TRUSTS IN COMMERCIAL SS CO C … slides for...Contractor 13/07/2014 8 Purpose Trusts – Exit Trusts Insolvent Corporate Structure Parent Company Holding Company Trustee of Purpose

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2014 Student Conference

Clive Beer (Savills)Michael Hooke & Mark Michael (Deloitte)

Penny Lovell (Close Brothers)Ben Thomason (Asset Leverage Consultants)

Victoria Yates (Yates Legal)

Chair: Tony Pitcher (LGL Trustees)

Sponsored by:

S S CO C

P t d b Vi t i Y t

TRUSTS IN COMMERCIAL ARRANGEMENTS AND

TRANSACTIONS

Presented by Victoria Yates10 July 2014

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Introduction

1. Key features of trusts• SegregationSegregation• Flexibility• Confidentiality

2. Classification of commercial trusts

• Investment Trusts• Finance and Security Trusts• Purpose Trusts

3. Potential issues to be aware of

Key Features of Trusts

1. Segregation• Split of legal ownership and beneficial interest in assets• Split of legal ownership and beneficial interest in assets• Trust fund neither part of trustee’s estate nor beneficiaries’ estate

• Obligations on trustee provide protection to beneficiaries

2. Flexibility• Full discretion of trustee within the terms of the trust instrument

f f h• Very few restrictions on terms of the trust instrument• Trust is a relationship, not a legal person (see article 2, TJL)

3. Confidentiality• Terms of trust not a matter of public record

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Classification of Commercial Trusts

1. Investment Trusts• To hold assets

2. Finance and Security Trusts• To facilitate financial arrangements

3 P T t3. Purpose Trusts• To achieve a specific aim

Investment Trusts - JPUTS

Unithold UnitholdS i

JPUT

er 1 er 2

0.01% of units

Security over units

L

99.9% of units

Trustee 1 as

trustee of JPUT

Trustee 2 or

Nominee

UK Commercial Real Estate

Bank

Loan

Security over rent account and

real estate

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Investment Trusts – Family Unit Trusts

Structure during Settlor’s Lifetime

Trust for Trust for son and

Trust for d ht

Trust for d

Settlor directed trust for principal

spouseson and heirs

daughter and heirs

son and heirs

Family Unit Trust

Economic Units in FUT giveholder pro rata share ofincome and capital profitsgenerated by assets held inFUT

Voting Units in FUT giveholder right to nominate oneperson to Family AdvisoryCommittee

Investment Advisory Committee (composition

determined by FAC)

Family Advisory Committee (FAC)Trustee/PTC

Investment Trusts – Family Unit Trusts

Structure following Settlor’s death

Trust for Trust for son and

Trust for d ht

Trust for d

spouseson and heirs

daughter and heirs

son and heirs

Economic Units in FUTtransfer to pre‐existing trustsfor spouse and children. Canbe structured so that maleheirs receive double the

Voting Units in FUT transferto pre‐existing trusts forspouse and children. Can bestructured so that male heirsd f l h i i

Family Unit Trust

heirs receive double theshare of female heirs

Investment Advisory Committee (composition

determined by FAC)

Family Advisory Committee (FAC)Trustee/PTC

and female heirs receiveequal numbers of units

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Finance and Security Trusts –Debenture Trusts

L d L d L dL d

Trustee of Debenture Trust

Lender Lender LenderLender

Borrower

Finance and Security Trusts –Quistclose Trusts

Lender Borrower Creditors

Loan for Specified Purpose

Loan Monies held on Trust

until applied for Specified Purpose

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Finance and Security Trusts –Turnover Trusts

Parent Company

Loan Subordination

Intragroup LoanIntragroup Loan Repayment

Borrower Subsidiar

yBank

Bank Loan

Finance and Security Trusts –Employee Benefit Trusts

Employees as

b fi i

Employees as

beneficialbeneficiaries of EBT

beneficial owners of shares

Trustee as

trustee of EBT

Trustee as

nominee

Employer Shares or £

of EBT ee

Shares in Employer

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Purpose Trusts – Voting Trusts

I t /b fi i l I t /b fi i lInvestors/beneficial owners

Trustee of Voting TrustEnforcer

Investors/beneficial owners

Company

100% of shares in Company

Purpose Trusts – Payment Trusts

I t /JV P ti I t /JV P tiInvestors/JV Parties

Trustee of Payment TrustEnforcer

Investors/JV Parties

Third Party Contractor

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Purpose Trusts – Exit TrustsInsolvent Corporate Structure

Parent Company

Holding Company

Trustee of

Purpose Trust

LenderLoanEnforcer

SecuritySPA re

shares in subsidiari

es

Subsidiaries Security

Potential issues to be aware of

1. Investment Trusts • Trustee’s exposure to risk• Dominion Corporate Trustees Limited & Dominion Trust Limited v Capmark Bank Europe Plc [2010] EWHC 1605 (Ch)

2. Finance and Security Trusts• Nominee holdingsNominee holdings

3. Purpose Trusts• Exit strategy

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Thank you

Presented by Victoria Yates

Yates Legal

victoria.yates@yates‐legal.com

01534 481 007

www.yates‐legal.com

Introducing Investment Management

For Professional Advisers Only

"Rule Number One: Never lose money.Rule Number Two: Never forget Rule Number One."

