McKie & Co
CAPITAL GAINS TAX - ESSENTIAL PLANNING FOR REGIME CHANGE:
NON UK RESIDENT TRUSTS AND COMPANIES
27th February 2008
MA (Oxon), Barrister, FCA, CTA (Fellow), APFS, TEP
McKie & Co (Advisory Services) LLP
I The Structure of the Lecture
II The Changes in Context
2 Irony upon Irony
III The Offshore Settlor Charge - TCGA 1992 Section 86
IV The Capital Payments Charge - TCGA 1992 Section 87
V The Introduction of the Offshore Settlor and Capital Payments Charge
VI Offshore Companies
2 Restriction on Reliefs
VIII A Strange Correspondence
2 The Final 'Clarification'
3 The Second 'Clarification'
4 The Third 'Clarification'
5 The Fourth 'Clarification'
THE STRUCTURE OF THE LECTURE
1.1.1 I was asked to speak on this topic after the Pre-Budget Report
but before any of the draft legislation was available. The only
information we were given about the proposed changes to offshore
trusts and companies was an enigmatic point in a single paragraph
headed "Anomalies" in the press release issued at the time of the
Report. The changes were to include:-
"Reducing the scope for the alienation of income and gains through the
use of offshore structures, such as companies and trusts, which
convert to taxable income and gains in to non-taxable payment"
1.1.2 That enigmatic comment resulted in nine pages of draft
legislation included in the draft Schedule' which was published on the
18th January 2008. The draft legislation includes substantial
amendments to the offshore settlor charge (imposed by TCGA 1992 s.86),
the capital payments charge (imposed by TCGA 1992 s.87) and the
provisions attributing the gains of non-resident companies to their
participators (TCGA 1992 s.13). References in these notes to "New
Schedule" are to this schedule published on 18th January 2008.
Statutory references prefaced by the word "New" are to the relevant
legislation as it would be amended if the New Schedule were enacted
1.1.3 In this lecture I shall first place the changes in their wider
context. I shall then look at the detailed changes that have been made
to s.86 and then at the changes to s.87. I shall then examine the
interaction between these amended charges. We shall then look at the
amendments to s.13 and their implications for tax planning. We shall
briefly look at the proposed new information disclosure duty placed on
non domiciled settlors. Finally, I shall examine a letter from the
Acting Head of HMRC of the 12th February 2008 "clarifying" the
Government's intentions in relation to this proposed legislation.
THE CHANGES IN CONTEXT
2.1.1 These are interesting times in capital taxation planning. The
proposed changes to Capital Gains Tax which we are discussing today
are introduced in a wider context of revolutionary change in the tax
2.1.2 In order to raise revenue without raising headline rates of tax
or introducing new taxes, the Government has attempted to squeeze more
revenue out of essentially the same taxes and tax rates. In order to
do that it has created ever more complex taxing provisions and has
responded to the resultant development of new tax planning techniques
with a ferocious attack on tax planning. That has seen the
introduction of the disclosure provisions and a campaign of
vilification by senior civil servants and ministers of those who
advise in this area. Whilst excoriating tax planning HMRC have
developed ever more artificial approaches to tax collection, such as
the decision to pursue family businesses in the Artic Systems case and
subsequently producing the draft income shifting legislation.
It has been particularly disturbing to see HMRC introducing
legislation which is so poorly and widely drafted that it can only be
made to work by the use of what are, in reality, extra statutory
concessions masquerading as Revenue guidance.
2.1.3 Finally, HMRC are now making an attempt to introduce selective,
purposive tax legislation under the guise of "principles based anti-
IRONY UPON IRONY
2.2.1 The package of Capital Gains Tax measures which the Government
proposes to introduce, as we know, was not introduced because the
Government wanted to reform Capital Gains Tax. It was the result of
newspaper agitation on the taxation of private equity firms and of
proposals emanating from the Conservative party.
2.2.2 As such, it is rich in irony.
2.2.3 Over the last ten years the Labour Government has been
conservative, with a small c, in resisting pressure to reform the
remittance basis on the pragmatic grounds that it has worked to the
economy's advantage. The Conservative party, manoeuvred them into a
position where they had to be seen to be taking action. Having done
so, however, they have not taken a minimalist route. They have taken
the opportunity to launch yet another attack on offshore trust and
companies and, in line with their modern practice, have produced
legislation of extraordinary breadth which inevitably contains many
anomalies some of which will only emerge over the coming months.
