In William Reeves v HMRC [2018] UKUT 293, the Upper Tribunal (UT) found that a non-resident taxpayer can gift a UK trading asset to a UK company he owns and claim holdover relief.
- The taxpayer (WR) claimed s165 Taxation of Capital Gains Act 1992 (TCGA) Gift relief, or Holdover relief, on a gift of his interest in BlueCrest LLP to his 100% owned UK resident company, WHR Limited.
- The LLP was a hedge fund business and the gain was approximately £33.6million. The purpose of the gift from the LLP to the company was to avoid a deemed disposal on the emigration of the LLP from the UK to Guernsey.
- WE was non-resident at the time of the gift.
- HMRC denied the claim as s167(2) TCGA disallows holdover relief where there is a gift to a company controlled by a non-UK Resident who is connected to the person making the gift.
The First-Tier Tribunal (FTT) found for HMRC:
- Mrs Reeves, a non-UK resident, is deemed to control the company, despite having no interest in the company, due to the Close company tests for control.
- Mrs Reeves is attributed the shares owned by her spouse in establishing if she has control of a company.
- On literal interpretation of the law, Mrs Reeves controls the company and is connected to WR. The same is true of the minor children of WR.
- This means s167(2) TCGA applied and relief was denied.
WR appealed the decision to the UT:
- Whilst accepting that the literal wording of the law means holdover relief is not available, the words cannot possibly mean what they say as it leads to absurd and arbitrary results.
- If the UT cannot interpret the words to prevent absurdity from arising, WR claimed that he can rely on European Convention of Human Rights, or free movement of capital in order to benefit from relief.
- Based on HMRC’s view, if he and his wife lived in the UK but his children, who have no interest in the company, were non-UK resident, relief would still be denied.
HMRC also expressed dissatisfaction with the law:
- It should read that s165 TCGA relief is denied where the transferee company is controlled by the person making the gift and that person is non-resident. This is not the case based on the literal interpretation as WR is not connected with himself.
- A purposive approach should be taken and WR should not be able to benefit from an unintended loophole, i.e. that he can be the person in control of the company and benefit from holdover relief.
The UT allowed WR’s appeal. In doing so it concluded:
- The wording of s167(2) TCGA should be construed as if the interests of connected persons are limited to connected persons who control the company by virtue of holding assets relating to that or any other company.
- If the literal interpretation had to prevail, there is a clear discrimination on WR as someone with a non-resident family as compared to someone with a resident family. He can rely on Human Rights to treat the UK law as allowing him relief.
- The outcome is unexpected, that family members with no interest in the company can affect the claim for holdover relief.
- The literal wording acts as a trap for taxpayers and advisers who would have to consider tax residence status of parents, grandparents, spouses and children, even if they have no interest in the company.
- There is no reason why a taxpayer should be taxed differently in relation to that provision just because they happen to have family with no interest in the company, who are not-UK resident.
- The UT did not need to address WR’s grounds that the ruling infringed his right to free movement of capital as the appeal succeeded on the interpretation of the law and on the Human Rights grounds.
- As for HMRC’s suggestion that a purposive approach be taken which would result in their view standing:
- It is not abundantly clear what Parliament intended so this cannot be relied on to enable a purposive approach.
- It is difficult to believe there was an error in such a short and simply worded provision such that the draftsmen would not notice or appreciate that a person connected to the transferor does not include the transferor himself.
- HMRC’s purposive interpretation was rejected.
WR was entitled to claim holdover relief.
Links
CGT reliefs: disposal of a business or its assets
Holdover relief claim fails: shares attributed to a non-resident spouse
SRT: Statutory Residence Test Toolkit
External link William Reeves v HMRC [2018] UKUT 293