Your Questions

March 5, 2010 6:15 pm

Can I change divorce settlement to help pay tax?

I am a UK entrepreneur living mainly abroad since my divorce in 2005. But I still have property and social interests in the UK. I was concerned to read that HM Revenue & Customs recently won the right to levy £30m in back-tax on entrepreneur Robert Gaines-Cooper, who lives abroad. When I divorced, I made a capital settlement for my wife. Were I to face a similar fate to Gaines-Cooper, I would have serious financial issues. Can I change the divorce settlement to access what may be vital funds?

Pauline Fowler, partner at solicitors Hughes Fowler Carruthers, says the Court of Appeal’s decision in Robert Gaines-Cooper’s case raises problems for a number of British expatriates.

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Your Questions

Gaines-Cooper retained important links with the UK, including a home in Henley and a will drawn up under English law. The court decided he had never made the distinct break with the UK required for non-resident status.

It is tempting to think you could unpick your 2005 divorce settlement should you be presented with a significant back-tax bill. However, the case law for changing settlements in such circumstances is not encouraging.

Last year, fund manager Brian Myerson asked the Court of Appeal to revisit his divorce settlement, which had been based on the value of the shares in his company in 2008. By 2009, the shares had fallen considerably in value.

But his appeal was rejected, partly because the original order had been made with his consent and, at the time of the settlement, the shares were known to be a volatile asset.

The main principles on which a court will entertain an appeal because of a change of circumstances are: a new event has occurred since the making of the order which invalidates the basis or fundamental assumption on which the order was made; the new event took place within a relatively short time of the original order, generally a few months; and the application for leave has been made reasonably promptly.

The time between your 2005 settlement and now means you are very unlikely to be able to change it.

Anyone currently negotiating a divorce settlement who is facing possible tax or other liabilities should consider introducing terms that allow for those potential liabilities becoming actual liabilities.

Funds could be earmarked to meet the tax, on the basis that any balance remaining is then shared between the couple. Depending on the levels of capital available, this could result in a maintenance order becoming necessary while funds remain tied up. That is not an immediately attractive option as most people prefer a clean break, but it does preserve some flexibility.

Worry over film funding tax break

A few years ago, I was encouraged to invest in a film-funding scheme to take advantage of tax breaks for supporting the industry. I understand that such schemes are now illegal, but that HM Revenue & Customs (HMRC) is continuing to investigate investments made through these vehicles as far back as 2003. I am concerned I may receive a sizeable backdated tax bill. If this happens, could I take any action against the advisers who recommended that I invest in the scheme?

David Pryce, partner at professional negligence specialists Fenchurch Law, points out that the 1997 Finance Act offered tax relief on investments made in British films provided certain criteria were met. But this opportunity also stimulated the creative juices of designers of tax avoidance schemes.

For some years now, HMRC has been investigating claims for tax relief for investments in film-funding schemes, but the fact that a claim is being investigated does not mean the scheme was illegal. Some schemes under investigation are legitimate and have contributed greatly to the British film industry.

If your claim for tax relief is disallowed, it may be because your scheme was set up primarily to avoid tax. These schemes are now rare, but HMRC is still able to recover tax from investors, even where relief has already been given.

Of particular concern are schemes that appear to allow investors to reclaim more tax from HMRC than the amount of their capital investment.

As film-finance partnerships generally constitute unregulated collective investment schemes, compensation under the Financial Services Compensation Scheme is not usually available. And many companies behind the less respectable schemes avoid having assets, making it pointless for investors to try to recover losses.

However, if you were advised to invest by a professional adviser, and if your claim for tax relief is ultimately disallowed, the adviser may have been negligent. If so, you can make a legal claim against him or her to recover your loss.

Any claim would need to be brought within six years of the date on which you were first entitled to bring a claim – typically the date of investment – or, if later, within three years of the date on which you became aware you had lost money as a result of the advice given.

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