- Warren Buffett

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Close Brothers Asset Management Bespoke portfolios are individually tailored to each client. Your appointed fund manager has individual discretion over both asset allocation and individual security selection within your portfolio. The effect of this is that your portfolio and its performance will be specific to you, even when compared to a portfolio with a broadly similar mandate. You should be aware that as a result of individual fund manager discretion, you may outperform or underperform the ‘average’ client portfolio.

This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it This document is intended for information purposes only It does not constitute investment advice or a recommendation

Important information and risks

receive it. This document is intended for information purposes only. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any investment. Except in so far as liability under any statue cannot be excluded, neither Close Brothers nor any officer, employee or associate accepts any liability (whether arising in contract, in tort, negligence or otherwise) for any error or omission in this document

Issued by Close Brothers Asset Management which is a trading name of Close Asset Management Limited and is part of Close Brothers Group plc. Close Asset Management Limited is registered in England and Wales and authorised and regulated by the Financial Conduct Authority. Registered number: 01644127. Registered office: 10 Crown Place, London EC2A 4FT.

Strictly private and confidential

Investment management historyPre 1980s laissez-faire environment

1986 Big Bang: end of opaque structure


Over 100 DFM houses in UK

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Investment management options

Do nothing

Do it yourself

Use an investment manager


Quite simply, we invest for clients to create and preserve wealth. Whilst remaining in cash is often seen as the safest option, it is not going to benefit your clients over the longer term

What do investment managers do?

Manage wealth of private clients as they evolve over time

Investment Objective

Income - Live off capital

Growth - Grow capital

Risk

Lower

Medium

Higher

Unique needs

Jurisdiction

Tax

Currency


Personal Client Specific

“…Wealthy clients wish to be treated as individuals and not put into a basket…”

The first task of an investment manager? See where the client fits in and devise an appropriate

investment strategy to meet their needs

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Choosing an investment manager?


Choosing the correct manager for your clients is absolutely essential. So what should you, as Trustees, be looking for and what should you know to help you make that decision?

• The philosophy

• The process

• The people

• The product

Philosophy – Active vs. passive

ActiveActive PassivePassiveActiveActiveAims to out perform a

benchmark

Markets are not perfect. Inefficiencies can be exploitedE t l i bl

PassivePassiveAims to match benchmark

Beating the market is foolish.


Expert analysis enables informed decisions to beat the market Defensive positioning for falling markets

Markets are efficient Low cost optionNo fund manager interference

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Philosophy – Direct vs. multi-manager

DirectDirect Multi-managerMulti-managerDirectDirect

Holds individual bonds, equities and alternatives

Aims to take advantage of market opportunities

Multi managerMulti manager

Holds units in funds

No single investment house has a monopoly on skill. E t di if


Can accommodate variety of specific investment aims and restrictionsPossibility of investor input

Easy to diversify across sectors and investment stylesMulti levels of management and charges

Processes - top down vs. bottom up

Top down:big picture investing Regular

review

Trends, liquidity, currencies and risk are assessed

macro-economic forecast events

Standard frameworkf l ti

In-depthcompany analysis

Company data screening

Whites of the eyes meetings


for evaluation

Regular review Bottom up:

fundamental company research

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The importance of diversificationPerformance of individual asset classes (% in sterling terms)

