Jonathan Crowther outlines the pitfalls in ensuring a donor spouse does not in any way benefit from remittances made out of a gift
A previous article in the Easy guide series on planning for non-UK domiciliaries stated: "Clean capital is cash held offshore, which can be remitted into the UK [by a non-UK domiciliary resident in the UK] without incurring a charge to income tax or capital gains tax.
"Examples of possible sour-ces of clean capital can include: funds that have been received by way of gift or inheritance. Gifts between husband and wife are considered to work but the donor spouse must not in any way benefit from remittances made out of the gift. This may in practice be difficult and so great care must be taken if using this arrangement."
Below is an example of a case that emerged after giving advice on this matter.
A grimm case
Mr Grimm was a US citizen working in the UK. He had a split employment contract, which meant that his remuneration for services performed outside the UK were paid offshore and would only be subject to UK tax when remitted to the UK by him.
Grimm was about to get married and he and his fiancée wished to buy a house in the UK. Grimm made a gift to his new wife outside the UK out of his rolled-up offshore income, which sought to take advantage of a one-off tax benefit in the US for gifts of up to $700,000 in the calendar year of marriage (this was 1991) and she transferred the money into the UK to part-fund the purchase of the house.
Grimm borrowed on the security of the house to fund the balance. Their contributions were approximately equal.
Grimm had taken advice from Mr Newman that by gifting his offshore income to Mrs Grimm it would be converted into clean capital and could therefore be remitted into the UK by Mrs Grimm free of tax.
Newman did not caveat his advice nor warn Grimm that the Revenue might well challenge the efficacy of this scheme if it came to their notice.
Grimm was subsequently subject to an general enquiry into his tax affairs by the Revenue's Special Compliance Office (SCO). The SCO maintained that the funds remitted by Mrs Grimm were as a point of law remitted by Grimm.
There was an SCO settlement, which itemised as one of the heads of charge "tax on a remittance of funds to the UK by a wife from a prior gift by her husband, completed outside the UK".
The problem with settlements with the SCO is they frequently swamp the technical points in a mass of trade-offs. Grimm paid the tax on the remittance as part of such a settlement after taking advice from a barrister that Newman's advice was wrong and sued Newman, who was not consulted during the enquiry.
Details of the case can be found at http://www.bailii.org by searching on "Grimm" and selecting Grimm v Newman Chantry Vellacot Dfk (7 November 2002).
In the Court of Appeal, the judge considered that the case hinged upon the efficacy of the scheme (which the judge in the High Court did not) and so felt compelled to critique it (which the judge in the High Court did not).
It should be noted that the Revenue were not a party to this case and did not make any representations to either the High Court or the Court of Appeal. The judge considered that the scheme worked.
His analysis hinged on the meaning of enjoyment: "The enjoyment must be of his 'emoluments', in some form. If the emoluments have been converted, by a valid gift, into something belonging to his wife, they are no longer his emoluments and are therefore not within the section.
"On the other hand, this also underlines the difficulty, and potential artificiality, of applying such narrow distinctions in the context of dealings between husband and wife."
The judge also considered that Ramsay did not apply to the scheme. The case against Newman therefore failed and Newman was awarded costs, which were out of all proportion to the amount of tax involved, against Grimm.
The problem for Grimm was that as part of the settlement with the SCO he would have signed away any future recourse against the Revenue.
He is therefore stuck with a liability that he should not have paid and the substantial costs of a case, which can only have enhanced the reputation of his erstwhile adviser. The barrister who gave the wrong advice cannot be sued.
Does the caveat that "the donor spouse must not in any way benefit from remittances made out of the gift" still apply? To be safe, yes. In the case of Grimm, it might have been safer to advise that the spouses buy as tenants in common rather than joint tenants, since when the funds were brought into the UK by the wife it was argued in the High Court they were used in a way that did provide the husband with the prospect of enjoyment - the prospect of total ownership of the property should his wife pre-decease him.
One of the counsel for Newman commented: "I consider this decision brings welcome clarification of the scope of the remittance rules and shines light into what had hitherto been murky corners."
Another commentator said: "The remittance basis has been shown once again to be the 'joke', which the Capital Taxes Office described it to be at a seminar in early 2002. Part of the Revenue's Schedule E Manual looks to give incorrect advice, but it is a fair bet that it will not get changed, since the Revenue was not a party in this appeal. In the meantime, The Guardian newspaper continues to snipe at the whole concept of the remittance basis of taxation."
Clients taking advice, or those taking advice on a client's behalf, should always get confirmation of the following (possible answers re Newman's scheme are offered in the brackets):
l Which tax planning strategy is being employed? (Recategorisation of income by alienation.)
l What are the roles of and the protocols applying to the players in the scheme? (The gift must be made with no strings attached.)
l How clear is the law impacting the planning? (Views differ, however, the court's view was that the law is clear.)
l What is the revenue authority's stated view on the plan and the likelihood of an attack? (The Revenue manual can be read as supporting the scheme and therefore the SCO attack should have appeared unwarranted.)
l How aggressive is the planning and where does it sit on the tax avoidance spectrum? (The scheme is fairly routine planning that accepts an invitation offered by the tax law.)
l What documentation is required and who will prepare, review and execute it? (A deed of gift would be advisable referring to the US tax planning considerations. There was no letter of engagement with Newman when there should have been.)
l What claims or elections are required to be made and within what timeframes? (None at the time. A claim must now be made for the remittance basis to apply to foreign income, but not gains, which in turn leads to new planning opportunities.)
l What compliance requirements flow from the plan? (Newman advised that no disclosures were required on either spouse's UK tax returns.)
l If the planning fails technically what are the downsides, including the possibility of criminal sanctions being applied? (See above.)key points
Clean capital is cash held offshore that can be remitted to the UK without incurring tax or CGT
Examples include funds received as gifts or inheritance and gifts between husband and wife
There are grey areas regarding gifts between husband and wife
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