It would be good to get some thoughts on whether the below analysis is correct or whether something obvious is being missed
Group X bought a non-resident company (Nonresi Co) that holds long leasehold interest in UK investment property some amount of years ago. Managing an offshore company is thought to be no longer commercially viable and management are looking to hold the property within a UK resident company going forward. The group entities are non-close.
Option A proposed is to make the non-resident company UK tax resident by transferring cm&c to UK. Client prefers this option from a commercial perspective as freeholder consent is not needed for transfer of the property + there is no transfer of asset therefore less professional fees. Would come within scope of UK CT instead of NRL scheme. The apparent drawback with this that I can see is that the base cost of the property going forward for Nonresi Co will be the historic base cost when it first purchased the property (ie there will be no uplift in base cost when Nonresi Co becomes UK tax resident).
Option B is to transfer the asset to a newly incorporated group company. From my reading s171 will not apply as the transferor is non-UK tax resident. Therefore, the base cost of the asset for transferee co will be market value at the date of the transfer - irrespective of the amount actually paid (albeit market value consideration would probably be paid for accounting purposes). Are there any anti-avoidance that rules that stop this uplift in base cost occurring under option B? SDLT group relief should be available and it would be a TOGC.
Due to the uplift in base cost, Option B seems preferable on the face of it due to the uplift in base cost.
Replies (19)
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I agree with you in option A.
I also agree with you in option B, except if the shares in the non-resident company are held by a UK resident company, an attribution under TCGA 1992, s 13 is possible. That would mean that any gain that is not taxable on the non-resident company is taxable on its UK resident immediate parent, unless you can show there was never any tax avoidance motive of holding the property through a non-resident company.
That may make option A preferable to option B.
Option C, which would have been to wash out any pre-acquisition gain potentially attributable under s 13 before the non-resident company was acquired would have been best.
I doubt s13 TCGA 1992 is an issue re motive defence and a treaty (e.g. UK/Luxembourg) may be available to assist there and in any event the question says "The group entities are non-close."
in any event the question says "The group entities are non-close."
That I had missed!
If that weren't there though, I don't, agree with you on the motive defence, because the asset must not have been held for tax avoidance purposes. A UK resident group continuing to hold an asset through a non-resident member is otherwise enjoying tax-free growth in value of the asset, such that tax is being avoided, as a matter of fact.
Fell free to speculate about what treaty may or may not apply.
Let's agree to disagree there, as Giles Clarke agrees with me that s13 motive defence can be used re enveloped dwellings as it was originally for IHT planning and if you were right that defence would fall away due to the gradual gains and we all know where property value go in the long term*. Also, Lux/UK is well known as a s13 treaty blocker.
*although it is all very fact specific of course.
Justin, I imagine that Giles Clarke is talking about a situation where a non-resident/non-dom individual holds property through non-resident company and later becomes resident, but makes no changes. There I'd accept that the motive defence was available.
Where a UK group acquires a non-resident company because of the property that it holds, and chooses not to do anything to bring that property within the UK tax net, I don't think it's in the same position.
Yes; I see your point and added above that it is all very fact specific and I would always try to argue motive defence as there is nothing to lose as long as you are professionally advised etc.
The waters get a bit muddy here, as you could also have a UK resident non-dom who bought a UK property in an offshore company (10 years ago say) and argued it was for IHT and not CGT avoidance and so s13 motive defence should apply (and that's what I was getting at above).
Also, it would be a bit rich for HMRC to argue that CGT is being avoided on the pre UK tax net historic gains.
In my above example there would of course be a trust owning the company or offshore directors to avoid cm&c issues causing the s13 point to be moot.
I fail to see how one can form any sort of view on whether s13 would or would not apply unless they've already been in touch with the OP to ascertain whether the avoidance of CGT/CT was a main purpose (as opposed to a consequence) of holding UK property in an overeas company.
In your defence, Portia, you did say that a s13 charge was merely "possible".
My point is that where tax avoidance results, then absent some rationale for the UK group continuing to hold the property through the non-resident company, it might be hard to contest that avoidance was not a main purpose of continuing to do so.
If s 13 applies, it would apply to the historic gain, as well as that which had accrued post-acquisition by the group.
So my further point was that, at the time of acquisition by the group, it would have been possible to structure the acquisition so that a s 13 issue could be avoided entirely (without resorting to a motive defence), albeit that post-acquisition gains would then be within the charge of corporation tax.
Which gets us back to my first point.
As Justin has pointed out though, the issue is moot in this instance, as the OP does say that the companies are not close companies.
And the answer to that question? Probably *no* in this case - hence my mischievous ;¬)
EDITED **
What's the question again? I'm confused.
I thought that if the parent is not a close company (implied in the OP), then any subsidiary (direct/indirect) would also not be a close company?
Are we agreeing or disagreeing?
Haven't a clue, as I confused myself by not going back to the original question. My previous answer reveresed to a probable "no" so on balance I'd say that we're all largely in agreement.
That's not quite right and as a large group it can presumably afford specialist bespoke advice on all this anyway.