Best2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Key

UK small cap39.71

Asia ex Japan17.14

Japan41.00

UK small cap20.59

Asia ex Japan29.39

Global Bonds51.52

UK small cap54.27

Gold32.77

Gilts15.57

UK small cap27.82

UK large capFTSE 100 Index

Europe ex UK29.74

Emerging markets bonds

15.02

Commodities36.11

Europe ex UK20.13

Gold27.74

Gold43.86

Asia ex Japan53.82

Asia ex Japan24.39

Gold10.45

Europe ex UK17.82

UK small cap FTSE Smaller Companies index

Asia ex Japan28.69

UK small cap14.00

Asia ex Japan35.60

UK large cap14.43


16 60


27 49

UK large cap27.33

Commodities20.50

Global Bonds7.13

Asia ex Japan17.72 World ex UK FTSE World ex UK

Index16.60 27.49

Japan24.67

Europe ex UK13.83

Gold31.4

Asia ex Japan12.63

Europe ex UK15.72

Gilts12.81

Europe ex UK20.09

Japan19.53

UK corporate bonds6.91


US S&P 500 Index

World ex UK20.66

UK large cap11.25

World ex UK24.85

Gold6.73

Commodities14.28

Cash3.92

World ex UK18.86

UK small cap19.52

US2.23

World ex UK11.95 Europe ex UK FTSE World Europe ex

UK Index

UK large cap17.89

Japan8.57

Europe ex UK24.08

World ex UK5.65

World ex UK9.70

Japan1.32

US11.78


19.07

Cash-0.4

US10.16 Japan TSE TOPIX Index

US15.1

World ex UK7.83

UK small cap22.40

Cash2.72

UK large cap7.36

UK corporate bonds-4.06


US17.97


-1.18

UK large cap9.97 Asia ex Japan

FTSE World Asia ex Japan Index

Commodities11.72


UK large cap20.78

US0.99

Gilts5.27

Commodities-10.91

Gold9.39

World ex UK16.69

UK large cap-2.18


9.93Gilts

FTSE British Government All Maturities Index

Gold7.04

Gilts6.60

US16.68


Cash4.22

US-13.39


7.74

UK large cap12.62

World ex UK-6.12

Japan2.82

UK corporate bonds

iBoxx Sterling Non-Gilts Index


6.09

US2.76


16.37

Gilts0.69

US3.14

World ex UK-17.12

Commodities5.87


Japan-11.85

Gilts2.70

Global BondsJP Morgan Global Government N=bond Index


Portfolio construction is not so simple

Worse

Source: FE, Close Brothers Asset Management as at 5 April 2013

For Professional Advisers Only


Cash2.40

Global Bonds15.94


-0.71

Global Bonds2.25

Europe ex UK-23.99

Cash-0.27

Global Bonds7.46

UK small cap-12.53

Gold1.42


JPMorgan Global Emerging Marekts Bond Composite Index

Gilts2.1

Commodities1.27


Commodities-10.47


UK large cap-28.33

Gilts-1.16

Gilts7.20

Commodities-12.68

Global Bonds-0.47 Commodities

Dow Jones UBS Commodities Index

Cash1.58

Global Bonds-2.20

Gilts7.93

Japan-10.48

Japan-6.78

Asia ex Japan-31.01

Japan-6.7

Europe ex UK5.75

Asia ex Japan-12.93

Cash-0.45 Cash FTSE Cash on Deposit

index

Global Bonds-8.07

Gold-2.24

Cash2.67

Global Bonds-11.58

UK small cap-10.55

UK small cap-43.91

Global Bonds-10.38

Cash-0.45

Europe ex UK-14.71

Commodities-5.40 Gold S&P GSCI Gold Total

Rturn

The benefits of income and compounding returns

Source: Bloomberg, 27/06/2014


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Understanding the risks of investing

Country Risk Inflation Risk Market Risk


Currency Risk Liquidity Risk Short fall Risk

• What is the investors ‘time horizon’?• What type of investments will the investor make?• How much money will the investor need to invest to reach his goals?• Does the investor have short-term financial goals?

Common questions for the client

g• Does the investor have short-term financial needs?• Will the investor need to live off the investment in later years?


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Challenging an investment manager?

Do you have your own money in your fund?

Who is the most important person in your team?Who is the most important person in your team?

How well do you know all your stocks?

How passionate are you about the asset class?

In what kind of market will you do well?

How do you understand risk?


You claim that you actively manage the portfolio by changing the asset allocation. How do you determine which asset classes aregood or bad?

How do you make investment decisions?

How have you performed throughout a complete market cycle?

Use a financial advisor/ investment managerMake sure you understand your financial circumstances, your tolerance to risk, and your

Get emotionally attached to investments that have served you well in the pastBuy at the top and sell at the bottom

Do’s and Don’ts of investment management

Do Don’t

circumstances, your tolerance to risk, and your long term needs and goals.Invest for the long termTake advantage of cost averaging by making regular investmentsMake sure you only invest in things you understand, and that you understand the basics of investing before going ahead.Review your investment strategy regularly.

Buy at the top and sell at the bottomTry to time the markets, especially equity markets, by frequent short-term tradingRush into investmentsPut all your eggs in one basketMake investments purely on the basis of their tax benefitsPay too much attention to media headlines about successful or less successful investments


investments

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Conclusion


Taxing TimesWhat Offshore Trustees need to know about UK Taxes

© 2014 Deloitte LLP. All rights reserved.

