Transfer of UK property from offshore trust

IOM company owned by offshore trust. UK property transferred from IOM Co direct to beneficiary

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Advice was given a few years ago which I'm revisiting. The IOM company owned 2 London properties both worth say £1m. Base cost £500k. Trust in existence for many years. 

When the first property was distributed to a trust beneficiary, advice was that there was CGT on the difference between cost and MV (correct) and an exit charge on the £1m for complete quarters after 6 April 2017 to date of distribution (also correct). But what about the tax treatment in the hands of the beneficiary? 

For a start, surely the property can't go directly from the company to the beneficiary, wouldn't that be ultra vires?  So logically the property would have to be distributed first to the trust, then out to the beneficiary. And if the company is not being wound up (which it wasn't) wouldn't this be an income distribution? Therefore shouldn't the £1m received by the beneficiary be treated as income, notwithstanding it was a capital asset that was received?

Or am I panicking for nothing!?

Any comments appreciated.

Replies (3)

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By Justin Bryant
14th Apr 2023 10:49

It would be unlikely to be income under trust case law re income vs. (potentially tax-free) capital distributions., However, it could be matched relevant income under s731 ITA 2007 - which acts in priority to matched s87 TCGA 1992 gains.

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By cliveth
14th Apr 2023 11:37

That's what I'm saying. The distribution is an income distribution as it must first have been distributed out as an in specie dividend to the trust, regardless of the 'short cut' of transferring directly to the beneficiary?

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Replying to cliveth:
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By Justin Bryant
14th Apr 2023 12:23

Just because a trust has received income does not necessarily make the distribution thereof income in a beneficiary's hands I think for UK tax purposes (e.g. if there's been a long delay and/or it's been appropriated to capital per the trust deed- have a look in Giles Clarke's Offshore Tax Planning book on all that), although it would remain relevant income re s731 and also you need to consider para 96 et seq here: https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j12703/TC...

Incidentally, there is an almost unbelievably and embarrassingly bad HMRC submission at para 123 of the above case that quite rightly gets shot down in flames by the judge.

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