Tax Break

John Fisher, international tax consultant

Archive for the month “January, 2020”

The Windsor Saga

Who by car crash? Who by suicide? Who by execution?

One of the perennial challenges of the writers of successful soap operas is finding original ways to write actors, who have had enough, out of the script. They can’t all be sent off to Canada, and the public sometimes doesn’t like what it gets. When, broadcast on Christmas Day 2012,  Downton Abbey’s Matthew Crawley died in a car crash on the way back from visiting his wife and new-born son, the outrage was almost tangible. One nutter even tweeted: ‘Why oh why Lord are you testing me…let alone on the day your son was born?’.

‘It’s the BBC, they want us to do a series.’

The British Royal Family has, of course, been a real-life soap opera at least since the Queen let the cameras into Buckingham Palace a half century ago. Writing people out of the script is a lot more complicated than Downton Abbey. Tragically, they have had the car crash and the sex scandal(s), while one of their number (plus household) is about to head for Canada. Lacking the imagination of Downton creator Julian Fellowes, others just get sidelined or – like old underground trains – are retired from public service.

The latest ‘Rexit’, that of Prince Harry and his family, appears to be attracting attention, less because of the human element, and more because of the budget. That isn’t what writers want to see – it detracts from the fairy tale script, and places the whole event in the grubbiness of the real world.

The British press is full of that bombastic and pompously self-righteous term: ‘The British Taxpayer’. How are they going to live? How much is it going to cost ‘us’? While that last question may be appropriate for Leninists, Trotskyites, and Corbynistas, it is not the ticket for a country whose electorate just returned a Conservative government with an 80 seat majority.

He also surrendered America

The Queen is not a pauper surviving on handouts from the State. Monarchs across the centuries amassed huge fortunes from – inter alia – rape, pillage and murder that gave them direct or indirect control over the means of production and human capital. Nice people all. On assuming the throne in 1760, George III surrendered his income from the ‘Crown Estate’ (basically, his property) in favor of an annual payment from Parliament (the Civil List). The Crown Estate was effectively placed into trust for the State, and the Treasury received the income. That state of affairs lasted for over 250 years until, 7 years ago, the Civil List was replaced by the Sovereign Grant which set the payment to the monarch at 15% of the total net revenues of the Crown Estate (temporarily increased to 25%).  Add to this the Royal Family’s  private wealth from the Duchies of Lancaster and Cornwall, as well as the occasional  flutter on the horses, and the Queen is not short of a pound or two.

Thus, as the right to own private assets is still embodied in British law, and as the Sovereign Grant – as successor to the Civil List – is a contractual agreement to pay royalties at a fixed percentage  in perpetuity for the surrender of all control of the Crown Estate by George III, why is it anybody’s business how the wealthy Queen finances her grandson’s welfare? Were the monarchy to be dissolved today in anything other than a communist-style revolution, the royals would be entitled to the two duchies (as at present) and a financial settlement in respect of their rights to income from the Crown Estate. They wouldn’t be living on a council estate as depicted by Adrian Mole creator Sue Townsend in ‘The Queen and I’.

The British Taxpayer can’t even feel indignant over the income tax and capital gains tax position of the monarch anymore. While a king or queen cannot pay tax (it is, after all, HER MAJESTY’s Revenue and Customs), the Queen and Prince Charles have been paying voluntary amounts since 1993 that are supposedly designed to shadow the position of the rest of us.

There is one gaping exception. One of the subplots in Downton Abbey is the recurring issue of Death Duties, today known as Inheritance Tax. It serves as the reason great family after great family is forced to sell their stately home or significant parts of their estate. Under the Queen’s arrangement with her Revenue and Customs, everything she leaves to her successor is not liable to Inheritance Tax (as well as everything inherited from her mum). While it might be argued that the properties included in the Crown Estate (such as Buckingham Palace and Windsor Castle) do not belong to her, Sandringham and Balmoral definitely do (her father even had to buy Balmoral off his abdicating brother), not to mention the assets held by the Duchies.