2.2.4 In a final irony, it appears that one result of the proposals
will be to stimulate the use of offshore companies by resident and
THE OFFSHORE SETTLOR CHARGE - TCGA 1992 SECTION 86
3.1.1 The taxation of offshore trusts and companies builds on the
changes to the remittance basis which were examined by Claire Maurice
in the preceding lecture.
3.1.2 Currently, one of the conditions for the application of the
Offshore Settlor Charge imposed by TCGA 1992 s.86 to a settlement in a
fiscal year is that:-
"... a person who is a settlor in relation to the settlement ("the
Settlor") is domiciled in the United Kingdom at some time in the year
and is either resident in the United Kingdom during any part of the
year or ordinarily resident in the United Kingdom during the year ..."
3.1.3 New Schedule para 66 deletes the words " domiciled in the
United Kingdom at some time in the year and is either ..." with the
result that s.86 will now apply to attribute the gains of non-resident
settlements to the settlor even in fiscal years in which the settlor
is not domiciled in a country of the United Kingdom at any time during
3.1.4 The amendments to s.86 are to " have effect for the tax year
2008/2009 and subsequent tax years". 2
2 New Schedule para 71
3.1.5 So, the change will apply to gains arising on non resident
trustees as from the 6th April.
3.1.6 If that was all the Government had done, however, non
domicillaries subject to the Offshore Settlor Charge would be in a
considerably worse position than if they held their assets directly.
For that reason a new paragraph is added to TCGA 1992 Schedule 5
(which contains detailed provisions in relation to the Offshore
Settlor Charge) to create a remittance basis for the purpose of that
charge. Doing so is not a simple matter. Under s.86 a calculation is
made of the gains on which the trustees would have been chargeable to
Capital Gains Tax had they been resident or ordinarily resident during
the fiscal year. These gains are not directly allocated to the
"chargeable gains of an amount equal to [the Computed Amount] shall be
treated as accruing to the settlor in the year ..."
3.1.7 It is therefore necessary to provide a mechanism to relate this
purely arithmetical, imputed amount to the gains of the trustees by
reference to which it is computed. As part of creating the new
remittance charge on individuals, TCGA 1992 s.12 is to be repealed and
replaced by a new section which utilises the phrase "foreign
chargeable gains" which are defined as chargeable gains accruing upon
the disposal of an asset which is situated outside the United Kingdom.
3.1.8 New TCGA 1992 Sch 5 para 5A(2) treats the deemed chargeable
gains accruing to the Settlor under s.86 as foreign chargeable gains
to the extent that a Computed Amount is attributable to disposals of
settled property situated outside the United Kingdom ("Relevant
Disposals"). It is then necessary to provide a link between the
Computed Amount and the consideration received by the trustees on the
disposals by reference to which the Computed Amount is calculated so
as to apply to the extended definition of a remittance under New ITA
2007 ss. 809G - 809L. This is done by treating the consideration for
the Relevant Disposals as deriving from so much of the deemed
chargeable gains under s.86 as are deemed to be foreign chargeable
3.1.9 As you have seen earlier today the new remittance rules contain
special provisions where foreign chargeable gains accrue to an
individual on the disposal of an asset at less than market value. In
that case, the asset itself on which the gain arises is treated as
deriving from the gains which arise on its disposal. 3
3.1.10 A matching rule is made for s.86 purposes. 4 If the trustees do
not receive consideration for a Relevant Disposal of an amount equal
to the market value of the subject of the disposal, that settled
property is treated as deriving from so much of the deemed chargeable
gains arising by virtue of the disposal as are foreign chargeable
gains. An example may help.
3 New ITA 2007 s.809L
4 New Sch 5 para 5A(7)
Chimp Twist is resident but not domiciled in the United Kingdom. Many
years ago he made the Twist Settlement 5 of which he is a
discretionary beneficial object. The trust property consisted of an
apartment in the Bronx (the "Bronx Apartment") and the entire issued
share capital of Twist Worldwide Enterprises Inc ("Worldwide").
