Finance Bill 2008
The Finance Bill has now been published and we can rejoice that the details are available to resolve the finer points on Residence, the £30,000 domicile charge, the remittance basis, offshore trusts, offshore companies, capital gains tax, rebasing, Entrepreneur Relief, etc. We can rejoice even more that the Finance Bill is so comprehensive, covering 500 pages – and we have the benefit of the explanatory notes. They run to a further 1148 pages. I do not want to sound ungenerous but given what we are trying to find, the last thing we wanted was a haystack.
Anyway, without going over too much old ground, the following additional information may be of interest.
Alienation:
There has been an extremely significant change here. It will be remembered that if a non-dom makes a gift out of their foreign income to another person outside the UK, that third party can remit the money to the UK without any charge to tax. It is not their income, nor is it a remittance by the donor. Obviously this falls down if the gift is not genuine, or if there is any reciprocity, but this has been a very valuable technique. From 6 April 2008 if the donee is the spouse (or equivalent) or minor child or minor grandchild of the donor, or an appropriate company or trust, the donor will be taxed on the income if it is remitted to the UK by the donee. The original proposals were much more restrictive and the continued ability to make gifts out of foreign income to adult children is extremely helpful.
A question arises whether income given to a spouse or other relevant person before 5 April can be remitted to the UK after 6 April – and the answer seems clearly to be no. A remittance after 6 April will have the disqualifying characteristics and will be taxable. However, this will not be the case if the income had been alienated before 12 March 2008. That money is safe and can be remitted by the donee at any time without any charge to tax. For gifts made on or after Budget day but before 6 April, the Finance Bill allows the funds to be protected from tax provided they are brought to the UK before 6 April 2008. However, having remitted the money, it should not be removed from the UK, because any subsequent remittance would be taxable.
Offshore mortgages :
Where a foreign-domiciled individual has taken out a foreign mortgage to acquire a UK property, the interest on that mortgage (but not repayments of principal) can be paid out of foreign income without it representing a constructive remittance. That is the present rule, but on 6 April, such interest will represent a taxable remittance. However, where such a loan was in existence before Budget Day and is secured on the UK property, the continued payment of the interest out of foreign income will not be treated as a remittance until 2028.
This protection will be lost if the loan ceases to be secured on the UK property. It will also be lost if any further loan is taken out which is secured on the property or if the terms of the loan are varied or waived. One can see the clear anti-avoidance thinking here but what about a switch from fixed rate to variable rate during the existing term of the mortgage. Would this represent a variation in the terms of the loan? Not perhaps if there is an existing right to switch – but it certainly would be a variation if a new right were to be offered by the bank.
The legislation is specific that the interest must be paid out of relevant foreign income so the discharge of the interest out of foreign earnings or capital gains would be regarded as a remittance.
I have a mild concern about the requirement for the loan to be (and to remain) secured on the UK property. This sounds like an attempt to make the interest have a UK source on the Greek Bank principle but maybe I am being too sensitive. It may be nothing more than an attempt to limit the grandfathering protection to existing properties where hardship would obviously arise, rather than to allow people to move home and buy another property while continuing to benefit from the existing rules.
Rebasing Election:
The trustees of a non-resident trust will be able to make an irrevocable election for the purposes of capital gains tax to rebase all assets held by them at 6 April 2008. This will have the effect of washing out all the accrued gains arising up to that date and securing an effective exemption from capital gains tax for foreign-domiciled beneficiaries. It is only the trustees who can make this election, not the settlor or the beneficiaries. The election applies to all non-UK domiciled beneficiaries whether or not they are taxed on the remittance basis.
This election has to apply to all assets owned by the trust on 6 April and assets owned by any underlying company – to the extent that gains made by the underlying company would have been apportioned to the trustees under section 13 TCGA 1992. This will not be a deemed disposal but when the relevant asset is disposed of, the gain will be attributed to the period before and after 6 April and only the gain for the period after 6 April will be taxable. The attribution of the gain will not be made on a time basis but on the basis of the value of the asset at 6 April 2008. The rebasing election does not have to be made in the abstract, but must be made by 31 January following the end of the first tax year in which a capital payment is received by a UK resident beneficiary.
