Over the last two weeks, I have considered the pre-A-Day position of funded unapproved retirement benefit schemes. I will now look at how the anti-avoidance provisions might operate in respect of offshore Furbs.
First, let's look at income. Chapter IA Part XV ICTA 1988 can apply if there has been a settlement under which the settlor can benefit. Where there is a close connection between the member and contributing company – say, an owner-manager – income can be assessed on the member as it arises.
No specific statement has been made by the Inland Revenue on the application of these provisions in respect of offshore Furbs but one could expect it to be more aggressive than for UK Furbs. However, the existence of the “exit charge” in respect of benefits paid where gains and income under the trust have not been brought into charge to tax (sections 394 and 397 ITEPA 2003) may operate to make the application of the anti-avoidance provisions less likely. In a fully commercial arrangement at arm's length or such as would have been concluded in a transaction at arm's length, it will be difficult to argue that a settlement has been made.
Section 739 ICTA 1988 could apply to assess income arising on the member if he could be said to have procured the Furbs trustees to make the investments. Section 740 could also apply, if section 739 did not operate, to assess trust income on a UK ordinarily-resident beneficiary when a benefit is received.
Anti-avoidance legislation for CGT comes in the shape of section 86 and Schedule 5 TCGA 1992, where gains made by the offshore Furbs trustees could be assessed on the member if:
There is a “settlement” and
The member has 5 per cent or more of the shares in the close company making the contribution, as provided in paragraph 8 Schedule 5 TCGA 1992.
These provisions will not usually operate if the Furbs is established on a fully commercial arm's length basis.
If the offshore Furbs has invested in a life policy, gains made under a policy held under trust – say, a UK or offshore bond but more likely the latter, given no internal tax charge – will be assessed on the company as settlor under section 547 ICTA 1988. This can be avoided if and to the extent that the gain has been assessed “to tax apart from under S547(1) ICTA 1988”.
Under an offshore Furbs (leaving aside anti-avoidance provisions), gains and income will usually not be “brought into charge to tax”, which means so much of the emerging benefit as exceeds the amount chargeable on the member on the way in and any member's contributions will be charged on the member on the way out.
Where the investment is a single-premium bond, this should equate to the chargeable event gain, which will be subject to income tax in the hands of the member. Thus, where the underlying investment is an offshore bond, there is likely to be a straight see-through of the gain to the member if the gain is realised in the same year the exit charge applies.
Let's turn to the taxation of benefits, starting with a UK Furbs. Under Chapter 2 Part 6 ITEPA 2003 (in particular, section 394), benefits will be subject to tax on the member. This will usually be avoided if the amount contributed with a view to providing benefits was taxable on the member (section 395(4)) and provided all income and gains arising to the trustees have been “brought into charge to tax”. If even some of the income and gains is not so brought into charge, it seems the benefit or lump sum received would be taxable on the member (section 396(1)(a)). For most UK Furbs, under current legislation, lump-sum benefits will be free of UK tax.
The Revenue has confirmed that tax on income and gains inside a UK life fund will count having been brought into charge to tax but any corporation tax chargeable on the employer when the gain is made will not.
Where income and gains have not been brought into charge to tax, the lump sum received less any amount(s) assessable on the member when the contribution was made or contributed by the member will be assessable to tax on the member under section 396 ITEPA as the highest part of income. The Revenue has stated that any amount so assessable on exit, say, from an offshore bond, can reduce any life policy gain otherwise assessable on the employer under section 547 ICTA 1988, avoiding a double charge, say, on the gain on the company and on the member.
For offshore Furbs, gains and income will usually not have been brought into charge to tax and a charge will arise on the basis in the preceding paragraph. This should prevent any risk of a charge on previously untaxed income (including bond gains) under S740 ICTA 1988.
Finally, let's look at inheritance tax. Most Furbs (onshore or offshore) will incorporate a discretionary trust similar to an exempt approved scheme, with a wide discretionary class of beneficiaries. Death benefits will be payable at the trustees' discretion with a non-binding power, vested in the member, to nominate beneficiaries.
Most Furbs will be sponsored superannuation schemes if a separately identifiable admin charge is payable by the employer. Despite death benefits being paid subject to discretionary trusts, as for an approved scheme the 10-year and exit charges will be avoided and death benefits paid from the Furbs within two years of the member's death will be IHT-free.
Under current legislation, an unfunded unapproved scheme hardly seems an attractive proposition at first glance but it avoids all tax implications until benefits are paid. In effect, it is a promise by the employer to pay benefits at particular times, most obviously at retirement. As for a funded scheme, this would usually be in cash.
The employer may fund to meet the liability to pay benefits but tax relief can only be claimed when the payment out of the scheme is made at the time the benefit would also be assessed on the recipient. NI would also be due at that point.
This forms the model for the taxation of Furbs from A-Day. I will look at this next week.