The Bronx Apartment
On the 30th April 2008 the trustees disposed of the Bronx Apartment
(the "Bronx Disposal"), receiving proceeds of a sterling equivalent of
£2,000,000 and realising a gain of1,000,000. The trustees used £25,000
of the proceeds to pay the outstanding fees of their UK tax adviser
for advice rendered at a series of meetings which took place in the
The disposal of the Bronx Apartment took place in the tax year
2008/2009 so that the amendments in the New Schedule applied in
relation to it. Therefore under s.86(4), subject to the special
remittance rules, gains equal to the gains on which the trustees would
have been chargeable had they been UK resident, were deemed to accrue
to Mr Twist in 2008/2009.
To the extent that that amount was attributable to the Bronx Disposal
it is foreign chargeable gains. So Mr Twist has foreign deemed
chargeable gains by
5 All settlements and companies referred to in any of the examples in
this lecture are resident and in the case of companies, are
incorporated in a tax haven country unless otherwise stated.
reference to the Bronx Disposal of 1,000,000. Under New TCGA 1992 s.
12 those foreign deemed chargeable gains are treated as accruing to Mr
Twist in any tax year in which they are remitted to the UK.
As an aside one should note that there doesn't seem to be a provision
that the gains are not treated as accruing in the year in which they
The consideration for the disposal of the Bronx apartment is treated
(by New Sch 5 para 5A(3)) as deriving from the Bronx gain.
For the purposes of the new remittance rules Mr Twist and the trustees
are connected. 6 The trustees are therefore a relevant person for the
purposes of the remittance rules. 7 Remittance Condition A is
satisfied because the UK tax adviser has provided a service in the
United Kingdom for the benefit of a relevant person, the trustees. 8
Remittance Condition B is also satisfied because something, the money
in the trustees' bank account, which derives from the chargeable
gains, has been used "outside the United Kingdom to satisfy a debt
which is in respect of the service".
Mr Twist is therefore treated as having remitted £25,000 of the
foreign deemed chargeable gains arising by reference to the Bronx
6 New ITA 2007 s.993(3)(a)
7 New ITA 2007 s.809H(4)
8 New ITA 2007 s.809H(2)(b)
Worldwide owned a painting which it had brought for £1,000,000 and
which it sold to Soapy Malloy for £2,000,000. The directors did not
realise when they sold the painting that it had a market value of
£2,250,000. Having bought the picture, Mr Malloy sent it to the UK to
hang in his Knightsbridge flat. Mr Malloy and Mr Twist's sister lived
together 'as husband and wife'.
An amount is included in Mr Twist's foreign chargeable gains by virtue
of Worldwide's disposal of the painting.
Section 18 deems transactions with connected persons to be treated as
not taking place under a bargain made at arms length and therefore as
taking place at market value by virtue of s.17. The relevant
definition of connected persons, here, is that given by TCGA 1992 s.
286. Mr Malloy and Worldwide are not connected persons under this test
and therefore the gain on Worldwide's disposal is £1,000,000
(£2,000,000 - £1,000,000). This gain forms an element in computing Mr
Twist's Computed Amount.
Mr Malloy is a person connected with Mr Twist for the purposes of the
remittance rules because for the purposes of those rules "a man or
woman living together as husband and wife are treated as if they were
married to each other"9 so Mr Malloy is treated as if he were the
spouse of Mr Twist's sister. Under ITA 2007 s.993 a person
9 New ITA 2007 s.809H(5)(a)
is connected with the spouse of his relative and for this purpose a
relative includes a sister.10 Mr Malloy is therefore a relevant person
in relation to Mr Twist.
Property (the "Picture") has been brought to the UK for the benefit of
Mr Malloy so that Remittance Condition A is satisfied. Because the
company did not receive consideration for its disposal of the picture
of an amount equal to its market value the picture is treated as
deriving from the foreign chargeable gains arising in respect of its
disposal." So Remittance Condition B is satisfied because the Painting
derives from the chargeable gains on its disposal. 12 Where the
property derives from the chargeable gains, the amount remitted is
equal to the amount of chargeable gains from which it derives. 13 So
Mr Twist is treated as having remitted £1,000,000 of his Computed
Amount by reference to the gain on the Painting.
