Now the dust has settled following publication of the 30th October 2024 budget, Kevin Prosser KC and David Yates KC give their thoughts on certain aspects of the budget, looking at important changes to CGT and IHT, and against the backdrop of the GAAR (general anti-abuse rule).

Kevin and David's discussion covers:

Capital Gains Tax (from 2.17 minutes)

• new anti-forestalling provisions
• unconditional contract planning and the use of overseas entities
• investors' relief in respect of gains on sale of shares in listed companies
• pilot trusts
• the consequences of the transfer of assets when limited liability partnerships become body corporates (s59A and s59AA TCGA)
• employee ownership trusts (ss236H - P of TCGA 1992)

Inheritance Tax (from 25.21 minutes)

• employee benefit trusts
• Post 6 April 2026 tax planning (partnerships, reorganising share capital) now APR and BPR has been reduced
• actual domicile/domicile of choice

The implications of the budget on "non doms" will be discussed by James Rivett KC and Emma Chamberlain in a separate podcast.

Cases and legislation referred to

WT Ramsay Ltd v IRC [1982] 2 AC 300

Rysaffe v IRC [2003] EWCA Civ 356

Barker v Baxendale Walker [2017] EWCA Civ 2056

Finance Act 2020

Finance Bill 2024

Inheritance Tax Act 1984 (in particular ss 13, 28, 86)

Taxation of Chargeable Gains Act 1992 (in particular ss17,18, 28, 59A, 59AA, 236H - P)

Laura 0.09

Welcome to Pump Court Tax Chat podcast series brought to you by the Barristers of Pump Court Tax Chambers. We are the largest UK tax set and our podcasts aim to give you insight into recent developments in tax law and procedure. Across the series, we'll look at a range of topics covering issues that arise both in disputes and in advising clients more generally.

Laura 0:29

All of the cases and legislation mentioned in a podcast are set out on our website in the listing for that particular recording. If you have any questions, please do contact one of our staff team. You can find their details on our website, PumpTax.com.

Kevin 0.52

So this is a podcast between me, Kevin Prosser and David Yates, both of Pump Court Tax Chambers. And what we thought we would talk about was something to do with the budget, but a bit more interesting than just this is what the budget says, along the lines of, thoughts we've got about certain aspects of the budget.

David 1.12

Yeah, Kevin didn't really want to talk about double cab pickups. So we're going to talk mainly about some of the capital gains tax changes and inheritance tax changes.

David 1:30

Since you are listening to this podcast, I imagine that you already know all about the tax changes on the 30th of October budget. You may even have read the finance bill published on the 7th of November. That being so, the aim of this podcast is not to tell you what the changes are, but instead to discuss the implications of some of those changes.

David 1:51

Some of those changes, I would emphasise, not all of them. This is partly because there are some very technical and detailed changes, brackets, very boring, which are not really amenable to a podcast. And also because Emma Chamberlain and James Rivett are going to do a podcast later this month, which will focus on the details of the non-DOM changes. So we're going to steer clear of those details.

Kevin 2:13

So we are first of all going to discuss some changes to capital gains tax that were announced in the budget, and indeed are in the finance bill. Now, as you probably know, the rates of capital gains tax are going up for gains accruing on disposals, which take place on or after budget day.

The lower rate from 10 to 18%, the higher rate from 20 to 24%. And there are anti-forestalling provisions, which are designed to prevent taxpayers from taking advantage of Section 28 of the TCG Act in order to obtain the previous rates.

David 2:51

And I think just pausing there, Kevin, those aren't no ordinary forestalling provisions, they're extra special ones.

Is that right? Not to go ahead too fast.

Kevin 2:59

You are jumping ahead, David, as I suspected you might do, but never mind. Let's take it stage by stage.

So as you probably also know, Section 28 provides that where an asset is disposed of and acquired under a contract, the time of the disposal and the acquisition, instead of being when the asset is actually transferred, is either when the contract was made or if the contract was conditional, when the condition was satisfied. Now we won't worry about conditional contracts. We're going to focus on unconditional contracts.

Kevin 3:33

David 4:09

And just pausing there, Kevin, that was quite a classic strategy for previously anticipated changes in the rate of capital gains tax.

