The new rules will have effect when an individual arranges for money or property to be brought into the UK or services and benefits to be provided in the UK that were funded out of their untaxed foreign income or gains.
Where that individual, or a member of their immediate family, benefits in any way, the individual will be taxed on the remittance basis up to the amount of untaxed foreign income or gains that were used to provide the money, property, services or benefits.
Immediate family, in this context, is limited to spouses, civil partners, individuals living together as spouses or civil partners and the children under 18 and grandchildren under 18 of any of those categories. It also covers close companies, or foreign companies that would be close if in the UK, in which any of them are participators and trusts in which any of them are settlors or beneficiaries.
Let us then look at the position of offshore companies. These, together with offshore trusts (and sometimes a combination of both), have been the most regularly used structures. Section 13 of the Taxation of Chargeable Gains Act 1992 is an anti-avoidance provision under which UK-resident persons are charged to tax on capital gains on the disposal of assets in non-UK-resident companies in which they are participators, provided the companies would be treated as close if they were resident in the UK.
Broadly speaking, this means controlled by five or fewer participators. However, before the amendment by the Finance Bill, section 13 did not apply where the participator was a non-UK-domiciled individual but who was resident in the UK and therefore that individual could receive sums remitted to the UK free of UK tax.
Under the new provisions in the Finance Bill, gains on the disposal by the offshore company of assets situated outside the UK will be charged to tax only when the gain is remitted to the UK, provided the participator is a non-UK-domiciled individual who is a remittance basis user. In other words, one who pays the £30,000 charge.
Let us now consider offshore trusts. Under the pre-Finance Bill rules, offshore trusts represented a particularly effective means of legitimately avoiding tax for UK-resident non-domiciled settlors of an offshore trust. Under section 86 TCGA, there was no tax liability for a UK-resident non-domiciled settlor in respect of gains arising to the offshore trustees.
Moreover, there was no tax under section 87 TCGA when a payment out of the trust was made to a UK-resident beneficiary (including payments to the settlor who would normally be capable of benefiting under such an offshore trust) provided the recipient was a non-domiciliary. In this way, payments from the trust could be made and thus remitted to the UK without any tax charge.
In respect of trust income, it was necessary to consider the transfer of assets abroad legislation which would apply where there was power to enjoy the income or an entitlement to receive it. However, the person who had the power to enjoy or entitlement or who received any benefit from the trust could use the remittance basis to avoid any liability to tax provided, of course, that the sums, albeit received or enjoyed, were not remitted to the UK.
How do the new provisions affect this position? Let us look first at trust income. The remittance basis will continue to apply in respect of foreign source income but only if the beneficiary concerned is a remittance basis user, that is, they pay the £30,000 charge.
There will be UK income tax if amounts are actually received in the UK. It is important to understand that there will be protection from a UK charge provided the income in question is genuinely left offshore.
The general aims of the proposed changes with regard to trust income are twofold. Non-domiciled individuals should be able to benefit from the remittance basis in respect of foreign source income within the scope of the provisions in the same manner as would have been available if they had received the income direct, that is, taxed on the arising basis, unless they are remittance basis users.
They should be charged to income tax on income treated as arising to them if it is actually received in the UK and protected from charge if (and only if) they genuinely leave the income offshore.
Much of the discussion in connection with offshore trusts and the new non-domicile provisions has been about the taxation of gains and the application of the new rules to trust gains. The rules to date have been extremely benign and next week I will look at the provisions as they will apply if the Finance Bill is enacted in its current form.