A parody of a soap opera

So, if the press wants to get on its soap box, lay off the Sussexes – that’s a family affair – and concentrate on the death taxes. Of course, were the position to change tomorrow, Her Majesty could transfer all her assets to Charles immediately, and would only have to live 7 years to avoid Inheritance Tax. At 100, she would be a year younger than her mother when she died. Long live the Queen!

Now is the winter of our discontent

How did they find me?

Years ago, before Millennials stalked the earth, I received a call from the Israeli tax authorities. ‘When is your client going to approach us regarding the capital gains tax on their transaction?’ I was duly impressed by the fact the inspector had read that morning’s paper and put two and two together, and was tempted to reply, ‘When they approach me’, but I opted for the benign, ‘All in good time’.

Once more unto the breach, my friends, once more

The fact was that, in the good old days, when the tax authorities wanted money, they had to get off their bottoms and sniff it out. I believe the thrill was in the chase. Not anymore.

Our friends at the Treasury now bless us with their annual shopping list of ‘Positions Requiring Reporting’. These are common tax planning devices where the taxpayer is told, ‘Do what you want, but you have to tell us about it if you are going to make a packet from it’. If all things go to plan, the sniffer dogs will be round before you can say, ‘Two tickets to South America, please’.

Thou hast slept well. Awake

The tax inspector is not as benign as he looks

The latest list, published last week, leans heavily on those coming out of the 10 year tax exempt hibernation granted to first time residents and veteran returning residents on their foreign income. As that particular jolly only entered the law in 2007, it is not surprising that the boys and girls gathering fuel for the engines of state have only woken up now –a year after the  first beneficiaries of the status  were required to report (the 2017 tax year, reporting in 2018).

What is irksome is that, apart from some of the positions being churlish (the income of CFCs and Foreign Personal Vocation Companies being taxable for the entire year even if the new resident’s 10 year period only expired on December 30th), there is at least one which is downright weird. The best way to understand it is to assume the authors of the list were having such a festive time in December while sitting in the comfort of their offices, pens at the ready, that they let the party get out of hand. I will explain.

Among the new positions, it is clarified that, if a dividend is paid from a foreign company after the end of the 10 year exemption period, but in that same year, despite the fact that the income of the foreign company accrued during the 10 year period, it is taxed normally. Fair dinkum. Dividends are a distinct ‘source of income’ in the tax ordinance, and the dividend appeared after the 10 year period. Although not presented in order, it is likely this led them on to the CFCs and Foreign Personal Vocation Companies where a ‘notional’ dividend is considered received on the last day of the year. Not nice that they didn’t split the year into ‘before’ and ‘after’ – it wouldn’t have hurt if, heaven forbid, they had taken the intention of the legislature into account – but there is little to do but gnash teeth.

Aye, there’s the rub

Then the authorities went a step further. Trusts settled by living parents (and certain others) for their Israeli resident children – known as Relatives Trusts – are, by default, required to pay  tax when a distribution is made. Provision is made in the law, and tax authority circulars, for the capital element to be deducted and losses and foreign tax credits to be taken into account, subject to proof being provided to the assessing officer. This approach is distinct from regular trusts that pay tax on an accumulative annual basis – a status that can also be elected by a relatives trust that chooses not to pursue the distribution route (also obtaining a beneficial tax rate). Beneficiaries in their 10 year exemption period are unequivocably entitled to an exemption from tax. But, what about those on the distribution route who receive distributions of income earned after the exemption period?

Fair is foul, and foul is fair

The authorities got carried away with their logic

Evidently pushing the dividend analogy one stage too far, they came to the conclusion that, as the tax event only occurs on distribution, no exemption will apply if the distribution is made after the 10 years. However, while dividends are a ‘source of income’ liable to be taxed in their own right, a distribution is not . What is more, the wording of the law clearly relates to the income derived or accrued abroad – not a million miles from the wording of the clause dealing with the 10 year exemption. It is hard to understand why the exemption would not apply.

I am not bound to please thee with my answers

The good news is that these positions are not legally binding – although their reporting will invite the prospect of audit.

But, let’s face it – the language of our laws isn’t up to Shakespeare’s standards.

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