Kevin 4:16

It was. And indeed, the government or HMRC knew about that because there have been previous examples of these sorts of anti-forestalling provisions.

So the finance bill does contain an anti-forestalling provision, which prevents advantage being deliberately taken of Section 28 by means of what we can call unconditional contract planning. That is, for the purposes of determining at what rate the gain is taxable, you must dis-apply Section 28 and therefore treat the disposal as taking place when the transfer occurred on the 1st of November, i.e. after Budget Day, unless the contract is what's called an excluded contract, which is defined as a contract which wasn't entered into to take advantage of Section 28. And also if the parties to the contract are connected, was entered into for wholly commercial reasons.

So if you were trying to take advantage of Section 28, that is not going to be an excluded contract, so you're caught.

There are similar anti-forestalling provisions which apply in relation to other CGT changes. So for example, the reduction in maximum investors relief from CGT down from 10 million to just 1 million for disposals on or after Budget Day, and the increase in the rate of CGT where the investors relief or business asset disposal relief is available from 10% to 14% for disposals on or after 6th of April 2025, and 18% for disposals on or after 6th of April 2026.

David 5:44

Kevin 6:01

Yeah, so it is reasonable to expect legislation which changes capital gains tax rules for the worse from the taxpayers point of view, from a specific date, to include these anti-forestalling provisions.

But, and this is the sort of interesting point if it hasn't been interesting so far, it is worth bearing in mind that there is no general rule that you can't carry out unconditional contract planning to take advantage of Section 28.

But apart from trying to avoid CGT changes applying to your disposal, why would you, for example, carry out unconditional contract planning?

I think you could do so wherever you'd be better off in capital gains tax terms if the date of disposal is now, rather than a date in the future. Let me give a couple of examples.

First, you might want to fix the date of disposal to ensure that conditions for relief are satisfied which might not be satisfied in the future. So, to qualify for investors relief, get into a bit of detail here, but just as an example, the shares which are disposed of have to be qualifying shares immediately before the disposal. And one of the conditions for a share to be a qualifying share is it must be an ordinary share immediately before the disposal.

Another condition is at no time during the period from the date when the shares are issued to immediately before the disposal was the investor or a person connected with him a relevant employee as defined. Now, if either of those conditions is likely to be failed in future, the investor might consider entering into unconditional contract now. Secondly, a bit more interesting, you might want to fix the date of disposal in order to ensure that future increases in value are not brought into charge to capital gains tax.

For example, suppose you've got a UK resident company which owns an asset which was acquired for 100 and is still valued at about 100. The UK company enters into a contract now to sell the asset to a non-UK resident member of the group on a future completion date for a price equal to the market value of the asset as at that future completion date. Now, suppose three years later when the asset has gone up from 100 to 500, it's decided to sell the asset out of the group.

The contract is completed, the UK company sells the asset to the non-UK member of the group for a 500. Now, because those two companies are connected persons, section 18 applies to the disposal to be for a consideration equal to the market value of the asset. Now, at what time do you determine the market value of the asset? I would say it's at the time of the disposal, which section 28 tells you is when the contract was entered into on day one.

Kevin 8:46

And so, the consideration for the disposal is 100 even though the actual sale price is 500. The result is that no gain accrues to the UK company.

Okay, but what about the non-UK company? Sections 18 and 28 apply to it too.

So, is it deemed to acquire the asset for 100? And when it sells the asset out of the group for 500, it will make a gain of 400?

Yeah, I think that's right. Those sections apply to both the companies, the UK company and the non-UK company acquiring the asset. But that won't matter provided that the non-UK company isn't a close company for the attribution provisions in section three, or even if section three is in point, if a double tax treaty applies to prevent the UK from being able to tax the non-UK company's gain.

So, you're not worried about the fact that the non-UK company has in effect inherited the 400 gain.

You obviously have to consider the non-UK company's overseas tax position, but maybe there's no equivalent of section 28 in the overseas jurisdiction.

Yeah, that's something you need to check.