Michael Hooke & Mark Michael 10 July 2014

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Taxing TimesAgenda

• Why use trusts?

• Statutory residence test

• DomicileDomicile

• Typical offshore trust structures and tax considerations

© 2014 Deloitte LLP. All rights reserved.35

Taxing TimesWhy use trusts?

• Trusts are a separate legal entity created when an individual (the “Settlor”) transfers his or her assets (the “trust fund”) to another individual or company (the “trustee”) who holds and manages these assets for the benefit of others (the “beneficiaries”) named by the settlor. The trustees are required to act within the rules within the trust deed. A protector may also be appointed to oversee the work of the trustees and has the power to replace them if necessary.

• Trusts are confidential and flexible and carry a number of potential practical benefits:

‒ Succession Planning‒ Privacy‒ Asset Protection‒ Asset Management & Consolidation


• Depending on the circumstances, there can also be UK tax benefits.

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Statutory residence test & domicile


Taxing TimesStatutory residence test

• It is important for trustees to be able to identify whether settlors and beneficiaries are UK resident / domiciled as this dictates the tax implications which they will need to consider.

• Following approximately two years of consultation, a new statutory residence test came into force on 6 April 2013into force on 6 April 2013.

• Prior to that, residence status had been determined based on a combination of past decisions by the courts and guidelines issued by HMRC. In some circumstances, this led to uncertainty for taxpayers over their status.

• The aim of the test is to set out some more objective criteria and, whilst quite involved, does give all parties concerned more certainty over their position.

• The test has three main constituent parts• The automatic non-UK residence test


• The automatic residence test• The sufficient ties test

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Taxing TimesDomicile

• General Law concept – not defined by statute

• Different from residence

• Affects liability to inheritance tax, income tax and capital gains tax

• An individual is normally domiciled in the country in which he has his permanent or natural home or where he has a ‘settled intention to permanently reside’.

• An individual has one domicile at any one time (and one alone!)Origin - at birth - father’s (or, where illegitimate, mother’s) domicileDependency - on change of father’s (or mother’s) domicile during minority or prior to 1974 domicile of wifeChoice age 16 onwards actively shed domicile of origin/dependency

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Choice - age 16 onwards – actively shed domicile of origin/dependency

• Domicile is ‘adhesive’ (i.e. difficult to shed).

• Shedding domicile requires severing ties with the old jurisdiction and permanently settling in a new country with the intention to remain there permanently or indefinitely.

• The burden of proof is on the person asserting the domicile status

Taxing TimesDomicile

Deemed domicile

Only relevant for Inheritance tax and is not applicable for income tax or capital gains tax

An individual is deemed domiciled in the UK for IHT if:

• They are actually UK domiciled at any time in the past 3 years; or,• They are UK resident for at least 17 out of last 20 tax years.

Section 267 IHTA 1984

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Taxing TimesUK resident non-UK domiciled individualsIncome tax

• Taxable on UK source income.• If the remittance basis is claimed, only taxable on non-UK source income if it is

remitted to the UKremitted to the UK.

Capital gains tax

• Taxable on UK source gains.• If the remittance basis is claimed, only taxable on non-UK source gains if proceeds are

remitted to the UK.• Capital payments from non-UK trusts are taxable on the remittance basis, regardless

of the situs of the assets sold by the trustees.

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Inheritance tax (not deemed domiciled)

• Only liable to IHT on death on, or on transfers of, UK assets.• Transfers of “excluded property” are outside scope of IHT.• Non-UK assets held within a trust established by a non-UK domiciled individual should

be excluded property, even if the individual subsequently becomes deemed domiciled.

Typical offshore trust structuresUK tax considerations


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Taxing TimesUK Tax Considerations

We will analyse some example trust structures in the following slides which will demonstrate the UK tax considerations which it is often necessary to consider.

Th UK t d t hi h ill b d f llThe UK taxes and tax areas which will be covered are as follows:

• Capital Gains Tax (CGT), including the Section 87 regime.• Income tax, including the Non-Resident Landlord Scheme and anti-avoidance

provisions• Inheritance tax (IHT)• Annual Tax on Enveloped Dwellings (ATED) • Capital Gains Tax on Enveloped Dwellings (CGTED)

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Taxing TimesTypical Structure 1

• Annual Tax on Enveloped Dwellings (ATED) will be payable by the company as the property is worth £2m+ and is occupied by the settlor (not exempt) – note the reduction in ATED thresholds. Trust

• On sale of the property CGTED will also apply. The increase in the value of the property from 6 April 2013 will attract a 28% tax charge.