10 ITA 2007 s.994(l)
11 New 'TCGA 1992 Schedule 5 para 5A(7)
12 New ITA 2007 s.809H(3)(b)
13 New ITA 2007 s.8091(3)
THE CAPITAL PAYMENTS CHARGE TCGA 1992 SECTION 87
4.1.1 The Capital Payments Charge imposed by TCGA 1992 s.87 deems
gains to arise to beneficiaries who receive capital payments which are
matched with trust gains of the trustees. Until 1998/1999 the capital
payments charge did not apply in a fiscal year in which a settlor was
not both domiciled and either resident or ordinarily resident in the
United Kingdom. Thereafter, this exclusion did not apply.
4.1.2 A beneficiary is not charged to tax on chargeable gains treated
as accruing to him under the capital payments charge in any year
unless he is domiciled in the UK sometime in that year. 14 This non-
domiciled beneficiary exemption is repealed by New Schedule para 72 of
the draft schedule. A new subsection (9A) is inserted into s.87
providing that a chargeable gain treated under the Capital Payments
Charge as accruing to a beneficiary is not a foreign chargeable gain
within the meaning of s.12.
4.1.3 So not only will capital payments made to non domiciled
beneficiaries now trigger charges under s.87 but there is no
remittance basis provided for s.87 gains.
14 TCGA 1992 s.87(7)
4.1.4 These amendments of s.87 have effect for the tax year 2008/2009
and subsequent years. 15 Under the Capital Payments Charge the trust
gains for a year are the aggregate of the gains on which the trustees
would have been chargeable in that year had they been UK resident and
of the gains of previous years to the extent that they have not been
matched with capital payments. The trust gains are matched with
capital payments of the year or of previous years to the extent that
those capital payments have not already been matched with trust gains.
The result is that the trust gains of 2008/2009 and future years may
be calculated by reference to the gains of previous years and the
capital payments with which they are matched may have arisen in
previous years. It is possible, therefore, that gains will arise under
the amended provisions by reference to events which took place many
Mr Twist is a discretionary beneficiary of two settlements.
The Uncle Bert Settlement
The first was made by his uncle on the 5th April 1984 at which time
his uncle was resident and domiciled in the United Kingdom. The
trustees realised a gain of £2,000,000 in the tax year 1984/1985. His
uncle died on the 30th June 1986. The trustees made no capital
payments until the 6th April 2008 when they made an interest free loan
to Mr Twist of £10,000,000. A market rate of interest on such a loan
would have been 5%.
15 New Schedule para 75
The settlement was within s.87 in 1984/1985 because the settlor was
resident and domiciled in the United Kingdom at the time it was made.
It continued to be within s.87 thereafter, in spite of the settlor's
death, because it satisfied the condition that:-
"... one of the settlors is, at any time during that year, or was when
he made his settlement [emphasis added] domiciled and either resident
or ordinarily resident in the United Kingdom."
The trust gains in 1984/1985 were therefore £2,000,000. Those trust
gains were not matched with any capital payments up to and including
the fiscal year 2006/2007. In 2007/2008 the trust gains were therefore
The provision of an interest free loan to Mr Twist was a capital
payment because it conferred a benefit on Mr Twist and the measure of
that capital payment was the value of the benefit conferred by it. In
calculating that benefit one would consider the interest which would
have been paid by Mr Twist if he had raised the loan commercially. 16
As from the April 2008, therefore, Mr Twist will receive capital
payments from the trustees of £500,000 per annum until the loan is
called in or otherwise extinguished or reduced. Those capital payments
will be matched with the trust gains which are calculated by reference
to the gains in 1984/1985.
16 Cooper v Billingham; Fisher v Edwards, CA 2001 74 TC 139; 
The Twist Senior Settlement
He is also a beneficiary of a settlement, the Twist Senior Settlement,
made by his father who was neither domiciled nor resident in the
United Kingdom at any time. The settlement was made on the 6th April
1998 and the settled property was a holiday property in the Bahamas.