Nice little point. But I suppose you'd also have to consider whether Ramsay would apply. Again, I suppose you wouldn't have to worry about that overseas, unless there's an analogous rule. And also, I suppose, at least for the UK, whether the GAAR applies.

Yeah. I mean, in terms of Ramsay, I suppose the issue would be whether for some reason it could apply to treat the UK company as disposing directly to the third party purchaser rather than to the non-UK company. But on the basis that when the contract with the non-UK company was in place, there wasn't any third party purchaser, I'd have thought it's quite difficult to apply Ramsay. As far as the GAAR goes, well, okay. Do you think the GAAR applies? I would say relying on section 28 is not sort of some sort of loophole in the legislation. It is a fundamental feature of the legislation. So, it's legitimate to take advantage of it.

I agree. This does seem to be just part of the hard mechanics and they're going to be harsh cases or uneconomic cases either side of that line.

Yeah. And then the final point, I suppose, is that same planning is possible, I think, for an individual taxpayer.

So, if you've got an individual who acquired the asset for 100 and is worried about it going up in value and wanting to shelter the gain, they could enter into a contract with an overseas relative, subject obviously to their own tax position. But it's the same analysis that the contract is entered into today when the asset is worth 100 and so the disposal proceeds through 100 and not the actual market value at completion of 500. And that's so even though the UK individual receives 500 from the overseas relative.

If you haven't got your overseas relative, then what about an offshore trust as the acquirer? And you may say, well, hang on, what about sections 86 and 87? But interestingly, how would they apply if the price is 500? First of all, 87 shouldn't apply, there's no benefit that's coming out because you're simply getting all the money from the trustees. Section 86 needn't apply because you don't need to get a benefit from the trustees. So, you could have a trust from which the settlor and all other relevant people are excluded. So, there's a bit of thinking there.

But what about sort of on a basic sniff test? I mean, if the revenue wanted to have a crack at this, the GAAR probably is the wrong tool for them to use. But could they Ramsay-away the contract entirely or perhaps try and argue it's a sham? I mean, those would probably be conventional, at least on by historic standards ways of trying to challenge this planning.

They could argue it's a sham, they could argue that it's actually a conditional contract in reality, that there's a nod and a wink or something. And whether that works depends on the facts really, I suppose. As reGAARds Ramsay, I mean, you could obviously do it better or worse depending on, for example, whether you complete the contract before a third party is actually lined up. That would make it very strong, I’d have thought.

And you mentioned that the maximum amount of investors relief from CGT, which can be claimed in respective gains accruing on a disposal of qualifying shares in an unlisted company is now 1 million rather than 10 million. But is it worth bearing in mind that the taxpayer and his or her spouse and other members of their family all have that 1 million of relief available? Indeed, you could make the point that trustees of any number of interest and possession settlements made by the taxpayer provided, of course, that each settlement has a different eligible beneficiary, that is a person who has a right to the trust income, if any, and who is not an employee of the company.

Okay, so what you're saying is, although we've now got a rule that says you get a maximum of 1 million investors relief, you could actually form any number of settlements, each with a different eligible beneficiary or whatever it's called, and get multiples of 1 million. What do you think about the smell test there?

Well, the case that immediately springs to mind there is Rysaffe. You remember all the pilot trusts, and what the revenue did try and attack that planning on was to say, well, that's actually all one settlement.

But the outcome of that decision, and it's now long been accepted, is that settlement in that legislation, at least, meant settlement as a matter of trust law. There wasn't some sort of free floating fiscal concept would be for the purpose of the legislation. So, I think in terms of the appetite for taxpayers to do that sort of planning, it's probably a matter of degree rather than there's a binary answer reGAARdless of the facts.

That would be my view.

Okay, I'd agree with that. So then the next capital gains tax change we thought we would discuss concerns Limited Liability Partnerships, LLPs.

Now, you may remember section 59A of the TCGA. Subsection 1 of that says that where an LLP carries on a trade or business with a view to profit, the assets held by the LLP are treated for gains tax purposes as held by its members as partners. So, in effect, the LLP is transparent for gains tax purposes.

