2008 UK Budget " Darling backtracks on original draft legislation"

June 2008

Alistair Darling has backtracked on many of the inequitable tax proposals affecting UK resident, Non domiciled individuals, issued in the draft legislation in February of this year.

The main areas which have been backtracked are:

1. The proposal to charge non- domiciled settlors to Capital Gains Tax on trust gains as they arise has been dropped.

2. The proposal to charge Capital Gains Tax on all capital payments (arising from the sale of UK assets) made to non-domiciled beneficiaries, even if not remitted to the UK, has been dropped if the non-domicile opts to pay £30,000 tax to retain the benefits of the non- domicile status.

3. Trustees are able to elect for a rebasing of all assets at April 2008 market value. So only gains arising after April 2008 will be taxable.

4. Requirements to disclose details of offshore trusts have been dropped, however if trustees opt for the rebasing election or HMRC enquire into a beneficiary’s return, then details will have to be given.

5. The £30,000 tax charge to retain the benefits of non-domicile status has been changed to a tax rather than a charge and can be used as a tax credit against income or gains remitted, therefore allowing it to be used for double taxation relief. The £30,000 will only apply to adults over the age of 18.

6. Including the days of arrival and departure has been dropped for day counting purposes for UK residence and replaced with presence in the UK at midnight.

Below is a more detailed analysis of these changes.
Individuals – Day counting 91-day average test for UK residence.

Although not statute, HMRC will treat a person as resident in the UK if they spend over 91 days in the UK on average over a four year period. Prior to the draft legislation days of arrival and departure were not included as days.

The draft legislation clearly stated that days of arrival and departure were to be included in the day count for UK residence purposes. The government has backtracked on this, stating that it is now the number of nights that are spent in the UK. This means that a day is included in the count, if an individual is in the UK at midnight. Therefore if an individual arrives in London at 11am and leave at 7pm, this would not be counted as a day. HMRC has also conceded on transit flights, which means that if an individual has a connection flight in the UK, even if that means the individual is in the UK at midnight, this will not be counted as a day provided that the individual does not engage in activities (such as business meetings) that are unrelated to the transit.

Individuals – To retain the benefits of non- domicile status once individuals have been resident in the UK for the past 7 out of 10 years and their overseas income is above £2,000, they must pay £30,000.

The £30,000 charge will no longer be a charge but a tax on unremitted income and gains. This means that the £30,000 paid can be used as a credit for double taxation relief.

As the £30,000 is a tax the individual can choose which unremitted income or gains this tax will apply to, so if those are remitted in the future they will not be taxed again.

The £30,000 will now only apply to adults (over the age of 18).

The £30,000 tax can be paid from an offshore account and not treated as a remittance.

Trusts

Settlor – The UK-resident, non-domiciled settlor of an offshore trust will now not be subject to capital gains tax should the trust dispose of a UK asset. This was the case prior to the draft legislation, and again after public outcry, the chancellor has backed down on taxing settlors

Beneficiary – The beneficiary will only be subject to 18% capital gains tax on the sale of a UK asset when the proceeds are remitted to the UK and when they have originated from gains post April 2008. If the trustees elect to rebase the assets at market value this would mean any gains accrued (realised and unrealised) prior to April 2008 would not be subject to capital gains tax. However the basis will be on a last in first out (LIFO) therefore any gain accrued between April 2008 and the date of the sale will be taxed first at 18%.

Example

Trust purchased a UK building for £1,000,000 in 1988; the market value of the building in April 2008 was £11,000,000. The building was sold in December 2008 for £12,000,000. A capital payment of £12,000,000 was made to the UK-resident non-dom beneficiary in Jan 2009. The trustees have elected to rebase. The tax liability for the beneficiary would be £1,000,000 X 18% = £180,000. The remaining £10,000,000 would not be taxable as it arises from a gain accrued before April 2008.

If in the above situation the capital payment to the beneficiary was £2,000,000. The tax liability would still be £180,000. The remaining gains not distributed would be carried forward and when distributed as capital payments they would be tax-free.

In the above example if we assume that the capital payments have been remitted to the UK and that the client has opted to pay the £30,000 tax to retain the remittance basis then he can set off the £30,000 against the £180,000 making the amount of the further tax payable £150,000.

Please note that it is the trustees who have to elect to rebase the assets, and when they do, all of the assets of the trust will be rebased. The election to rebase must be done by the 31 January following the tax year in which the following occurs:

1. A capital payment is made to UK-resident beneficiary; or

2. Part of the trust fund is transferred to a new settlement.

Offshore Companies owned by UK-resident, Non-domiciled shareholders

The chancellor made the rebasing election available only to trustees. Companies held under trusts which own UK properties will therefore only be taxed on post April 2008 gains, however those held personally will be taxed on all gains. It is essential if you own an offshore company, which holds UK assets that you take legal advice immediately.

The legislation is still extremely complex and will cause considerable difficulties to UK resident non- domiciled clients of Gibraltar firms. Every client should be aware that they would probably need legal/accountancy advice to negotiate the difficulties presented by this legislation to minimise any potential future tax burden.

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