Private client review for September 2021

24 September 2021

In this article, the September monthly update review for Tax Journal, Edward Reed and Naomi Charrington look at a number of private client developments.

The trust registration service has been upgraded and the new registration deadlines have been announced. The FTT found that mixed-use woodland should be treated as a residential property for the purposes of SDLT. There is news of steps being taken by overseas buyers to attempt to reduce their SDLT bill. France appears to be trying to overrule the European Succession Regulation in relation to children’s inheritances. The FTT finds that HMRC cannot justify reading words into a tax statute under the guise of taking a purposive approach unless there is an obvious drafting error in the statute. HMRC closes its unit investigating family investment companies. And in Dukeries Healthcare Ltd, the FTT finds against a taxpayer who applied to set aside a tax scheme on the grounds of mistake, when the scheme failed to work.

Latest TRS developments

HMRC has announced that the trust registration service (TRS) online portal has been upgraded and is now open for registrations by non-taxable trusts. The new deadline for registration is 1 September 2022 (HMRC previously promised to push back the original March 2022 deadline to give affected trustees at least 12 months to register), although trusts created in the 90 days before the registration deadline have longer to register. HMRC has also confirmed that neither trusts for children’s bank accounts, nor trusts holding healthcare insurance policies will be required to register.

We expect updated guidance to be published in the coming weeks, including a step-by-step guide to determine whether the business relationship condition applies to non-UK trusts, but we don’t anticipate significant changes to the current TRS manual to be available on

Non-UK resident buyers

There have reportedly been a number of transactions involving unconnected non-UK resident buyers bundling together property purchases to take advantage of the ‘single transaction’ exemption. This exemption applies where six or more residential properties are acquired in a single transaction, and results in a lower overall rate of SDLT (since HMRC considers transactions which include six or more dwellings to be commercial rather than residential, resulting in non-residential rates of SDLT).

This appears to be an unintended consequence of the way the SDLT rules are drafted, and we suspect that HMRC monitor these types of transactions. If this approach becomes more widespread amongst overseas buyers, it is likely that HMRC will introduce amendments to the rules to prevent these types of schemes.

Mixed-use rules

In The How Development 1 Ltd v HMRC [2021] UKFTT 248 (TC), the First-tier Tribunal (FTT) held that a country estate with mixed-use woodland should be treated as a residential property for the purposes of SDLT.

In this case, a property developer purchased a large country house comprising 15.7 acres of land, a main house, a lodge house, outbuildings, orchards, gardens, grounds and a large wooded area of approximately two acres. The purchaser had paid SDLT on the basis that the property was residential, but subsequently claimed a refund on the basis that the property was a mixed-use property, qualifying for a lower SDLT rate.

The developer argued that the woodland did not ‘subsist for the benefit of the property’ as it was not readily accessible from the estate (it could only be accessed via a public path), and was not essential to the character of the house. The developer also submitted that the land was agricultural in nature and so the property should be categorised as a mixed-use property. 

The FTT disagreed, holding that the property and grounds, including the woodland, were residential property for SDLT purposes. The FTT found that the actual use of the land was important when determining whether it formed part of the garden or grounds of the house, and here there was no evidence that the woodland was used or exploited for commercial purposes. ‘Garden or grounds’ was to be given its ordinary meaning and, for a large country house, that meant adopting a wide definition taking into account the character of the property and the additional privacy provided by the woodland, as well as the enhancement to the house’s overall setting. It was also significant that the woodland fell within the same legal title as the rest of the estate, and that the woodland was classified as residential property for planning purposes.

Gardens and grounds are not defined in the legislation, so this case provides helpful guidance. Tax practitioners should bear in mind that land forming part of the garden or grounds of a dwelling is most likely residential property for SDLT purposes – unless there is clear evidence of separate commercial activity on the land.

France re-asserts forced heirship rights

When the bulk of the European Union (other than the UK, Ireland and Denmark) agreed in 2012 to allow testators to apply the law of their passport globally to any estate anywhere in the EU, it seemed that peace had broken out in the world of estate planning. The ability to apply a non-EU law to estates across the EU, including to real property, had particular benefits to anybody domiciled or deemed domiciled in the UK because estate planners for married couples could aim to optimise the situation back in the UK by accessing the IHT spouse exemption. 

The question at the back of everyone’s mind since it came into effect in August 2015 has been whether the French system would withstand the shock. It transpires that the French system, where the modern incarnation of ‘forced’ heirship took shape at the beginning of the 19th century, is having a philosophical struggle with the idea of implementing in France a law which might not recognise French principles, be that a common law or (perhaps) a sharia law.

Despite Senate opposition, in July the French National Assembly passed a portmanteau law labelled as strengthening the principles of the Republic. Article 13 of that law provides that, where the impact of a foreign law under the effect of the EU Succession Regulation (EU No. 650/2012) (EUSR) is to override the forced heirship rights of children, those children can claim against the estate in France such rights as they appear to have lost by the application of the foreign system (new sub-paragraph to article 913 of the Civil Code). For this new provision to apply, either the deceased or one of the children needs to be (at the death) an EU national or habitually resident in the EU; this means the provision is wider in ambit than might at first appear. As you might expect for a notarially-based system, a notary administering the estate is required to inform affected children.

The law has been reviewed by the Constitutional Council. Against some scholarly commentary, that particular article was neither criticised nor reversed (unlike some others) in its judgment on 13 August. It is therefore expected to come into force on 1 November 2021.

For any client who has confidently embraced the opportunities offered by the EUSR, if there is a French angle, it would be worth a review, not least to try to assess if there is a UK tax consequence.