What you might not remember is subsection 4 of 59A because that provides that subsection 1 ceases to apply in various events including on the appointment of a liquidator, which means that if that occurs, the LLP is no longer transparent and so it's treated as a body corporate which it is, therefore a company, which owns its assets. And as far as the members are concerned, the members of the LLP, their interests in the LLP are also treated as assets for gains tax purposes. Indeed, subsection 5 of 59A acknowledges that following the appointment of a liquidator, the LLP is taxable as a company in respect of gains accruing on the disposal of its assets and the members are taxable in respect of gains accruing on the disposal of their capital interest in the LLP.

Finally, we have subsection 6 which says that the cessation of the application of subsection 1 shall not be taken as giving rise to a disposal of the asset by any of the members.

Now, I think I remember seeing planning like this kicking around maybe in the early 2010s, certainly that's my memory.

Okay, yeah, you're right. So, in the past, people took advantage of those provisions in the following way and I'm just going to set out five steps. You've got to imagine that a taxpayer starts out owning an asset which is pregnant with gain. It's possible that actually the asset's already in an LLP which simplifies it a bit but let's just take the sort of most aggressive version where the taxpayer starts out owning the asset.

Step one then is the taxpayer forms an LLP of which he's a member with 100% capital profit share. Step two, he sells the asset pregnant with gain to the LLP for a price equal to the market value of the asset which is left outstanding. Now, if we stop there, provided that the LLP does genuinely carry on a business with a view to profit, subsection 1 of 59A applies.

So, the sale of the asset to the LLP at step two is a non-event for capital gains tax purposes because the taxpayer owned it before and he's treated as owning it after. The LLP is transparent and so, as I say, it's a non-event. Then step three, a liquidator is appointed, maybe not immediately after step two, sometime after.

We know that subsection 1 of 59A ceases to apply and now the LLP is deemed to be a company which owns the asset.

So, let's stop there, just keeping my eye on the ball. The taxpayer is no longer deemed to own the asset but subsection 6 says they're not taken as essentially disposing of the assets when subsection 5 is engaged.

So, the LLP company in speech marks has now acquired the asset and the question is, well, what's the consideration?

First of all, section 18 doesn't apply to deem the LLP company to acquire the asset for a market value consideration because there is no disposal. We're told by subsection 6 there is no disposal. What about section 17? The LLP company has acquired its asset otherwise than by way of a bargain at arm's length.

So, on the face of it, section 17.1 applies to deem the LLP company to acquire for market value. However, 17.2 says subsection 1 doesn't apply if there is no disposal and there is no consideration for the acquisition or the consideration is less than market value.

Okay. So, we agree there's no disposal by the individual who sold the asset or indeed when the LLP becomes a company. But when one is looking at the position of the company, can it be argued that reGAARdless of whatever deeming has occurred in the past, when you're asking the question now, did it acquire the asset for consideration? Well, the answer is yes, it's the amount payable at step 2.

Yeah, we know it's acquired it and we know that in fact, it agreed to pay for it. I think you put those together and say, yes, there is consideration.

So, on that basis, the LLP company now owns the asset and its base cost is the amount which was agreed to be paid at step 2, which is still an outstanding debt. So, if we then move on to step 4, the LLP company transfers the asset back to the settlor in settlement of the debt.

Yes. Okay. So, stopping there, that is definitely a disposal of the asset by the LLP company and an acquisition by the taxpayer and I suppose they're connected. So, section 18 would apply.

So, there is a deemed consideration equal to the market value of the asset at that point. So, one sort of disreGAARds the outstanding debt as being the consideration. Instead, one applies market value.

The company has made no gain on that disposal, however, unless the value of the asset has increased since step 2.

Yeah, I think I agree.

As to whether there's going to be a gain, that's largely going to depend upon how long the gap is between the appointments of the liquidator and any eventual sell back by the LLP.

Whether there's an increase in value in the meantime, if it's a fairly short period, then that may be unlikely.

Yeah. So, I agree with that. And then finally, we come to step 5, where the taxpayer sells the asset to a third party and the taxpayer makes no gain on that disposal because as we've just seen, he acquired it for market value at step 4 unless, of course, there's been an increase in value between step 4 and 5.