• UK Res / Non Dom settlor so s87 TCGA is applicable in respect of rent free occupation. An annual capital payment equal to the annual rental value is deemed to have been paid to the settlor (benefit). The capital payments are matched to capital gains realised in the whole structure, in this case when the property is sold.

UK Res / Non Dom Settlor

Jersey Company


• PPR relief would not be applicable on a sale of the property as the property is not held at trust level.

• Inheritance Tax is not applicable as the trust owns shares in an offshore company. As the settlor is non UK domiciled this is ownership of a foreign asset and therefore outside the IHT net.

• The settlor is occupying the property rent free so no income tax is due by the company but note possible shadow director exposure.

44

UK Residential Property £2m+

occupied by Settlor (Rent free)

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• The Jersey company is liable to UK income tax (20%) on net rental income. The company may register to participate in the non resident landlord scheme in order to receive rents gross.

• Returns are due annually by 31 January, payments are due 31 Trust y y y p yJanuary and 31 July.

• UK source income arising in the Jersey company will also be taxable on the settlor (on the assumption they are not excluded from the trust) on an arising basis under s720 but tax credits are available in respect of tax paid by the company.

• ATED and CGTED are not applicable in this case as the property is commercially let (one of the exemptions). The property must not be let to a connected person.

• As for Structure 1 IHT is not applicable as the trustees are


Jersey Company


As for Structure 1, IHT is not applicable as the trustees are treated as holding shares in a Jersey company, rather than a UK property.

45


Commercially Let


• The trustees are liable to UK income tax on net rental income at the rate applicable to trusts (45%).

• The trustees may register with the non resident landlord scheme in order to receive rents gross. Trust g

• The property is not ‘enveloped’ e.g. owned through a company therefore ATED and CGTED are not applicable.

• The settlor (assuming he can benefit from the trust) is taxed on UK income arising in the trust (i.e. from rent of property) but tax credits are available in respect of tax paid by the trustees.

• Inheritance Tax is applicable as the trust owns the property directly i.e. ‘relevant property’. A principal charge is due every ten years from the date of creation of the trust on the value of the property (maximum 6%)



the property (maximum 6%)• Section 87 will apply on a distribution from the trust but the

remittance basis will be available even though the trustees will have sold a UK asset.

• CGT not currently applicable for the trustees but may be due under new rules from 6 April 2015.

46


Commercially Let

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• ATED and CGTED are not applicable in this case as the property is not owned by a company

• Inheritance Tax is applicable as the trustees own the property directly i.e. ‘relevant property’. A principal charge is due every Trust y p p y p p g yten years on the value of the property (maximum 6%)

• CGT not currently applicable for offshore trustees; however may be due under new rules from 6 April 2015. PPR relief may be available to exempt the gain provided settlor is allowed to occupy property under the terms of the settlement and it is his/her principal private residence as defined by HMRC.

• As before, s87 TCGA is applicable in respect of rent free occupation. An annual capital payment equal to the annual rental value is deemed to have been paid to the settlor



p(benefit). The capital payments are matched to capital gains as they arise, in this case when the property is sold.

47


occupied by Settlor (Rent free)


• The Trustees will be required to complete a UK trust return and pay tax at the rate applicable to trusts on UK income arising in the portfolio.

• Income may be taxable on the settlor if he is the life tenant of th t t d 624 ITTOIA if it i di ti t t d h

Trustthe trust or under s624 ITTOIA if it is discretionary trust and he can benefit. The remittance basis should apply to non-UK income.

• It is important for the trustees to ensure that the income and gains arising in the portfolio are segregated. Separate accounts should be created, for UK income, for foreign income and for capital and gains. This is important when it comes to paying distributions to the settlor and beneficiaries.

• CGT not applicable as offshore trustees are not liable on i


Portfolio of Shares (UK and Foreign

Investments)


gains. • However, s87 TCGA is applicable, matching capital payments

to gains – consideration may be given to timing payments to reduce the cost of the remittance basis charge.

• Inheritance tax may be applicable if the trustees own the UK shares directly i.e. ‘relevant property’. A principal charge is due every ten years on the value of the UK property (maximum 6%)

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Questions?


Contact details

• Michael Hooke [email protected] 01183 222521

• Mark Michael [email protected] 01534 824211


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Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the


, g y p p y plegal structure of DTTL and its member firms.

Deloitte LLP is the United Kingdom member firm of DTTL.

This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198.


‘A T ’ A i lt l P t‘A Tax’ on Agricultural Property

Clive Beer Director

Head of UK Rural Professional Services


savills.com


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Clive Beer – Director


Tax Planning

Valuation

Trust Practice

Property Investment


Land Development

Dispute Resolution / Mediation

Agenda

This talk will include discussion on:

Agricultural Property Relief (APR)

Farmhouses

Buildings & Land

APR cases

Links with Business Property Relief


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APR Criteria

Are you a farmer ?

