated Payment Notice in connection with the EBT amount allocated to our client’s sub-trust. The income tax arising on the distribution of sub-trust assets was reduced by relief for the amount taxed as earnings under the part-settlement with HMRC. Mr B’s sub-trust was closed which put an end to annual trustee’s fees thereby making a financial saving.

There were no tax consequences of the post-settlement restructuring. Careful consideration of assignment of the loan balance transferred to the client means he is able to enjoy tax free extraction of rental profits. Finally, by structuring the property within a company has meant our client is not caught by the 2015 Summer Budget changes to relief for finance costs for individual property owners.

Contact our team today for advice on paying tax owed to HMRC in relation to Employee Benefit Trusts or other tax planning structures.

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