Okay. I mean, I can see that it's a good scheme of principle. It does seem a bit 1990s in flavour, if I may say that. It only works if the LLP genuinely carries on the trade or business with a view to profits and, and it's a big and, if the Ramsay principle doesn't apply to require the transactions to be ignored.

And furthermore, what about the GAAR? Because I can see the GAAR in relation to subsections 5 and 6 might have something to say about the planning.

Okay. Looking at the Ramsay principle, would you agree with me that if instead of steps 4 and 5, where the liquidator transfers the asset back to the taxpayer who then sells it, instead of that, the liquidator himself or herself sells the asset to a third party and then applies the proceeds of sale in paying off the debt that's owed to the taxpayer? Do you think that would help?

It certainly smells less, I think is what I'd say.

Right. If you think it is a good scheme, then it continues to be one if the liquidator was appointed before budget day. But if the liquidator is appointed after budget day, then a new section 59 AA applies.

Well, it applies where a member of an LLP contributed, that's the word in the section, an asset to the LLP in circumstances where 59 A1 applied. And the LLP disposes of the asset to the member or a person connected with him in circumstances where 59 A1 has ceased to apply. In that case, the asset is deemed to have been disposed of and reacquired by the member immediately before it was contributed to the LLP.

It's deemed to be for a consideration equal to the market value of the asset at that time, although any chargeable gain or allowable loss is deemed to accrue later when the asset is actually disposed of by the LLP.

Okay. So I suppose the taxpayer, if you're looking at this purposefully, must be taken to have contributed in speech-marks the asset to the LLP within the meaning of the new section, even though he or she sold it to the LLP for full market value.

But the new section doesn't seem to apply at all to the variants whereby the liquidator sells the assets to the third party and pays the proceeds of sale to the taxpayer in payment of the outstanding debt.

I don't know why that is really. I mean, it may be that HMRC thinks that that variant doesn't work. If so, I'm not sure why. It may be they're not aware of that variant, although that's one I was aware of back in, it's not quite as long ago as the nineties actually. But now that we've got the new section 59 AA, I think any variant which isn't actually caught by the section would be much more likely to be caught by the GAAR. Would you agree with that?

I agree. I think the new legislation is very much a keep off the grass type indicator, which definitely is a relevant consideration to take into account when thinking about the GAAR.

But there is the grandfathering aspect of the GAAR. So if any of those steps, even step one was taken before budget day, it may be the GAAR wouldn't apply.

Maybe, but then the revenue can still have other weapons in their arsenal to try and tackle it.

Fair enough.

There is another CGT change that is worth mentioning. It concerns sections 236H to 236P of the TCGA 1992, which provides that disposals of shares to certain employee ownership trusts are deemed to take place at no gain, no loss rather than for market value consideration. One of the quite generous features of the former rules was that trustees of the EOT, i.e. the Employee Ownership Trust, could be non-resident and therefore not only could CGT be avoided on disposals of shares to the trustees, but also on the sales of those same shares by the trustees.

But that generosity has now been withdrawn. Henceforth, trustees must be UK resident in order for the no gain, no loss treatment to apply. There are other changes as well.

In particular, the trustees of the EOT must be independent as defined. And there is also a new condition that the trustees must have taken all reasonable steps to secure that the consideration for the disposal does not exceed the market value of the shares. And that the rate of interest payable in relation to any deferred consideration does not exceed a reasonable commercial rate.

That change must have been made in light of some sort of scheme or other, which there are lots of conditions for those sections to apply as to who could be beneficiaries.

There are.

But if you sell for more than market value, then you're going to get a lot of benefit out. And that change must be with that sort of idea in mind, I think.

Yes. Surprising sort of hole in that legislation, given how prescriptive it is in some respects. But there we are.

Okay. So still on the topic of employee trusts, we wanted to discuss some changes made to the IHT rules reGAARding employee benefit trusts.

Now, you know that the Inheritance Tax Act makes a number of special provisions for EBTs. First of all, you've got the section 86, which if the settled property falls within section 86, you don't have the 10-year anniversary charges. Section 86 trusts are trusts where for the time being, the trust property cannot be applied except for the benefit of basically employees and members of their family.