The trustees immediately resolved to allow Mr Twist exclusive
occupation of the property and this situation continued until the 30th
June 2008 when the property was sold resulting in a capital gain of
£5,000,000. A market rental of the property would have been £250,000
Because the provision of exclusive occupation of the Bermuda property
was a benefit, Mr Twist received capital payments from the trustees in
every tax year from 1998/1999 onwards. The measure of those capital
payments was the market rent which could have been charged for
exclusive occupation of the property and was therefore £250,000 per
year. The trust gains of 2008/2009 of £5,000,000 were matched with the
capital payments of that year (£250,000) and the unmatched capital
payments of previous years (£2,250,000) (9 x £250,000). Mr Twist was
therefore deemed to realise capital gains of £2,500,000 (£250,000 +
£2,250,000) by virtue of a situation which had been in existence since
the 6th April 1998.
THE INTRODUCTION OF OSSHORE SETTLOR AND CAPITAL PAYMENTS CHARGE
5.1.1 It will often be the case that the offshore settlor charge and
the capital payments charge will both apply to a non resident
settlement in relation to the same fiscal year. The existing
legislation deals with that by providing that, where in the same year
of assessment chargeable gains are treated as accruing under the
Offshore Settlor Charge the trust gains of the settlement for the same
year under the Capital Payments Charge are reduced by the amount
treated as accruing under the Offshore Settlor Charge. 17 Because the
remittance basis applies to gains under s.86 and not gains under s.87
and because gains and capital payments under s.87 can be taken into
account in years other than the years in which they arise, the
proposed changes necessitate a more complicated set of rules to deal
with the interaction of ss.86 and 87.
5.1.2 The rules apply for a tax year where some of the gains accruing
to a person under s.86 are foreign deemed chargeable gains and the
remittance basis applies to the settlor for the relevant tax year.
5.1.3 If the capital payments charge applies to the settlement for
the relevant tax year or any subsequent tax year, the trust gains
under that charge are increased by an amount equal to:-
17 TCGA 1992 s.87(3)
FDCG - RA Where -
FDCG is the amount of foreign deemed chargeable gains, and RA is the
total amount of those gains that have been remitted to the United
Kingdom in the tax year or any earlier tax year. 18
5.1.4 As we have seen, any gains which are charged under s.86 are
deducted in computing trust gains for the purposes of s.87 so without
this further provision gains which were deemed to accrue under s.86
but which were not chargeable because they had not been remitted would
have been excluded from the s.87 charge. The purpose of this provision
is to add them back to the computation of s.87 trust gains.
5.1.5 Where there is an add back under this provision, the foreign
deemed chargeable gains of subsequent years are reduced by the add
5.1.6 The interaction of ss.86 and 87 can bring different gains into
charge by reference to the same event as the following example shows.
Mr A is not domiciled in the United Kingdom. He made an election for
the remittance basis to apply in 2008/2009 and all succeeding years.
He had settled a non-resident trust of which he was a beneficiary in
1999/2000 and the
18 New TCGA 1992 Sch 5 para 5B(2)
trustees had made a gain of £1,000,000 in that year. No other
transactions took place until 2008/2009 when the trustees made a
further gain on a foreign situs asset. In 2009/2010 the trustees made
a capital advance of £1,000,000 to Mr A in the UK.
The gains realised in 1999/2000 were not treated as accruing under s.
86 but they were trust gains for the purposes of s.87.
An amount equal to the gains realised in 2008/2009 were deemed accrue
to Mr A in that year under s.86. That amount of deemed chargeable
gains were foreign chargeable gains and so, not having been remitted
in 2008/2009, Mr A was not chargeable in respect of them.
The trust gains in that year would, under s.87(2), have included the
gains of previous years of £2,000,000 (£1,000,000 - £1,000,000 [sic])
except that s.87(2) excluded the gain of 2008/2009 from being included
in trust gains.
In that year, Schedule 5 para 5B would have added back an amount to
the trust gains for 2008/2009 equal to the unremitted deemed
In 2009/2010 the foreign chargeable gains which had been treated as
accruing to him under s.86 were deemed to have been remitted by Mr A
and so were chargeable on him.
For s.87 purposes, no addback under Schedule 5 paragraphs 5B was made
to trust gains because the gains were remitted in that year. So trust
gains in 2009/2010 were £1,000,000. The result was that the trust
gains of1,000,000 were matched with the advance in 2009/2010 which was
a capital payment and gains of that amount accrued to Mr A under s.87.