Do you have a farmhouse and agricultural land ?

Is the farmhouse occupied for the purpose of agriculture ?

Is the farmhouse character appropriate ?

Is the land farmed for agricultural


gpurposes ?

Benefit of APR

• 100% or 50% Inheritance Tax relief on the Agricultural Value of all eligible

Agricultural Property


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Is the House a Farmhouse?

“A dwelling for the farmer from which the farm is managed” (Rosser v IRC)

“A farmer is the person who lives in the farmhouse to farm the land comprised in the farm and who farms the land on a day to day

basis” (Antrobus 2)


Agricultural Property Relief

A typical farmhouse?A typical farmhouse?


Accepted as a farmhouse and character appropriate on 280 acres

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Cookhill Priory - the subject of the Antrobus cases


Agricultural Value and Character Appropriate


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Antrobus 2

Antrobus 1 dealt with the question of Character Appropriateness

But left open the issue of whether agricultural value of the property differed from

its open market value?

Agricultural value was subject of the Antrobus 2 case – Lands Tribunal (2004)


Antrobus 2 - Conclusion

The Tribunal found:-

A i lt l V l f d i h th ti l k t l d h ill t bAgricultural Value found in hypothetical market – exclude anyone who will not be

farming on a day to day basis i.e. the lifestyle farmer

Hypothetical covenant is more restrictive than that of a standard agricultural

occupancy condition (AOC)


Rule of thumb:- Agricultural value should be 30% less than market value

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Rosteague House

Mckenna Case

Not character appropriate to 187 acres

Not a farmhouse due to level of occupier’s

involvement

Rosteague House



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Farm Buildings


Farm Buildings


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Farm Buildings


Outbuildings


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McKenna - Conclusion

The Special Commissioners found:-

Rich Man’s Residence

Did not occupy for day to day farming purposes

Not character appropriate

D McKenna and Lady McKenna did not occupy for purposes of agriculture in two


years leading up to deaths


Golding v HMRC

Classic Smallholding:

Small 3 bedroom farmhouse in poor

condition

Range of buildings in proximity to farmhouse

Land extending 16.29 acres


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Farmhouse Interior


Approach to Farm


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Traditional Barn


Agricultural Machinery


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Land



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History

1940: Mr Golding’s parents purchased Blue Gates Farm

Mr Golding worked on the farm for 65 years

- Early years: Range of farming activities

- After death of wife: reduced to some arable and egg production

- No subsidies claimed

Farm remained relatively unchanged


Livelihood derived from farming activity - Tax returns accepted by HMRC

My Involvement


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Revenue had accepted that the land and buildings qualified for APR

Revenue accepted farmhouse was occupied for agricultural purposes

Revenue’s Position

Revenue accepted farmhouse was occupied for agricultural purposes

However:

Principal reason for denying APR on farmhouse:

- House was not “of a character appropriate” to land and buildings

The area of land accompan ing the ho se as too small


- The area of land accompanying the house was too small

Expert Evidence

Civil Procedure Rules

RICS Practice Statement: Surveyors Acting

as Expert Witnesses 3rd edition

“Must be, Must be Seen to be, your

Independent and Unbiased Product, and fall


within your Expertise, Experience and

Knowledge”

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My Approach

Apply Antrobus Tests

Physical Evidence

Historical Factual Matrix

Finance Test Proved by History

Defra Data – (over 100,000 holdings in England)

Listing Evidence


Listing Evidence

District Valuers Approach

Settled Cases

Financial

Financial

Financial

Comparable of Sales


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Golding Achievements

Golding confirms that the principles of Antrobus are still alive

Golding has provided clarity and confidence

- If HMRC had won the ‘character appropriate’ test would have been

subject to farming profitability

If so farmhouses would not qualify for APR if poor accounts


- If so, farmhouses would not qualify for APR if poor accounts

• Settlement of case – awareness of litigation

Achievements (cont)

Golding secures APR for farmers in the futureg

- Acknowledgement that age can result in lower business turnover and

profitability does not mean a farmhouse will cease to qualify for APR

HMRC did not launch an appeal


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BUSINESS PROPERTY RELIEF


Business Property Relief

Cannot claim BPR and APR on the same elements of value

APR has priority

BPR may be available on excess market value over agricultural value for Agricultural property. Not generally

available on the farmhouse.

2 year ownership qualifying period

100% or 50% relief


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Farmer v IRC [1999]


[ ]

BPR is available on the value of an interest in a business, provided that business

does not consist wholly or mainly of investments

Test requires an overall judgement of the purported business, effectively as to

h th it i ti b i i i l i i t d


whether it is an active business or is more passively receiving rents and

investment returns.