Persons of a class defined by reference to employment by a trading company and their relatives. And that the class must comprise most of the employees. So there's sort of a negative condition that the trust property can't be used otherwise than for members of that class.

Secondly, the exit charges to IHT, settled property, don't apply where section 86 ceases to apply by virtue of a payment out of the settled property, except where the beneficiary who receives the payment, either is a settlor or the employment in question, you know, by reference, which the class of beneficiaries is defined, is by a close company and the beneficiary is a 5% or more participator, or is connected with such a participator.

The third one is you've got section 13 of the Act, which provides that a disposition by a close company to trustees of a trust to which section 86 applies, is not a transfer of value, so no IHT, if the beneficiaries include all or most of the employees of the company or a subsidiary of the company. But then there's a proviso that the trust mustn't permit certain persons, who I'll call excluded persons, to benefit from trust capital at any time, although they are permitted to receive trust income, and I'll call that the income exception.

Then the fourth one, which has some similarities with section 13, is section 28. That provides that if an individual who's beneficially entitled to shares in a company makes a transfer of value, and the value transferred is attributable to shares or securities in the company, which become comprised in the settlement to which section 86 applies, the transfer is an exempt transfer, so again no IHT, if the beneficiaries include all or most of the employees of the company, and at the time of the transfer, or within one year after that, the trustees have voting control of the company. Again, there's a proviso, the trust mustn't permit what I've called excluded persons to benefit from the trust capital, and again you've got the income exception to that.

Now, currently, subject to the finance bill, both sections 13 and 28 have the same definitions of what I'm calling excluded persons, and in particular a person is an excluded person if he's a five percent participator in the company, or was in the past 10 years, or is in future such a participator, or if he's connected with such a participator.

Now I remember a recent case about section 28 which went to the Court of Appeal called Barker v Baxendale Walker. I was actually, for the revenue, lurking in the background on that case, watching with interest, but the actual Court of Appeal decision was a professional negligence claim, but during which the Court of Appeal had to adjudicate upon the meaning of section 28.

Now, Mr. Barker was advised to settle his shares on EBT trusts on the basis that no IHT would be payable because the exemption in section 28 would apply, and he was advised that members of his family could benefit from the trust after his death on the basis that they would not, at least at that point in time, be excluded persons. That is, they would not then be connected with him as a five percent plus participator because he would, by definition, be dead. In other words, he was advised that the time to determine whether someone is connected with a participator, and therefore is an excluded person, is in the future.

When a benefit is to be provided, not on day one when the shares are settled. The Court of Appeal held that the advice was negligent because Mr. Barker had not been warned of the risk of HMRC arguing that the correct construction of section 28 is that the time to determine whether someone is connected with a participator, so as to be an excluded person, is on day one, and that that argument was probably correct. Indeed, Lord Justice Henderson expressed the view that the time to determine was at day one and at any time thereafter.

And that brings me to the budget changes. Sections 13 and 28 are both amended, so as, first of all, to provide that the time to determine whether a person is excluded as being connected with a participator is at day one or any later time. So, in other words, adopting what Lord Justice Henderson said. Secondly, the income exception in Sections 13 and 28 is tightened up, so it doesn't apply if immediately after day one more than 25% of what are called relevant beneficiaries are excluded persons.

And for this purpose, a person is a relevant beneficiary if they can benefit from income or capital and they're an employee of the company. So Section 28, for example, still applies if at least 75% of beneficiaries who are employees are not excluded persons. But this is a day one test only and those relevant beneficiaries don't have to receive any benefit, so provided the test is satisfied on day one, excluded persons can receive income.

And then finally, so far as IHT and EBTs are concerned, Section 28 is also amended to require the individual transferor, who's claiming that the transfer value is exempt, to have been beneficially entitled to the shares or securities throughout the period of two years ending with the transfer. There wasn't a period of ownership before, now there's a two-year period. Now, having mentioned all those changes, what I think is important is that although Section 13 and 28 have been amended, Section 86 itself has not.

