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Overseas Taxation and Property IncorporationDomicileRemittance BasisIncome TaxIHT

ACCA · Question 3 · Overseas Taxation and Property Incorporation

SECTION B: ADVISORY REPORT

This question is worth 25 marks.

You are a tax advisor. Your client, Dr. Aris, is a highly specialized medical consultant. He was born in Greece and has a Greek domicile of origin. He moved to the UK 14 years ago and has been UK resident for 14 of the last 15 tax years.

Dr. Aris has historically claimed the remittance basis of taxation for his significant overseas investment income, which remains unremitted in offshore bank accounts.

In addition to his medical practice, Dr. Aris personally owns a portfolio of 10 residential properties in the UK, which he lets out. He spends approximately 25 hours a week managing this portfolio, dealing with tenants, maintenance, and financing. The properties have a combined market value of £4 million and a base cost of £2.5 million. There are no mortgages on the properties.

Dr. Aris is considering transferring his entire UK property portfolio into a newly formed UK close company, Aris Properties Ltd, in exchange for 100% of the shares in the company. He wishes to do this to mitigate the restriction on finance costs (should he borrow in the future) and to facilitate estate planning.

REQUIREMENTS:

Prepare a report for Dr. Aris advising on:

(a) The Income Tax, Capital Gains Tax (CGT), and Inheritance Tax (IHT) implications of him becoming deemed UK domiciled at the start of the next tax year. (10 marks)

(b) The CGT implications of transferring his UK property portfolio to Aris Properties Ltd, specifically evaluating the availability and mechanics of Incorporation Relief (s.162 TCGA 1992). (8 marks)

(c) The Stamp Duty Land Tax (SDLT) implications of transferring the 10 residential properties to the connected company. (7 marks)

How to approach this question

Step 1: Format as a professional report. Step 2: For Part (a), clearly state the 15/20 year rule for deemed domicile. Explain the shift from remittance to arising basis for Income Tax/CGT, and the shift from UK-situs to worldwide scope for IHT. Mention the protection of historical unremitted income. Step 3: For Part (b), identify the deemed market value disposal. Outline the three conditions for s.162 Incorporation Relief. Crucially, apply the 'Ramsay' case principles to argue that 25 hours/week managing 10 properties constitutes a 'business' for this relief. Step 4: For Part (c), state the s.53 FA 2003 market value rule for connected companies. Then, apply the '6 or more properties' rule which classifies the transaction as non-residential for SDLT purposes, avoiding the 3% surcharge.

Full Answer

This question covers the transition of a non-domiciled individual to deemed domiciled status, a critical area of UK tax planning. It also tests the incorporation of a property business, requiring students to distinguish between a 'trade' (not required for s.162) and a 'business' (required for s.162, per the Ramsay case). Finally, it tests specific SDLT anti-avoidance rules (s.53) and reliefs (6+ properties rule).

Common mistakes

Students often confuse the definition of a 'business' for s.162 Incorporation Relief with a 'trade' for Rollover Relief. Property letting can be a business, but it is never a trade. Another common error is forgetting the s.53 SDLT market value rule and assuming SDLT is based on the nominal value of the shares issued.
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