Balfour Case

• Whittingehame Estate, East Lothian

1907 acres, with Tower House

665 acres in hand farming

917 acres of let farms

308 acres woodland and park


26 houses and cottages

2 commercial premises

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Upper Tax Tribunal – Balfour Principals

• Lord Balfour carried out the management of the estate both on a day-to-day g y y

basis and in terms of strategic decision making

• Separate trust and farm accounts - consistent with good management practice

• The fact that the trust was a separate entity from Lord Balfour does not mean

that there had to be two separate businesses


that there had to be two separate businesses.

• The business should be looked at over a period of time (Farmer v IRC)

Balfour Matrix

IHT Tax Planning Resource



Factual Matrix


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Conclusion

Importance of Tax Planning

Case Law Development

No two Farms or Estates are the same

Historic agricultural activity accounted for


Relationship between APR and BPR


Clive Beer, MRICSTelephone: 01952 239511

Mobile: 07967 555654

Email: [email protected]

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Leveraging – the market, the opportunities the risks the coststhe opportunities, the risks, the costs.

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2007

THE MARKET

Rank Company Country Market cap,US$ billionUS$ billion

1 Bank Of America USA 135.271

2 Citigroup Inc. USA 119.783

3 JP Morgan Chase USA 115.79

4 HSBC UK 114.928

5 Mitsubishi UFJ Financial Group Japan 81.94

6 Royal Bank Of Scotland Group UK 78.73

7 ING Group Nederlands 78.088

8 Credit Agricole France 77.462

9 Wachovia Corporation USA 69.716

10 BNP Paribas France 67.378

11 Banco Santander Spain 62.072

12 Industrial & Commercial Bank of China China 58.975

13 Barclays Plc UK 53.05

14 Unicredito Italiano Spa Italy 50.726

15 Wells Fargo USA 45.814

16 Deutsche Bank AG Germany 44.142

17 Bank Of China Limited China 44.137

18 China Construction Bank China 42.294

19 Mizuho Financial Group Japan 40.724

20 UBS AG Switzerland 40.703

Rank Company Country Market cap,US$ billion

2013

THE MARKET

p y y US$ billion

1 Industrial and Commercial Bank of China China 235.23

2 China Construction Bank China 204.28

3 Wells Fargo USA 196.39

4 HSBC Holdings UK 195.72

5 JP Morgan Chase USA 185.65

6 Agricultural Bank of China China 150.48

7 Citigroup Inc. USA 136.23

8 Bank of America (BoA) USA 132.66

9 Commonwealth Bank of Australia Australia 115.26

10 Westpac Australia 99.84

11 Royal Bank of Canada Canada 87.4711 Royal Bank of Canada Canada 87.47

12 Mitsubishi UFJ Financial Group (MUFG) Japan 84.72

13 ANZ Banking Group Australia 81.82

14 Itau Unibanco Holding Brazil 80.32

15 Toronto-Dominion Bank Canada 76.65

16 Banco Santander Spain 71.2

17 Goldman Sachs USA 70.4

18 Sberbank of Russia Russia 68.97

19 Bank of Nova Scotia Canada 68.86

20 Banco Bradesco Brazil 68.5

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Credit

THE MARKET

NO

Risk

PolicyRegulator

Return

THE MARKET

• PRA• FCA• EBA• Concentration• Hold Limits

Regulators• Bundling

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THE MARKET

• Person• Amount• Repayment• Security• Expediency• Remuneration

Credit Risk

• Services

Property

THE OPPORTUNITIES

→ Residential→ London (Prime) / South of England / Rest of UK→ Freehold or Leasehold (sub 50 years)

→ Commercial → Prime / Sub Prime / Secondary / Tertiary / Ground Rents→ Term and Strength of Lease→ Alternative use

→ Development→ Type→ Exit→ Experience

→ Agricultural / Country / Sporting Estates→ Productivity→ Proximity to London→ Listed Property

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Stock or ‘Lombard’ / M&A

THE OPPORTUNITIES

Stock or Lombard / M&A→ Liquidity

→ Single or Portfolio→ Global / FTSE / AIM / Unlisted→ Private Equity→ Options / Futures→ Hedge Funds (carry)

→ Regulator→ Exchangeg→ Political Risk→ Capital Restrictions (India / China)

→ Holding Structure→ Legal Status

Alternatives

THE OPPORTUNITIES

Generally non Income producing, therefore who is the underlying client?