That's important, I would say, because it occurs to me that EBTs falling within Section 86 might be an effective IHT structure, where you've got an individual who is going to become what's called now a long-term UK resident, who wishes to provide for his spouse, children and remoter issue and is prepared to be excluded from benefit. That is, what the individual might do is establish a company, perhaps an offshore company, which carries on a trade, it could be a relatively small trade. He would be a director of the company and own all the shares in the company.

At the same time, he settles assets situated outside the UK on offshore discretionary trusts for a class of beneficiaries defined as all the employees and directors of the company, excluding himself, of course, and their relatives. So, because his spouse and children and remoter issue are relatives of him, who's a director, they all qualify and it's a Section 86 trust. Now, no IHT is chargeable on settling the assets because he's not yet a long-term resident of the UK and so the assets are excluded property.

Once he becomes a long-term UK resident, the settled property is no longer excluded property, but the trusts are within Section 86. So, there are no 10-year charges, no exit charges in respect of payments of capital, because the recipient beneficiaries will not be 5% participators. They may be associates of participators, but that doesn't matter for the purposes of there not being an exit charge. As I've mentioned, the settlor owns all the shares.

What if the individual is already a long-term resident?

Well, that's a lot more tricky then, isn't it? Because he can't settle the assets at a time when they're excluded property. So, he's going to have to do something like take advantage of Section 28 to get assets into the Section 86 trust.

Section 28 has now tightened up and that's going to be pretty difficult. Although I would say not impossible, but it's going to be much more difficult.

And for people who aren't long-term UK residents yet, I mean, in terms of what the revenue challenge that might be, it's quite hard to see how Ramsay would work in the context where you have all these quite prescriptive rules.

And ditto, you would say that the GAAR won't apply because Parliament's made a deliberate choice as to which bits it's tightening up. And it can be taken that it's decided not to tighten up Section 86 for these purposes, notwithstanding the changes it has made elsewhere.

So, you've got lots of provisions, gains tax provisions, income tax provisions, which give special tax treatment for certain types of employee trust. But there are very tight prescriptions about who can qualify and so on and so forth. So, you've got that tightening up also for 13 and 28.

And the point I'm making is not for 86.

Yeah. Okay. Still on the topic of inheritance tax, we know that as from 6th of April, 2026, the existing 100% rates of APR and BPR relief will continue for the first 1 million of combined agricultural and business property. And thereafter, the rate of relief will be 50%. And in this connection, each individual will qualify for their own 1 million pound allowance so that a husband and wife will have a 2 million pound allowance between them.

But any unused allowance will not be transferable between spouses. And the 1 million allowance will also apply to settled property. That is each trust will have its own 1 million allowance except for trusts set up on or after budget day.

Yes. For example, you'd have to decide, does the business in question actually qualify for BPR? Is it actually an investment business so it doesn't qualify? There have been quite a few recent FTT cases where particularly land-related businesses, even if carried on actively, have been held not to qualify.

And in relation to farms and farmland, consider creating a partnership so that partnership interests can be given away to the children when they have an initial low value, and again, in such a way that the reservation of benefits provisions do not apply.

So all that traditional planning involving partnerships, involving reorganising share capital, that might come back more into fashion now that BPR and APR is being capped.

The final topic we wanted to discuss concerns the issue of domicile, that is actual domicile rather than deemed domicile.

Secondly, as you know, the Temporary Repatriation Facility, the TRF, will allow foreign income or gains which were taxable on the remittance basis to be remitted at a reduced rate during a three-year window. And for this to apply, the client must claim the TRF in their return and specify the foreign income and gains in question. At that point, HMRC will see how much is being claimed.

And if it is a large amount, may be tempted to argue that the TRF is not available because the income or gains in question were not taxable on the remittance basis at all, because the client had acquired a domicile of choice in the UK when the income or gains arose. If there is some doubt about the client's domicile status, would it be better for the client to keep their head down by not claiming the TRF and keeping the income or gains offshore? So that's really a good example of new legislation still looking back with a long tail. Thirdly, as you may also know, there are special provisions in the Finance Bill for pre-commencement emigrants.

And an individual who's got a non-UK domicile of origin acquires a UK domicile of choice by becoming UK resident and while resident, forming a settled intention to live in the UK as their chief residence until they die.

