October Q&A: Private residence relief, IHT on gifts and the taxation of a non-UK resident’s company

19 October 2018

In this month’s Q&A we consider private residence relief, inheritance tax on gift giving and the tax implications of setting up a company in the UK by a non-UK resident.

Q. I bought my house in 1999 and I lived in it until 2001 when my employer required me to work in Portugal. I returned to live in the house in 2006 and have lived there until now. I have never owned any other properties. Will I qualify for full private residence relief for capital gains tax purposes when I sell my home?

A: Based on the information provide, you should be entitled to full relief.

The qualifying periods of absence are:

a) absences for whatever reason, totalling not more than three years in all

b) absences during which you are in employment and all your duties are carried on outside the UK

c) those totalling not more than four years when either:

  • the distance from your place of work prevents you living at home
  • your employer requires you to work away from home to do your job effectively.

You’ll keep the exemption for absences b) and c) if you can’t return to your dwelling house afterwards because your existing job requires you to work away again. The absences at b) and c) also apply if the employment was that of a spouse or civil partner.

Q. I would like to give a close friend a wedding gift of £15,000. What are the inheritance tax implications of making a gift of this type?

A: The cash gift is likely to qualify as a potentially exempt transfer (PET), meaning that if you survive for seven years after making the gift, it will be completely free from inheritance tax. If you die within the seven- year period, taper relief may be available.

Depending on your circumstances, it may be possible to combine the various annual exemptions to reduce the PET. For example:

  • Gift = £15,000
  • Less annual exemptions from current and previous years (£6,000)
  • Less gift on marriage (£1,000)
  • Reduced potentially exempt transfer (PET) = £8,000.

Q. I do not live in the UK but wish to set up a UK company and will be the sole director. The company is not a property company and in the short term there will be no UK employees. Will the company be liable to tax in the UK or in the country where I reside?

A: It is important to know whether a company is UK resident. If it is, subject to certain conditions, it will be chargeable to UK tax on its worldwide income and gains. Non-UK resident companies may be subject to UK corporation tax only if they have a permanent establishment in this country.

HMRC’s International Tax Manual (paragraph INTM120030 ) confirms that:

A company is resident in the UK for the purposes of the Taxes Acts if:

  • it is incorporated in the UK (with certain exceptions), or
  • the central management and control of its business is in the UK.

Even if a company is not incorporated in the UK, it is still resident in the UK if it is centrally managed and controlled in the UK. One of the leading cases on this issue, De Beers Consolidated Mines Ltd v Howe (1906) 5 TC 198, involved a company that was registered in South Africa where it worked diamond mines. The company’s head office and shareholders’ general meetings were held in South Africa, but the directors’ meetings took place in both South Africa and the UK. The majority of directors who made the key decisions lived in the UK.

In his judgement the Lord Chancellor, Lord Loreburn, stated:

“A company resides … where its real business is carried on … and the real business is carried on where the central management and control actually abides.”

Therefore, even though the company was incorporated in South Africa and its main trading operations were there, the House of Lords held that the company was UK resident because the majority of the directors who had the overall control were situated in London.

There is an additional requirement for dual resident companies, effective from 30 November 1993. To resolve how a dual resident company is to be taxed, reference is made to the double tax treaty (if any) that the UK has with the other country. Most double tax treaties have a tie-breaker clause to determine which country has the taxing rights. If residence has been or would be awarded to the UK treaty partner, the company is called ‘treaty non-resident’ (TNR). Corporation Taxes Act 2009, s 18 provides that a TNR company is not resident for UK tax purposes. In summary, this means that a dual resident company is resident in the country that has priority per the relevant double tax treaty.

As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax related issues. If you would like to speak to one of our local experts, please contact us.