So it is at least arguable that the interaction of ss.86 and 87 has
not resulted in double taxation. The assessment under s.86 brought
into charge in 2009/2010 the gain realised by the trustees in
2008/2009. The assessment under s.87 brought into charge in 2009/2010
the gain made by the trustees in 1999/2000. But it should be noted
that a single payment of £1,000,000 has caused to be brought into
charge gains of £2,000,000. This, in spite of the fact that some eight
years had passed between the realisation of the first gain and the
publication of the draft legislation which, when enacted, brought it
into charge. What is more, the tax on the gain assessed under s.87
will be increased by the supplementary charge by sixty per cent
because over six years has passed between its realisation and the
capital payment of which it is matched.
The ClOT has said that it assumes that this cannot be HMRC's intention
but I think that it is highly unlikely that it is not. It should be
noted, however, that if the trustees had accelerated the disposal in
2008/2009 and the advance in 2009/2010 to 2007/2008 the problem would
largely have been avoided. The gain in 2007/2008 would not have been a
gain within s.86 and although the advance to Mr A would have resulted
in gains accruing to him under s.87 because of the exemption which
currently exists in s.87(7) that gain would not have been chargeable.
The situation would have been less favourable, had there been a
transfer of value by trustees linked to a trustee borrowing within
TCGA 1992 Schedule 4B.
6.1.1 The attribution of the gains of non-resident companies under s.
13 to participators in those companies is extended to participators
who are not domiciled in the United Kingdom. 19 Previously, gains were
only attributed under that section to participators who were resident
or ordinarily resident and domiciled in the United Kingdom.
6.1.2 New TCGA 1992 s. 14A applies where:-
(a) By virtue of s.13 part of a chargeable gain that accrues to a
company on the disposal of an asset is treated as accruing to an
individual in a tax year; and
(b) The individual is not domiciled in the United Kingdom in that
6.1.3 Where those conditions are satisfied the part of the chargeable
gain treated as accruing to the individual is a foreign chargeable
gain and can therefore be taxable on the remittance basis. For the
purposes of the new remittance rules any consideration obtained by the
company on the disposal of the asset is treated as deriving from the
deemed chargeable gain and if the consideration so
19 New Schedule para 62
20 New TCGA 1992 s. 14A(1)
obtained is not equal to the market value of the asset, the asset is
to be treated as deriving from the deemed chargeable gains arising on
6.1.4 So these provisions aim to reproduce the effect of the new
remittance basis rules in relation to the gains of non-resident
6.1.5 Although this may be bad news for non-domicillaries, s.13
companies could continue to be useful investment holding vehicles for
those who have either not opted for the remittance basis or,
alternatively, have done so but will remit significant capital gains.
That is because the gains of non-resident companies are calculated
under Corporation Tax rules which gives an allowance for indexation
but the rate of tax applicable to those gains will be the individual's
rate of eighteen per cent. Thus, holding investments through a non-
resident company neatly combines Corporation Tax Indexation Relief
with the individual's rate of Capital Gains Tax.
6.1.6 This advantage does not depend upon the participator being a
non-domiciliary. It applies as well to UK domicillaries. The advantage
also applies where gains arise within a non-resident company held in
an offshore trust.
RESTRICTION ON RELIEFS
6.2.1 Where gains are treated under s. 13 as accruing to an
individual who is not domiciled in the United Kingdom there are two
restrictions on reliefs which would otherwise be provided by s.l3.
Section 13(8) allows losses arising in a non-resident company to be
apportioned to participators for the purposes of reducing gains
allocated under s.13 in respect of the same fiscal year. Where,
however, a gain becomes chargeable by virtue of being remitted in a
year later than the year in which it arises, losses arising in the
offshore company in the year of remittance cannot be set off. Nor will
any losses arising in the year of the disposal be set off in
determining the amount of the gain. That is because s.13(8) works not
by setting the loss off against the gains of the company in
determining the amount of a gain which is allocated to the individual,
but rather by allocating both the gains and the loss to the individual
(but only for the purposes of relieving section 13 gains of the same
year) and allowing the set off at the level of the individual. TCGA
1992 s.12(2) deems chargeable gains in respect of foreign chargeable
gains where the remittance basis applies to accrue at the time of
remittance and not at the time of the disposal which gives rise to
6.2.2 That is a very significant disadvantage in comparing the effects
of the application of the remittance basis with being taxed on an
arising basis. It shows, that a decision to make the remittance
election will never be a simple one and will require detailed
predictions of future events to be made.
