New measures were announced dealing with the location of assets owned by non-domiciled UK residents and persons who are non resident but carry on a business in the UK.
There are also new anti-avoidance measures to combat the exploitation of any Double Taxation Agreements by temporary non-residents, including individuals and trustees.
5.1 ANNUAL EXEMPTION
This is increased from £8,200 in 2004/05 to £ 8,500 in 2005/06 for individuals and personal representatives. For trustees the exemption increases from £4,100 to £ 4,250.
5.2 RATES OF TAX
The rates of CGT for individuals have not changed and, after taper relief and the annual CGT exemption, gains will be taxed as if they were the top slice of a taxpayer’s income and so be subject to CGT at 10%, 20% (for a basic rate taxpayer) or 40% as appropriate. Trustees, pay CGT at 40%.
5.3 NEW MEASURES – LOCATION OF ASSETS
The location of an asset that is being disposed of is relevant ( for CGT purposes) to individuals who are UK resident or ordinarily resident but not UK domiciled and to persons neither resident nor ordinarily resident but carrying on business in the UK.
In most cases , non domiciled individuals will have no CGT liability on the disposal of an asset situated outside the UK unless the gains are remitted to the UK. Persons who are non-UK resident but carrying on business in the UK only have a CGT liability on disposals of assets situated in the UK which were used for the purpose of the business.
Section 275 TCGA 1992 provides rules which determine the location of certain assets but is apparently not comprehensive enough. It seems that people have taken advantage of the absence of a specific rule in certain cases to enable that asset to not be treated as situated in the UK even if most or all of its value derives from the UK.
A new measure will provide specific rules for certain assets which are currently not within the scope of section 275. For example all shares in and debentures of companies incorporated in the UK, whether registered or not, will be treated as situated in the UK. There are further detailed provisions dealing with certain other rights in a company, rights corresponding to patents, copyright and intangibles including options and futures.
5.4 NEW ANTI-AVOIDANCE MEASURES – EXPLOITATION OF DOUBLE TAXATION AGREEMENTS (DTAs)
There are two separate measures being introduced – one dealing with temporary non-resident individuals and one with the changes of residence by trustees.
In both cases the perceived avoidance turned on using certain DTAs to avoid UK tax on chargeable gains by securing residence in a territory outside the UK for treaty purposes.
To be subject to gains tax (CGT) an individual must be UK resident. To prevent people going abroad to establishing residence elsewhere and then disposing of an asset with a view to avoiding UK CGT, section 10A of the Finance Act 1998 introduced the concept of “temporary non-residence”. This means that individuals who are non UK resident for fewer than five complete tax years, may be chargeable to CGT in the tax year of their return as if all the capital gains and losses which arose to them during the “intervening tax years” (that is, the tax years between the tax year of departure and the tax year of return) had instead arisen to them in the tax year of return. (This is subject to then satisfying certain UK residency conditions before departure)
However, if assets were disposed of in the intervening years when the individual was resident in a territory where no, or only a small, liability to tax would arise in respect of the gain in question but the terms of the relevant DTA would prevent the UK from taxing the gain, no charge to UK tax could arise under section 10A TCGA 1992. Apparently the Inland Revenue now considers that those DTAs do not in fact preclude a tax charge under section 10A and the matter is being put beyond doubt by the changes announced in the Budget.
Similar measures are being introduced with regard to trustees, who at some time in a tax year are resident in the UK and at a different time in the same tax year are resident, by virtue of a DTA, in a territory outside the UK. These measures prevent such trustees avoiding UK tax by disposing of assets during the latter period.