→ Metals / Minerals→ Gold→ Platinum→ Jade

→ Aircraft / Yachts / Art / Classic Cars→ Registration→ Authenticity / Provenance→ Security

→ Insurance – JUMBO Life Insurance→ 90% gearing→ Domicile→ £2m plus

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THE OPPORTUNITIES

Pensions→ Appropriateness

→ Risk profile

→ SIPPS→ 50% max gearing→ Commercial / Agricultural Property

St k→ Stock

→ SASS

Choosing a bank

THE RISKS

Choosing a bank→ Term of debt

→ Refinance risk

→ Bank Strength→ Tier One Capital→ Basel III

→ Pricing v AUM

→ Bank policyp y

→ Monitoring – covenants→ Regulator monitoring / Market caps→ Forced changes

→ Track record

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Risk of Stock or ‘Lombard’

THE RISKS

Risk of Stock or Lombard Do you fully understand the implications of leveraged stock? Could you answer the question to a compliance officer?

Returns can be enhanced, but also losses can be greatly magnified.

→ Investment risk profile

→ LTV

→ Margin Call

→ Top Up Level

→ Additional Pledge

→ Tax

→ Forced sale

→ Capital Gains

THE COSTS

CORRECT STRUCTURE

NEGOTIATE

MANAGE RELATIONSHIP

→ Consider all assets

→ AUM→ Cross products→ Margin v Fee

RELATIONSHIP

COST OF GETTING IT WRONG

→ SWAPS→ Forced Changes

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REQUIREMENTSASSETS

CASE STUDIES

Case A – Family TrustREQUIREMENTS→ Additional borrowing of £8m→ Reduction in risk of margin call→ Longer term commitment→ True Private Banking relationship

CHALLENGES→ Inability to pledge further stock→ Low liquidity of single stock

FACILITY SECURED→ 5 year term, margin reduction of 25%→ £20m borrowing facility

Interest only no early redemption penalties

ASSETS→ £80m of single stock→ £20m of mixed property stock→ PG worth in excess of £1bn

INCOME→ Dividend income 95%→ Rental income 5%

PRESENT BORROWING→ £12m→ 2 providers→ Annual revolving facility

ALC has managed the full process including:-

• Bank credit report• Detailed Trustee report

• SOW / AML documentation• Account opening process

→ Interest only, no early redemption penalties→ No PG→ Increase in LTV from 35% to 65%

SECURITY→ Limited number of single stock→ Property assets → PG

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Case B – Family Office

CASE STUDIES

REQUIREMENTS→ Borrowing of £50m→ Long term commitment→ True Private Banking relationship

CHALLENGES→ Price volatility→ Custody of asset

FACILITY SECURED→ Top Tier Private Bank→ 5 year term

ASSETS→ £280m of gold bullion→ PG worth in excess of £400m

INCOME→ Business income 80%→ Rental income 20%

PRESENT BORROWING→ Nil

SECURITY y→ Margin above overnight LIBOR with nil custody charges→ Interest only, no early redemption penalties→ No PG or property as security

→ Gold Bullion→ PG


• Bank negotiations• Secured two offers sub 100 bps margin

• SOW documentation• Account opening process

Case C – Property Portfolio & Trading Business

CASE STUDIES

REQUIREMENTS→ Borrowing of £20m→ Commitment to fund an acquisition→ 16 year amortization profile

CHALLENGES→ Mix of trading and investment assets→ Funding the acquisition of a further trading business→ Complex structure incorporating 13 Ltd Companies

FACILITY SECURED→ 5 year term

ASSETS→ Property assets circa £38m

INCOME→ Rental income→ Trading Income

PRESENT BORROWING→ £16m

SECURITY→ Property 5 year term

→ 16 year amortization profile→ Reduced interest margin

Property→ Debentures


• Bank negotiations• Managed legal and valuations

• AML and Account opening process

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Case D – Property Portfolio & Cash Deposits

CASE STUDIES

REQUIREMENTS→ Borrowing of £18m→ Commitment to fund further property purchases→ Reduction in net costs

CHALLENGES→ Compliance with the tax structure in place→ Agreement to a property “hunting pot”→ Use of two independent lenders

FACILITY SECURED→ 3 and 5 year term

ASSETS→ Property assets circa £17m→ Cash deposits £10m

INCOME→ Rental income

PRESENT BORROWING→ £13m

SECURITY→ Property 3 and 5 year term

→ Interest only facilities→ Reduced net costs and maximum tax benefits

→ Property→ Cash


• Bank negotiations• Managed legal and valuations

• AML and Account opening process• Working with the Tax Planner

Thank you for your attendance

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TRUSTS IN COMMERCIAL SS CO C … slides for...Contractor 13/07/2014 8 Purpose Trusts – Exit Trusts Insolvent Corporate Structure Parent Company Holding Company Trustee of Purpose