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GAAR Advisory Panel opinion - distributions and benefits through trust interests

GAAR Advisory Panel opinion

The opinion found that certain arrangements involving distributions through trusts were not a reasonable course of action.

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The GAAR Advisory Panel has released an opinion on arrangements designed to enable a Company’s sole director and shareholder (Mr A) to extract cash from the Company without incurring income tax. The arrangements involved interests in a trust and a loan from the trust, together with other complex features. Mr A sold the right to income arising in the trust with a credit to his director’s loan account. The aim of these arrangements was to provide Mr A with a tax-free amount without a loan to participator tax charge or other participator benefits charge arising on the Company.

Mr A acquired the settlor’s interest in a trust together with a corresponding loan from the trust. The primary interest, the right to income arising in the trust, was then purchased by the Company from Mr A via a credit to Mr A’s outstanding director’s loan account. A secondary interest, the right to capital in the trust, was held by a family trust established by Mr A. The trustees of the first trust had the power to transfer the assets of the trust to the secondary beneficiary.

Mr A and the Company argued that the amount Mr A received from the Company is a market value purchase price for an asset, so no charge arises to income tax under the distributions legislation. They also argued that the existing loan to Mr A is repaid and is not replaced by another loan from the Company, and that Mr A received no other taxable benefit.

The GAAR Advisory Panel found that there was no commercial, non-tax, reason for Mr A and the Company to involve a trust in the desired goal of extracting cash from the Company, and that “contrived and abnormal steps have been adopted to avoid the tax consequences of the most likely comparable commercial transaction.” The Panel’s conclusion was that the entering into of the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions and the carrying out of the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions.

The Panel has also recently released two further opinions on gold bullion arrangements dated 9 November and 10 November. These are similar in reasoning to the arrangements that we have previously covered in Tax Matters Digest.

For further information please contact:

Paul Harden

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