In Mark Dunsby v HMRC [2020] TC7755, a tax scheme designed to transfer tax-free cash out of an owner-managed company fell foul of both the settlements and transfer of assets abroad rules.
- Mr Dunsby used his company Majordegree Ltd to enter into a tax scheme that aimed to extract tax-free dividends from the company.
- The company allotted a new share in a new share class to a Mrs Gowver. She was based abroad and part of the scheme.
- The company paid a £200,000 dividend on the new class of share which, under the terms of the trust, belonged to charity in the amount of £1,497, to Mrs Gower as to £3,103, with the balance on trust for Mr Dunsby in his lifetime then his family. Mr Dunsby received £195,400.
- The tax planning was notified to HMRC under DOTAS.
HMRC raised an assessment and challenged the planning on the basis that:
- The company had made a taxable distribution to the director.
- The director had created a Settlement and so was taxable on its dividend income being the settlor of a settlor-interested trust.
- The director was taxable on the distribution under the Transfer of Assets Abroad legislation.
The FTT found that:
- The company had not made a direct distribution to Mr Dunsby.
- As the settlements legislation is sufficiently broadly drafted to cover most tax planning arrangements, Mr Dunsby was, like Mrs Gower, a settlor of the trust. He had allowed his company to create a new share class and allot her with a share.
- As the trust was settlor interested, income payable to the trust was taxable on the settlor. That income was a distribution by dividend.
- The transfer of assets abroad legislation did not apply if the trust's income was Mr Dunsby’s as he is based in the UK.
- Alternatively, if Mrs Gower was a settlor the arrangement, the transfer of asset abroad provisions would apply to the trust income if it was paid to a person abroad and therefore it was taxable on Mr Dunsby.
The judge also amended the assessment increasing it to the sum of £200,000, that being the sum total extracted from the company.
Comment
This is a short summary of this case. This is the lead case in a number of similar appeals. It is listed for appeal. It will be interesting to see if the Upper Tribunal disagrees with the analysis.
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External link
Mark Dunsby v HMRC [2020] TC7755
