In Mark Dunsby v HMRC [2021] UKUT 0289, the Upper Tribunal (UT) found that dividends paid through a trust under a scheme to transfer tax-free cash to a company owner were still taxable on the owner. They would also be caught by the Settlements and Transfer of Assets Abroad anti-avoidance 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 share in a new share class to a non-resident individual, Mrs Gower. She transferred the share to a trust but retained an interest.
  • The company paid a £200,000 dividend on the new class of share. Under the terms of the trust, a charity received £1,497, Mrs Gower £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. Mr Dunsby Appealed the decision.

The First Tier Tribunal (FTT) dismissed his appeal finding 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 a settlor of the trust.
  • As the trust was settlor interested, income payable to the trust was taxable on the settlor.
  • The Transfer of Assets Abroad legislation did not apply if the trust's income was Mr Dunsby’s as he was based in the UK. If Mrs Gower was a settlor, the provisions would apply to the trust income if it was paid to a person abroad and it would then be taxable on Mr Dunsby.
  • The judge amended the assessment increasing it from £195,400 to £200,000, being the sum total extracted from the company.
  • Mr Dunsby appealed. 

The Upper Tribunal dismissed the appeal on all grounds raised.

The Distribution issue

  • Where there is a Distribution, the law under s.385 ITTOIA 2005 does not require the taxable person to hold the shares on which it is made. All that is required is that they receive the distribution or were entitled to receive it.
    • Through the scheme, Mr Dunsby did receive the dividend, and under the trust, as principal beneficiary, he was entitled to receive it. He was chargeable to tax on it and the FTT had erred in law in finding otherwise.

The Settlements issue

Whilst not relevant if they were right about the distribution point, the UT went on to consider the Settlements legislation in case they were wrong.

  • They found that Mr Dunsby was the settlor, not Mrs Gower, and as such would be subject to Income Tax on the entire income of the settlement i.e. £200,000, to the extent that these rules were in point.

The Transfer of Assets Abroad Issue

The Transfer of Assets Abroad (TOA) rules were only relevant if Mr Dunsby was not chargeable on the distribution directly and if Mrs Gower was the only settlor so that the Settlements rules could not apply.

  • In this event, the income of the settlement would be properly regarded as the income of Mr Dunsby as he would have transferred relevant income to a person abroad in order to avoid Income Tax. He would be taxable under the TOA provisions on the entire income of the settlement.

As the FTT had made an error of law in its conclusions on the distribution issue the UT was able to remake the decision. The FTT had found Mr Dunsby taxable under the settlements rules which meant that all of the income of the trust was taxed on him as settlor i.e. £200,000. The UT held that under the distributions rules he was only taxable on the amount he received, and was entitled to, which was £195,400. 

Useful guides on this topic

Transfer of Assets Abroad (TOA)
What are the ToA rules? When do they apply? Is there any defence against the rules?

Settlement anti-avoidance rules
What are the settlement anti-avoidance rules? How do these rules catch some common family tax planning? What are the rules for spouses and other family members?

Dividend tax: subscriber guide
This practical tax guide explains how dividends are taxed on or after 6 April 2016. It includes HMRC's own examples, more detailed examples, including an Owner Managed Business (OMB) section together with tax planning tips.

External link

Mark Dunsby v HMRC [2021] UKUT 0289 

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