It has been the Revenue's view for some time that a shadow director of a company i.e. a person in accordance with whose instructions or directions the directors of a company are accustomed to act is liable to tax under Schedule E if he or his family receive a benefit by occupying accommodation provided by the company. A decision from the Special Commissioners suggested that this was not necessarily the case, and so this line of argument has not always been pursued.
The Court of Appeal's judgement in the recent appeals from the Chipping case (R v Dimsey, R v Allen [1999] All ER(D) 745) has removed any doubt for the time being. Although the case was heard in the Criminal Division, the case was argued fully by tax counsel on behalf of the taxpayer. The taxpayer was held to be a shadow director and as such was deemed to hold an office or employment with the companies which owned the properties occupied by himself and his family and as a result was liable to tax on the benefit of the living accommodation provided.
An employee provided with living accommodation by reason of his employment is treated as receiving an emolument equivalent to the value of the accommodation. This is taken to be the annual value of the property (which for UK properties is generally taken as the gross rating value). If the cost to the company of providing the accommodation exceeds £75,000, an additional tax charge will be levied based on a fixed percentage (currently 6.25%) of the cost of providing the property.
Holding UK property through an offshore company has been popular in the past with non-UK domiciliaries because this turned a UK asset into a foreign asset as the individual owned the shares in the foreign company and not the UK property. The shares would not then be subject to UK inheritance tax on the death of a non-UK domiciled person. Individuals who have adopted this structure will now be at risk of an annual Schedule E charge unless they can show that they are not shadow directors. On a property worth £500,000 the charge to tax could be in excess of £10,000 p.a.
It is common practice for the offshore company in this sort of arrangement to be held by an offshore trust. This was the case with Mr Allen's companies, but the jury in the Crown Court held the trusts to be shams which could effectively be looked through. It will be a question of fact as to whether the offshore company is run by its directors answering to the offshore trustees or whether the directors are accustomed to follow the directions of the settlor (or anyone else).
As the argument that shadow directors cannot be taxed on benefits in kind has been blocked, it is now more important than ever for trustees to ensure that they do not allow their UK beneficiaries/settlors to run things, although it can still be argued that in circumstances where the taxpayer gifted the property into the structure the company's cost of providing the accommodation is nil and so the additional charge cannot be made. It may moreover be difficult to demonstrate that the offshore company is genuinely non-resident if decisions affecting property owned by the company are taken in the United Kingdom. If the company is UK resident it would then be taxable on any gains when the property is sold.
The Court of Appeal has also made it clear that a charge may arise in respect of benefits other than living accommodation provided to a shadow director or to members of his family. This would include the provision of pictures and furniture, whether in the living accommodation or elsewhere, or a yacht which is available for private use by the shadow director or his family. Generally speaking, the provision of such benefits will result in the taxpayer being charged to tax on 20% of the market value of the assets at the time they were first provided; the amounts brought into charge will in some circumstances be considerable.
It appears that the Revenue may now seek to tax certain individuals on benefits received from companies. Offshore structures should now be reviewed to assess what the likely impact, taken in conjunction with other rules dealing with income and gains attributable to residents of the UK who receive benefits from such arrangements, will be.
This note is intended to provide general information about a recent development which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.