This has come as an unwelcome surprise. The impact is still being digested, but there appear to be two broad possibilities:

  • first, that there will be an appeal (no doubt some way in the future) to the European Court in an individual case on the ground that the law is unconstitutional, as it undermines the superior EU law, a regulation which has direct effect over the whole territory of the EU other than Ireland and Denmark (i.e. with no need for transposition into local law). Only the European Union can change that; and
  • secondly, an alternative perspective would suggest that, since the EUSR itself leaves open the possibility of ‘clawback’ of lifetime gifts taking place according to local rules as well as public policy interventions, this new initiative may in fact amount to a strengthening of clawback and therefore arguably does not strictly undermine the regulation itself. Bearing in mind the ‘applicable law’ provisions, especially article 23.2.(i) and (h), seem to provide that obligations to account or to make good the estate are within the grasp of the law which the deceased has applied rather than the local law, this second perspective seems weak. Nevertheless, for any client who has confidently embraced the opportunities offered by the EUSR, if there is a French angle, it would be worth a review, not least to try to assess if there is a UK tax consequence.

Discovery channel

Following the recent Supreme Court decision in HMRC v Tooth [2021] UKSC 17, the Upper Tribunal (UT) has held against HMRC in its decision in HMRC v Wilkes [2021] UKUT 150 (TCC).

The facts in Wilkes are abstruse, turning on three small assessments to high income child benefit charge (HICBC), which is a free-standing charge dealt with outside the routine assessment of a taxpayer’s income and which, importantly, it doesn’t specify a sum of ‘income’. To engage the TMA 1970 s 29 provisions on discovery assessments, HMRC needed to find a sum of income. The UT held that the framework of s 29 does not permit HMRC to issue a discovery assessment to recoup HICBC. Nor can HMRC read words into tax statute (such that a reference in s 29 to ‘income’ should in fact be read as ‘any amount liable to income tax’) under the guise of taking a ‘purposive approach’, especially if HMRC has other avenues available to it. In other words, a purposive approach could only be used to read words into a tax statute where there was an ‘obvious drafting error’ which it was necessary to correct to maintain the coherence of the legislation. In this instance, there was no such error.

Whilst the case is interesting for anyone similarly assessed retrospectively to HICBC or similar free-standing charges, the UT has also reminded the tax community of the ambit of the purposive approach, quoting in the process iconic, historic cases (including the judgment of the Privy Council in Mangin v IRC [1971] AC 739 where it was held: ‘There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used’).

The judgment also appears to be in line with Balhousie Holdings Ltd v HMRC [2021] UKSC 11, where the Supreme Court took a purposive approach to avoid a manifestly unfair result.

HMRC closes its FIC unit

Where family members use a company to hold their assets, and potentially also to transfer wealth to the next generation, that company is often described as a family investment company (FIC). In April 2019, HMRC set up a dedicated team to conduct research into the use of FICs and assess whether there was any associated tax risk. This caused concern among advisers that HMRC might view FICs as particularly aggressive estate planning and investigate the affairs of taxpayers who have set up FICs. However, HMRC has now concluded its research, finding that there is no evidence that taxpayers who establish FICs are less tax compliant than other taxpayers. On that basis, HMRC closed down its dedicated FIC team and confirmed that it will treat taxpayers with FICs as ‘business as usual’.

Permission refused to set aside failed tax scheme

In the case of Dukeries Healthcare Ltd and others v Bay Trust International Ltd and others [2021] EWHC 2086 (Ch), the High Court ruled against taxpayers who applied to set aside failed tax planning for mistake.

Mr Levack (who was a sole trader) and two associated companies each established a ‘remuneration trust’ on the advice of Baxendale Walker LLP. The intention was to allow Mr Levack and his family to benefit from the earnings of the businesses with a lower tax rate, in a way that the Court categorised as artificial tax avoidance.

There are separate proceedings in the FTT as to the exact tax consequences of the trusts, which were stayed pending the outcome of the mistake application. Nonetheless, it is clear that the trusts did not operate as Mr Levack and the companies had hoped. They argued that the trusts should be set aside because they had mistakenly believed that:

  • Mr Levack could benefit from commercial loans from the trusts during his lifetime;
  • his family could benefit from the trusts after his death;
  • payments to the trusts would not trigger income tax and national insurance contributions; and
  • the contributions would not be transfers of value for inheritance tax purposes.

This case makes clear that claims to set aside tax schemes for mistake must meet a very high bar to succeed. HMRC actively defended the claim, and it is likely to take an assertive approach in claims of this nature in future.

The High Court rejected the application on the basis that there was insufficient evidence of mistake. While Mr Levack’s written evidence set out the background and the tax consequences carefully, Mr Levack accepted on the witness stand that he did not remember reading any of the important documents, and did not understand or consider most aspects of the tax schemes. There was even less evidence from the companies that the directors had the mistaken beliefs claimed; the only evidence was a set of pro forma company minutes prepared by Baxendale Walker LLP.

While that was sufficient to dismiss the claim, the Court found that the claim would also have failed as Mr Levack had a ‘cavalier attitude to risk’ and had deliberately run the risk of the schemes not operating in the way Baxendale Walker LLP had claimed. Mr Levack simply accepted the advice of Mr Baxendale-Walker at a meeting, without reviewing any of the documents or doing any due diligence.

This case makes clear that claims to set aside tax schemes for mistake must meet a very high bar to succeed. HMRC actively defended the claim, and it is likely to take an assertive approach in claims of this nature in future.

This article was first published by Tax Journal.