Paying ATED – avoid those pitfalls!

As we approach the end of October, many offshore companies will be making payments to HMRC in relation to the ATED charge.   As these payments will be made to the UK, the directors of these companies need to be aware of the possibility that these payments could be taxed as ‘remittances’ and thus create ‘tax on tax.’

In the majority of cases an ATED charge will apply where a property is held by a non-UK company (albeit that it is important to remember that the tax can apply to UK companies too).  Such companies are likewise likely to be owned either by an individual or an offshore trust and there could be a taxable remittance where the individual shareholder or a beneficiary of the trust is a UK resident non-domiciled individual and the payment to HMRC in the UK represents or derives from the individual’s foreign income or gains. For this purpose, the foreign income or gains may be deemed to be those of the individual.

Examples where an individual’s actual income is remitted could include:

  • Where an individual transfers some of his foreign income or gains to the offshore company to enable it to pay the ATED charge; or
  • Where a trust was originally settled with the individual’s foreign gains and its wholly owned company pays the ATED charge. This is a taxable remittance because the payment is likely to have ‘derived’ from the individual’s foreign gains.

An example of where the individual’s deemed income can amount to a taxable remittance will include where the company’s foreign income is deemed to be the individual’s income under s720 ITA 2007 (the transfer of assets abroad rules).

The permutations in this context are many and the rules are complicated, so whether or not there is a taxable remittance in any particular case will turn on the facts.  For example, where the individual is the settlor of a ‘settlor interested’ trust and the payment of the ATED is made out of untaxed income from the underlying trust structure there is likely to be a taxable remittance.  This is because such untaxed income is assessable on the settlor on a remittance basis.  By contrast, where a trust has no living settlor or UK resident beneficiaries, paying the ATED tax would be unlikely to give rise to a taxable remittance.

In addition to all of the above, there are a number of other tax issues which will need to be considered when considering how the ATED liability might be paid.  For example, if additional funds are transferred to the company to facilitate this, is there is a risk that the individual providing funds might be making a chargeable lifetime transfer for inheritance tax purposes or be inadvertently becoming a ‘settlor’ of trust?

There is a lot to think about!  And is it unfortunate that – unlikely in relation to the remittance basis charge, there is no concession to provide that monies brought to the UK to pay the ATED charge will not give rise to taxable remittance. Furthermore, there appears to be little if any guidance in this regard.

We can help companies explore different options to find a tax efficient means of funding the tax payment.  Please contact the TaxDesk on 0845 4900 509 and ask for Paul Bramall or Priya Dutta.