Credit for Tax Paid
6.2.3 The second disadvantage under s.13 applies where the
participator is not domiciled in the United Kingdom even if he is
fully taxable on an arising basis.
21 At least, that seems to be the intention of the legislation,
although read literally it actually seems to give rise to a double
Were it not for the provisions of ss.13(5A) and 13(7) the s.13 charge
would lead to double taxation; a charge on the attribution of the gain
to the participator and a charge on the participator when he disposes
of the shares in the offshore company. That of course mirrors the
situation of a UK resident holding assets through a UK resident
company but at the time that s.13 was enacted it was thought
inappropriate. Section 13(5A), as subsequently amended, provides a
credit for the tax suffered under s. 13 against the UK tax charged on
a subsequent distribution in respect of the capital gain made within
three years of the end of the period in which the gain is made.
6.2.4 To the extent that the tax has not been credited in this way, s.
13(7) allows the tax to be treated as a deduction in the computation
of a gain accruing on the disposal by the participator of any asset
representing his interest in the company.
6.2.5 Section 13(5A) can apply to gains allocated under s.13 to non-
domicillaries but s.13(7) cannot. It is difficult to understand why it
should not but it is particularly outrageous that it should not apply
to a non-domiciliary fully taxable on the arising basis.
7.1.1 TCGA 1992 Schedule 5A imposes various duties of disclosure in
relation to non resident settlements. Paragraph 2 of that Schedule
imposes a duty on settlors to provide certain information about a
settlement within two months of creating it. These provisions only
apply if, at the time the settlement is created, the settlor is
domiciled in the United Kingdom and is either a resident or ordinarily
resident here. Paragraph 2 applies only to settlements created on or
after the 3rd May 1996.
7.1.2 In relation to settlements made on or after the 6th April 2008
the duty will fall on settlors who are resident or ordinarily resident
in the United Kingdom regardless of whether or not they are domiciled
7.1.3 Schedule 5A also contains information provisions relating to
settlements created before the 17th March 1998. Paragraph 1 requires
information to be provided by a person who transfers property to the
trustees otherwise than under a transaction entered into at arms
length. There is no exclusion for non domiciled transferors.
7.1.4 A non domiciled settlor who made a settlement between the 3rd
May 1994 and the March 1998 would not have had to have made a return
in relation to his creation of the settlement but he would have had to
make a return of any
22 New TCGA 1992 Sch 5A para 2
additions to the settlement. If he made the settlement after the 17
March 1998 but before 6th April 2008, however, he would neither have
been required to make a return of the making of the settlement nor of
7.1.5 If he makes the settlement on or after 6th April 2008 he must
make a return of the creation of the settlement but not of any
addition to it.
A STRANGE CORRESPONDENCE
8.1.1 HMRC's concern for the standard of its written English is very
different from that of previous generations. Two and a half centuries
ago the Secretary to the
Commissioners of Excise wrote the following to the Supervisor of
"The Commissioners, on perusal of your Diary observe that you make use
of many affected phrases and incongruous words ... all of which you
use in the sense that the words do not bear. I am ordered to acquaint
you that if you hereafter continue that affected and schoolboy way of
writing and to murder the language in such a manner, you will be
discharged for a fool."
8.1.2 On the 12th February 2008 STEP and the ClOT received a very
strange document. It was in the form of a letter and yet there was no
salutation and no valediction. There was, however, a name at the end
of the letter; 'Dave' Hartnett and floating near the top left hand
corner was the phrase "Key Stakeholder". In the top right hand corner
'Dave' Hartnett is described as 'Acting Chairman' although of what he
is Acting Chairman is not stated. Presumably the reader is to infer he
is the Acting Chairman of HM Revenue and Customs, the logo of which
appears on the document although not as part of the sender's address.