One of the concerns about the election for rebasing is that it may require a wholesale disclosure of information by the trustees to HMRC and this was the aspect which caused so much trouble. There is no information requirement contained within the Finance Bill (other than that the election must be made in the way and in the form specified by HMRC – but not yet specified of course) and the explanatory notes contain the following passage at paragraph 63:
"The trustees will be required to provide additional information to HMRC about trust assets. Trustees of non resident settlements have been assured in a letter from the acting chairman of HMRC, Dave Hartnett dated 12 February 2008 that in applying the provisions set out in this schedule, HMRC will not require any additional disclosure".
It is difficult to gain much comfort from this paragraph because HMRC clearly need to satisfy themselves that the part of a gain which will be chargeable to tax is accurately calculated and they can hardly do that without requiring disclosure of all the relevant information. Perhaps what this means is that HMRC will only require relevant details in respect of the assets actually disposed of.
Offshore Companies:
At the moment, the attribution of capital gains made by non-resident companies to the shareholders does not apply to foreign-domiciled individuals but the Budget proposals specifically removed this exemption. UK-domiciled and foreign-domiciled individuals were going to be treated exactly the same and any gains made by the company would be fully attributable to the UK resident shareholder. This will apply to tax accrued gains because rebasing will not apply to assets held by offshore companies if the shares in the company are held by UK resident individuals.
However, the Finance Bill contains a relaxation which is a kind of remittance basis for foreign-domiciled shareholders. If the company makes a gain on an asset which is situated outside the UK, the gain will only be attributed to the UK resident and foreign-domiciled shareholder to the extent that it is remitted to the UK.
It looks like an unexpected advantage might arise for UK-domiciled individuals holding assets in a non-resident company. The gains of the company will be attributed to the shareholder who will pay capital gains tax on their proportion of the gains at the new rate of 18 percent. However, the abolition of indexation does not apply to companies so it would appear that the gain attributed to the UK shareholder will be the gain after indexation. This would be welcome but I cannot believe it is intended and I do not suppose it will last.
Offshore Trusts:
The idea of treating foreign-domiciled beneficiaries of offshore trusts in broadly the same way as if they owned the assets directly has not yet materialised. A foreign-domiciled beneficiary will be chargeable to tax on the remittance basis in respect of trust gains – but it will not matter whether those gains are made on UK assets or foreign assets; it is only when the beneficiary receives a capital payment in the UK that the gain on the asset will be taxable. This contrasts with the position of foreign-domiciled individuals owning UK assets which are fully chargeable to capital gains tax despite their foreign domicile.
It may perhaps be helpful to mention that the income tax and capital gains tax treatment of non-resident trusts continue to be completely different. A UK-resident but foreign-domiciled settlor of an offshore trust will continue to be taxed on the income of the trust in exactly the same way – that is to say the UK income will be fully chargeable and the foreign income will be chargeable only if it is remitted to the UK. The changes to the definition of a remittance will obviously be relevant here, but in principle the chargeability is the same. It will be possible for the trustees to segregate the trust assets into capital and income and to bring only capital to the UK without giving rise to a taxable remittance.
The capital gains tax implications were always different, and now they are different for other reasons. A capital gain made by the trustees is not attributed directly to the settlor under section 86 (as it is for a UK-domiciled settlor) because foreign-domiciled settlors are excluded from section 86. This exemption continues. However, the exemption for foreign-domiciled beneficiaries is being removed and they will have the trust gains attributed to them by reference to capital payments – but in only if the capital payment is received in the UK. If the settlor is a beneficiary, the capital payments regime will apply to him in exactly the same way. As trust gains are attributed to beneficiaries only by reference to capital payments (which include benefits of any kind) it does not matter if such benefits are provided out of capital or gains or anything else; if the beneficiary receives a capital payment and the trustees have any unattributed trust gains, it will be taxable on the beneficiary – subject to being remitted to or enjoyed in the UK. Accordingly, whilst there was previously no need to segregate capital from capital gains because neither would be taxable even if remitted to the UK, there continues to be no need to segregate capital from capital gains because the trust gains would be attributed to the beneficiary whether the gains are segregated or not.
