Where an asset is purchased with company money in the name of one of the director shareholders this can give rise to a charge to tax as a distribution. Alternatively, it could be treated as a loan to a participator giving rise to a charge to tax under s419, ICTA 1988 in addition to tax as a benefit in kind as a beneficial loan. However, there may be another analysis: that the asset belongs to the company and is merely being held by the director as constructive trustee. On this basis no tax liability would arise on the director (other than the possibility of a benefit in kind if the asset is used by him or his family). The asset would be shown in the company's accounts together with any income arising, which would belong to and be taxable on the company.

The recent case of re Ciro Citterio Menswear Plc [2002] EWHC 662 (Ch) reviewed these principles in the context of an insolvency (see also p84). A house had been purchased with company money in the name of a director shareholder and the administrators of the company claimed title to the property on the grounds that it was held as constructive trustee for the company. Alternatively they claimed that the transaction was a loan; such a loan would be unlawful under s330, Companies Act 1985 and that itself gave rise to a constructive trusteeship of the property. The company had some other arguments as well under the Insolvency Act 1986.

The first argument failed because, on the facts, a constructive trust did not arise; the evidence showed the transaction to be a loan. The second argument failed because a loan to a director is not void, it is merely voidable at the instance of the company, and property in the money paid under the loan passes to the borrower. When the loan is avoided, an obligation arises for the money to be repaid forthwith, but that is not by reason of a constructive trust. The court confirmed that a misapplication of company money can give rise to a constructive trust, but not necessarily in every case.

This is obviously a principle that can have an important application to the tax implications of a transaction - although the decision in Ciro Citterio can be contrasted with the case of In re Duckwari (no. 2) (1998). In this case a constructive trust did arise in respect of a transaction in contravention of s320, Companies Act 1985 (substantial transactions involving directors), presumably on the basis that this was a type of misapplication of company funds that did give rise to a constructive trust - notwithstanding that s320 does not in terms make the transaction void, but merely voidable.

It has recently been suggested that where individuals have holiday homes abroad held through local companies (which is standard practice in France, Spain and Portugal to ease the administrative arrangements on disposal and unexpected results on a death) such properties could be within the charge to income tax under ss145 and 146, ICTA 1988 on the grounds that the individual is a shadow director.

For UK inheritance tax purposes it is clearly advantageous for a property in the UK owned by a foreign domiciliary to be held by a company incorporated abroad. The shares in the company would be foreign property and outside the scope of inheritance tax. This is greatly to be preferred to the direct holding of the UK property, which would be within the charge to UK tax as being situated in the UK.

However, the income tax disadvantage of introducing a company in this way can be severe. The UK resident individual will in many cases be a shadow director (being a person in accordance with whose directions or instructions the directors of the company are accustomed to act). In such circumstances the individual will be treated as an employee and the use of the property regarded as a benefit in kind calculated at 5% of the cost of the property over £75,000. Accordingly, the income tax implications of this structure can easily outweigh the inheritance tax saving.

The impact on foreign properties is more complex because of the considerable uncertainty whether foreign properties are within the scope of ss145 and 146 at all. Powerful arguments exist that these sections are limited to land in the UK, but unfortunately these arguments are completely ignored by the Inland Revenue Manuals which simply assume that there is no distinction between properties in the UK and properties abroad.

The matter has arisen again recently because of suggestions that a French property company, a société civile immobilière should be avoided because the Inland Revenue's traditional view that such a company should be regarded as transparent may no longer apply. The Revenue's Tax Bulletin 50 contains a statement that it now regards such a company as opaque. It may therefore be necessary to arrange the structure more carefully to ensure that the benefit in kind provisions do not apply to such property.

Peter Vaines is a partner in Haarmann Hemmelrath