8.1.3 This strange document began by stating:-
"The Government's consultation on changes to the tax rules on
residence and domicile closes on the 28th February. In the meantime,
there are 4 [sic] issues that have been raised, where I want to make
clear what the Government's intention has always been and how it will
be set out in the legislation to be brought forward."
8.1.4 As you will see from the copy which is included with your
lecture notes, the letter goes on to say:-
"The consultation process will run to the 20th February. However, I
want to make clear that the Government's intention - which will be set
out in the legislation to be brought forward - has always been to
- those using the remittance basis will not be required to make any
additional disclosures about their income and gains arising abroad. So
long as they declare their remittances to the UK and pay UK tax on
them, they will not be required to disclose information on the source
of the remittances;
- there will be no retrospection in the treatment of trusts and the
tax changes will not apply to gains accrued or realised prior to the
changes coming into effect;
- money brought into the UK to pay the £30,000 charge will not itself
be taxable; and
- it will continue to be possible to bring art works into the UK for
public display without incurring a charge to tax.
In addition, we will continue to discuss with the US authorities how
the £30,000 charge can become creditable against US tax."
8.1.5 It is difficult to see how one is to understand this. If we
take the second to last bullet point, for example, HMRC had published
FAQs on the draft legislation which contained the following question
and answer: -
"If I remit £30,000 to the UK in order to pay the additional tax
charge but I remit no other money, will I have to pay tax on the
£30,000 when I remit it?
The £30,000 is in addition to any tax due on foreign income and gains
remitted to the UK. It is up to the taxpayer whether they wish to pay
the £30,000 charge by remitting money to the UK."
8.1.6 It would have been breathtaking incompetence for a Government
which intended specifically to exempt income from charge in these
circumstances to put out FAQs which specifically said the opposite.
However low an opinion one may have of the competence of the civil
service it is difficult to believe it could be as incompetent as that.
8.1.7 Of course, we all know that these 'clarifications' were
reversals of the Government's intentions made in the face of public
criticism. I cannot recall a previous occasion on which a Chairman of
HMRC has allowed his name to be put to such blatantly political
material as this.
8.1.8 One may ask how useful the 'clarifications' are when one is
formulating a tax planning strategy?
THE FIRST 'CLARIFICATION
8.2.1 The first 'clarification' appears to relate to individual
taxpayers and certainly cannot be read as implying that the additional
disclosure provisions in relation to offshore trusts will not be
introduced. It is of course highly unlikely to be true. Without making
an enquiry into a non-domiciled taxpayer's worldwide affairs HMRC
could not determine whether or not he had declared all of his
remittances and paid UK tax on them. HMRC is surely not going to give
up its powers of enquiry so that it must simply accept the return at
THE SECOND 'CLARIFICATION
8.3.1 What about the second 'clarification' in relation to
retrospection in the treatment of trusts? Of course, retrospection is
not a precise word. The Government often disagrees with professionals
as to whether a provision is retrospective or not, but even if that
were not the case, what are "gains accrued or realised prior to the
changes coming into effect."
8.3.2 I have shown, for example, that the draft legislation will
bring into charge under s.87, amounts calculated by reference to gains
realised many years ago. But the term "realised" is not one which is
used in the legislation. The term "accrued" is so used but s.87
provides that "the trust gains for a year of assessment shall be
treated as chargeable gains accruing in that year ..." so it is
arguable that the effect of s.87 is that the gains accrue not in a
previous year but in the year in which the legislation takes effect in
accordance with the alterations.
8.3.3 So whether this statement deals with the problems that we have
identified will not become clear until we see draft legislation giving
effect to it. That is unlikely to be before Budget Day.
THE THIRD CLARIFICATION
8.4.1 The third 'clarification' as we have seen, directly contradicts
the position set out in the Frequently Asked Questions which HMRC have
published. It seems an
unequivocal statement and so may presage a real change.
THE FOURTH 'CLARIFICATION
8.5.1 The final 'clarification' may be artfully worded. Of course it
will be possible to bring art works into the UK for public display
without incurring a charge to tax but it will also be possible under
the proposed new legislation to incur a charge to tax by bringing art
works into the country because doing so will represent a remittance
within the remittance rules. As the rules are currently drafted, not
every work of art brought to the country will represent a remittance
of income or gains but some will.
- posted 11 years ago