Credit for the £30,000 Charge:
It was announced in the Budget that the £30,000 non-dom charge can be attributed to specific items of foreign income which should ensure a double tax credit in other countries. This is quite brilliant – who would have thought we could have introduced a charge on UK residents and made other countries pay it. It was also announced that if the income on which the £30,000 tax is paid were later to be remitted to the UK, that would not be a taxable remittance. That sounds reasonable enough – except that now we know that this only applies if all other unremitted and otherwise untaxable income is remitted first. Not quite so helpful after all.
Residence and Domicile: FAQs
HMRC have published a 16-page note on frequently asked questions on the Budget changes in connection with residence and domicile and in particular the £30,000 charge. As this is the hottest of topics, I read it all with eager anticipation but unfortunately there was practically nothing that we had not seen before.
HMRC confirm that if the £30,000 is first paid into a UK bank account for onward payment to HMRC, that would be taxable remittance. It is only if the charge is paid directly to HMRC from an overseas account that the charge will not be treated as a taxable remittance. They add that individuals will need to keep sufficient records such as a copy of the cheque drawn on an offshore bank account to demonstrate that the payment was sent direct. Cynics have suggested that this is a way for HMRC to learn about offshore bank accounts owned by the taxpayer in respect of which they will then be able to make further enquiries. The paranoid will no doubt establish a new foreign bank account exclusively for this purpose so as to frustrate further HMRC intrusion.
HMRC confirm that if an asset is purchased out of untaxed foreign income after April 2008 and then brought to the UK and tax is paid on it, that the asset is subsequently taken out of the UK and later brought back again, there will be no second tax charge on the second remittance provided tax was paid on the first remittance. However, where it has been remitted in a manner which did not give rise to tax, a second remittance will be taxable.
Transactions in Securities
The recent case of Trevor G Lloyd v HMRC SpC 672 is in many ways a classic section 703 TA 1998 case of a transactions in securities. It is well known that section 703 is designed to counteract tax advantages transaction in securities, the essence being to bring into charge to income tax a receipt which the taxpayer has arranged to be chargeable to capital gains tax (or not chargeable at all). Section 703 is one of the oldest and most celebrated of the anti-avoidance provisions and it comes with a commercial defence – that is to say if the transaction was carried out for bona fide commercial reasons and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained.
In this case, Mr Lloyd sold some shares in a company to another company for cash and sought to pay capital gains tax on the proceeds, after deducting taper relief and retirement relief. There was no doubt that the transaction was a transaction in securities and that there was a tax advantage (i.e., the amount received was not brought into charge to tax as income) and the only question was whether the bona fide commercial defence could be satisfied. Mr Lloyd put forward various commercial reasons for the transaction but the Revenue were able to show that however commercial those objectives were, they were not advanced in any way by this transaction.
The Special Commissioner agreed. End of case one might think. However, the Special Commissioner had some interesting comments to make. In particular, he said that although the transaction may have been unnecessary the appellant could still believe that it was, or the directors could regard it as, a step in achieving another commercial purpose. Accordingly, he found that the transaction was carried out for bona fide commercial reasons.
This sounds extremely promising because as long as the taxpayer thinks that he is achieving some commercial purpose, that will be enough to get him within the defence. It makes taking professional advice rather difficult because the advisor, perhaps more experienced in this sort of thing, could have put him right – and that knowledge would have ruined his defence.
Unfortunately we cannot get carried away here because the defence has two limbs; it is not enough for the transaction to be undertaken for bona fide commercial reasons, the obtaining of a tax advantage must not have been one of its objectives. The taxpayer did understand that this transaction enabled him to claim capital gains tax retirement relief. This was clearly a tax advantage and the Special Commissioner decided that it could not be said to be an effect rather than object of the transaction. A nice try, and it so nearly came off.
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