If they do form that intention, they acquire a UK domicile of choice then and they retain it for so long as they continue to reside here as their chief residence, even if they subsequently change their mind about remaining here until they die. So that's the test. And if the client never forms a settled intention to live in the UK as their chief residence until they die, then they don't acquire a UK domicile of choice however long they live here.

And they don't have to intend to leave the UK and go back to their domicile of origin. Indeed, in theory at least, they don't have to intend to leave at all. They only have not to intend to stay here as their chief residence until they die.

So if they never form any intention at all, they never consider it or never make up their mind, then they don't acquire a domicile of choice either. Although that's a bit unlikely. You'd think people would think about where they're going to spend the rest of their life.

Now all that is well and good as far as what the test is, but there are three very important points to bear in mind. The first is, if HMRC argue that the client has acquired a UK domicile of choice and they charge tax accordingly, of course the client can appeal, but the burden of proof is on him, not on HMRC. In other words, he must prove on the balance of probabilities that he hasn't formed the requisite intention.

HMRC don't have to prove on the balance of probabilities that he has formed it. Secondly, as I've already mentioned, he will have acquired a UK domicile of choice if he's formed the requisite intention at any time while he was UK resident. So in order to discharge this burden of proof, it's not enough for evidence to be given about the client's current intentions.

Evidence must also be given about his intentions ever since he became UK resident. And thirdly, and most importantly, the tribunals and courts have been warned they must be very cautious about giving weight to what the client himself says about his intentions if that evidence is inconsistent with objective evidence about the way in which the client has actually lived his life. In other words, if the client has been living here for many years and there's no objective evidence that he ever intends to leave the UK, the chances are that the tribunal won't accept his evidence when he says he did always intend to leave.

Now what all this means is that when you're determining how sure you are that the client hasn't formed the requisite intention, for example, as David said, for the purpose of deciding whether or not to take advantage of the TRF facility, then you've got to have regard first and foremost to the objective evidence rather than just what the client tells you about his intentions. And by objective evidence I mean, for example, whether the client and his spouse have ties with another country, so it's feasible that they will live there in future. And although what the spouse says may be given little weight, it'll be very unhelpful if the spouse doesn't give evidence at all or says, well, we never discussed leaving the UK.

And if evidence can be given by friends and others who've got no axe to grind that the client told them he was going to leave the UK when he retired or in other event, that will be very helpful. And in my experience, such evidence may cause HMRC to abandon their case. So I would urge you all, if you've got a client who says he's not actually domiciled in the UK, he hasn't actually acquired a UK domicile of choice, if that's going to be tested by doing any of the things we've just been talking about, then you've got to look at it very realistically by reference to the objective evidence and not just rely on what the client tells you his or her intentions are.

Just in terms of what you've said about the burden, Kevin, I thought that the revenue did accept that they bore the burden in some situations. For example, they say in their manual that the burden of proving a change of domicile rests with the person that asserts that the change has occurred. And so they say, in some circumstances, the party asserting change will be the taxpayer, whether it is their own or their ancestors domicile, their alleging has changed.

In other cases, HMRC will be asserting a change. And this is, they say, most likely in situations where a long term UK resident has a non UK domicile of origin, and HMRC considers that they have acquired a domicile of choice within the UK.

Okay, well, I think I would say you've got to distinguish between the ultimate legal burden, which is on the taxpayer as the appellant, and sort of an evidential burden, which I accept would be on HMRC.

But they would discharge that, I think, by showing that the taxpayer has lived here for 40 years or whatever. And there's no objective evidence that he's ever contemplated moving. And in which case you come back. I mean, most cases don't turn on burden of proof anyway, quite honestly.

We all obsess about it.

But nevertheless, the point I'm trying to make is that the taxpayer has got to come out with some objective, persuasive, objective evidence of what what he says his intentions were.

Yeah.

Well, that's it. I hope we've given you something to think about. Maybe not on everything to do with the budget, clearly, but some elements of the budget, which do raise some interesting topics for discussion.

Definitely a deeper dive into the wonderful world of CGT and IHT.

Thank you very much for listening to Pump Court Tax Chat.

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