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Budget 2008: The wealth manager’s point of view

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18th Mar 2008
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Segments of orangeLouise Somerset, RBC’s wealth management tax director, assesses how the chancellor’s budget affects the wealth manager’s business.

Taxation of non-UK domiciliaries (non-doms) individuals

The much publicised £30,000 annual charge payable by non-doms who have been resident in the UK for seven of the last 10 tax years, will come into effect from 6 April 2008. This will apply to those aged 18 and above who have offshore income and gains over £2,000 (increased from £1,000).

However, this will now be a charge on specific unremitted income and gains and not a stand alone charge. This will be good news for US citizens, who will be able to claim credit against their US tax.

If taxpayers wish to remain taxable on the remittance basis in a particular year, they will have to identify specific foreign income and gains, and effectively pay tax of £30,000 (either income tax or capital gains tax, as appropriate), in respect of them. The income and gains which have been identified in this way can then subsequently be remitted to the UK tax free, but only after all other offshore income and gains arising in the same year have been remitted and tax paid in respect of them.

As anticipated, source ceasing will no longer be effective, and where income has already been source ceased it will be taxable when remitted, if it is not remitted before 6 April, 2008. Currently, non-doms are only taxed on foreign investment income where that money is brought into the UK as cash. From 12 March, this has been widened to include property acquired and services derived from foreign income (although, in a sensible change, personal effects, such as watches, jewellery, clothes and shoes, have been
excluded).

Non-doms have frequently taken out offshore loans to buy UK property and paid the interest out of offshore income without it being remitted to the UK. The draft legislation indicated that this would change, and the interest on new or amended loans will still be caught. However, the interest on existing unaltered loans secured on UK residential property can continue to be financed out of offshore income without a remittance for the period of the loan or until 5 April, 2028.

Offshore trusts

Non-dom settlors of offshore trusts can breathe easier tonight; the proposals for all trust gains to be treated as arising to them personally have been reversed. However, non-dom beneficiaries (whether or not the settlor) who receive capital payments in the UK from offshore trusts will be charged to capital gains tax where those capital payments are (effectively) matched to gains realised after 6 April, 2008.

It has been confirmed that trustees of offshore trusts can make a rebasing election as at 6 April, 2008 in respect of both directly and indirectly held assets, i.e. including assets held in underlying structures. This is a welcome
clarification and effectively means that only gains realised or accruing post 6 April can ever be within the tax charge for non-dom beneficiaries.

HMRC has confirmed that there will be no requirement to disclose information about trust assets, provided the taxpayer has declared any taxable income or gains from the trust. However, HMRC may seek information if an election to rebase the trust assets has been made or it
enquires into a beneficiary’s tax return.

UK residence: Day count rules

Another good piece of news has been a relaxation of the originally draconian rules on how days are to be counted for the purpose of determining residence. At present, HMRC ignores days of arrival and departure when deciding how many days an individual has spent in the UK in any one year. In January, the draft legislation provided that both days would count as from April 6. An individual will be resident in the UK if he spends 183 days or more in any one year or an average of 91 days or more over a 4 year period.
However, has now announced that the individual must be present in the UK at midnight for that day to count for residence purposes. Days spent in the UK whilst in transit between two non-UK destinations will also be ignored, even if the passenger moves between airports or between terminals for two different modes of transport, and even if he spends the night in the UK, provided he does not engage in other activities whilst in transit, e.g. attend a business meeting.

Capital gains tax
As previously announced, taper relief and indexation relief will be abolished and all capital gains will be taxed at 18 per cent. The much publicised entrepreneurs’ relief will have effect for disposals of business assets after 6 April, 2008. The first £1 million of qualifying gains realised over the lifetime of the individual will be taxed at 10 per cent.

Enterprise investment scheme (EIS) relief
The maximum amount that can be invested in EIS shares in a tax year and qualify for a 20 per cent income tax credit and capital gains tax exemption on subsequent sale is being increased from April 2008 to £500,000.

Corporation tax
The main rate of corporation tax will be reduced from 30 per cent to 28 per cent. However, the rate for small companies will increase from 20 per cent to 21 per cent from 1 April, 2008. The Chancellor talks widely about supporting small businesses, but he has introduced a number of measures in recent years which suggest otherwise.

Anti-avoidance provisions
No budget is complete without a number of anti-avoidance rules, and this one is no exception. Over the last 10 years or so, taxpayers have mitigated their liability to income tax by investing in trading partnerships, which have generated initial losses which can be offset against their other income. HMRC has clamped down on these investments in successive budgets, with the result that, more recently, individuals have been trading on their own account. As from 12 March, however, losses generated in any trade will only be capable of being offset against other income of the trader if he spends an average of at least 10 hours a week in conducting his trade.

There will be transitional provisions for such arrangements entered into before 12 March; although we have no specific information on these, we anticipate that arrangements entered into unconditionally before this date should escape the tax changes.

The wording of certain double tax treaties, most notably those with the Isle of Man and the Channel Islands, has apparently enabled taxpayers to avoid paying UK tax on the profits arising in a foreign partnership from the sale of
business assets, particularly UK land subject to planning permission, but which has not yet been developed. Ominously, the press release announces that, notwithstanding the wording of the relevant double tax treaty, UK residents have always been liable to pay UK tax on their profits from foreign partnerships. It seems likely that this provision will result in tax being payable retrospectively.

Alternative investment funds
To make way for a new FSA regime, certain funds will be able to elect to move taxation on offshore income gains from the fund to its investors.

Qualifying offshore funds
HMRC has now removed the distribution requirement for funds to qualify; instead income is ‘reported’ to investors, and they are subject to tax on this reported income. This may give rise to double taxation as it is implemented; income tax on deemed income and capital gains tax on the increase in value of the fund due to the income being kept within the fund.

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