GAAR Advisory Panel shuts down 'contrived' trust interest scheme
Tax arrangements using distributions and benefits through trust interests to extract cash tax free are ‘not a reasonable course of action’, according to the GAAR Advisory Panel
11 Dec 2017
In its second-ever published opinion, the panel, set up to adjudicate on the application of the General Anti-Abuse Rule (GAAR) to tax avoidance schemes, issued two 10-page documents detailing its view of the scheme for two taxpayers, the Company and Mr A. Mr A is the sole director of and shareholder in the Company.
As the planning arrangements inseparably involve both taxpayers, the panel’s opinions were issued in substantially the same form.
The arrangements were entered into in 2014. At the time, Mr A owed the Company £460,000. Had that loan remained in place, the Company would have incurred a charge to tax under the loan to participator rules in section 455 of the Corporation Tax Act 2010. Mr A and the Company adopted a planning arrangement brought to them by a Promoter. The planning was designed to allow Mr A to extract cash (or cash equivalent) from the Company with no charge to income tax, and no loan to participator charge or other participator benefits charge on the Company.
The objective of the arrangements was to allow Mr A to receive £500,000 from the Company, £460,000 of which was used to discharge the loan he owed the Company.
Until a 120-year loan from the Trust to Mr A is repaid on his death or the loan is otherwise unwound, Mr A funded the annual income the Company received from the Trust. The Company reflected the right to receive annual income from the Trust as a £500,000 asset in its accounts. The trustees of the Trust had the power to make an outright distribution of the trust assets to the holder of the secondary interest (Mr A’s family trust).
The GAAR Advisory Panel found there is ‘no commercial, non-tax, reason for Mr A and the Company to involve a trust in the desired goal of extracting cash from the Company’.
The Trust and splitting of the Trust interests in this case appears to be ‘designed to manufacture (at no cost other than trust set up costs) an asset that is not a loan and can be sold to a wholly-owned affiliate’, it found.
In addition to the overall use of the Trust and the Trust interests being contrived and abnormal, the panel identified several other aspects of the arrangement as abnormal.
The first was that Mr A bought a trust interest where the only trust asset was intended to be an interest-free loan to himself, with the amount of the loan substantially the same as the purchase price he paid for the trust interest.
He also entered into arrangements for over 120 years where the underlying asset was a loan to an adult individual, with little regard was paid to what happens if the loan is repaid on his death or otherwise before the expiry of that period.
Finally, a contract was drawn up for the purchase of an income stream (the primary interest in the Trust) containing none of the purchaser protections typical in a third party transaction.
‘Using a trust in this way to achieve a commercial goal is both contrived and abnormal,’ the panel found. ‘We are therefore of the view that in their totality the steps involving the Trust and the trust interests are contrived and abnormal.’
Report by Calum Fuller