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Less pain on gains

Last week, I looked at offshore trusts and the tax treatment of income arising under them and remitted from them when the settlor is a UK-resident non-UK domiciliary. I would now like to look at the matter of trust gains and how the new legislation relevant for non-domiciliaries operates.

There have been some significant changes to the provisions as originally proposed. Of great importance is that a UKresident non-domiciled settlor will continue to be protected from the section 86 TCGA 1992 arising basis of charge, regardless of whether the settlor is a remittance basis user. This means that gains arising to the offshore trustees in a trust under which the settlor and his family can benefit will not be subject to tax on the settlor. This is a significant benefit.

In addition, the provisions of Schedule 5A TCGA 1992 will not be extended to non-UK -domiciled settlors of non-UK-resident trusts. This means that such settlors will not be required to tell HM Revenue & Customs of the settlor’s name and address, the names and addresses of the trustees on the creation of a non-UKresident settlement or the existence of a settlement where the settlor becomes resident or ordinarily resident in the UK.

The section 87 TCGA 1992 charge in respect of beneficiaries under offshore trusts will be amended so that non-UKdomiciled but UK-resident beneficiaries who receive benefits from an offshore trust will be subject to UK tax which they are not currently. However, this charge to tax under section 87 will be subject to the remittance basis where the non-UK-domiciled beneficiary is a remittancebasis user, that is, they pay the current £30,000 charge.

This potential section 87 charge, albeit under the remittance basis, could extend to settlors who receive benefits in the UK. Provided the beneficiary, including the settlor, is a remittance-basis user, benefits paid from the trust but not brought into the UK would not be subject to tax.

It is important to note that there will be no difference in the treatment of gains under offshore trusts depending on where the assets that give rise to the gains are situated. Gains on disposals of assets situated in the UK will be treated as if they were gains of foreign assets where the beneficiary is a remittance-basis user.

There is a further very important set of provisions that non-UK-domiciled beneficiaries will value. There will be no charge to tax in respect of capital payments made to non-UKdomiciled beneficiaries who receive capital payments on or after April 6, 2008 that are matched to trust gains accruing before April 6, 2008. This will be so irrespective of whether the non-UK-domiciled beneficiary is a remittancebasis user. This means that all stored up but not yet remitted capital gains up to April 5, 2008 can be brought into the UK by the non-domiciled but UK-resident beneficiary without being subject to tax in the same way that they would have been before April 6, 2008. This is an extremely beneficial grandfathering provision.

In addition, trustees of non-UK-resident trusts will be given an option to rebase trust assets to the market value as at April 6, 2008 so that the element of trust gains relating to the period before April 6, 2008 will not be chargeable if matched to capital payments made on or after April 6, 2008 to non-UKdomiciled beneficiaries.

This option will be open only to the trustees and neither the settlor nor the beneficiaries will have the right to make the election. However, this is another very valuable concession in that stored up but not yet realised gains will not be subject to tax when brought into the UK, regardless of whether or not the beneficiary who receives them is a remittance-basis user.

Together, these provisions mean that it is only gains accruing from April 6, 2008 that will be potentially subject to a UK tax charge when received by a UK-resident non-domiciled beneficiary and even then only when remitted if the beneficiary is a remittance-basis user.

All in all, the continuing opportunity to use offshore bonds to defer tax on gains and income from investment portfolios and provisions on offshore trusts that are less onerous than they could have been mean that the tax planning world for UK-resident non-domiciliaries has not necessarily caved in.I have just started work and have read about the introduction of personal accounts in 2012. Should I wait for these new pension plans or should I start a pension plan now? Also, my aunt and uncle are about to retire, so I want to ensure that they are aware of their retirement income options.

Almost a quarter of UK workers are not saving at all for their retirement and one in three people who are actively saving do not know what their main source of income will be in retirement.

To remedy this situation, the Government is trying to tempt employers to automatically enrol their employees into a new pension system called pension accounts.

From 2012, workers who are not in occupational pension schemes will be enrolled in personal accounts unless they opt out. Personal accounts will be a trust-based defined-contribution occupational pension scheme and employees between age 22 and state pension age will be enrolled automatically if they earn more than £5,000 a year. Staff will pay in 4 per cent of their salaries and employers 3 per cent, with an extra 1 per cent coming from tax relief.

Research conducted by Legal & General found that more than half of UK employees said they would choose to remain opted in to personal accounts when they are introduced. The survey of more than 33,000 people found that one-third would choose to opt out while one in five remained confused about what personal accounts were.

You cannot afford to wait for personal accounts to be introduced as a delay in starting pension savings can be very damaging to your later pension fund value. I therefore advise you to join your workplace group personal pension now and I will advise you separately about your fund options, life insurance and regular savings choices.

As for your relatives, it is estimated that only around 40 per cent of people taking their pension benefits shop around when taking an annuity to secure their retirement income.

Make sure your relatives use their open market option on their vesting pensions to secure the most suitable retirement income.

Depending on their state of health and attitude to risk, they could consider an unsecured pension as an alternative to buying a traditional annuity. This will allow your aunt and uncle to draw an income from their pension funds while leaving their funds invested.

As they are both under age 75, they can take out an unsecured pension and draw an income by using income withdrawal or pension drawdown or by using a limited period annuity. These allow them to buy annuities in smaller chunks, each spanning a five-year term, while the rest of their fund is left invested.

This will give them more choice on when to buy annuities and also allows them to maintain more control over their pension funds. Unsecured pensions can be used up to age 75 and policyholders can take a maximum amount up to 120 per cent of the annual income payable from a single-life level annuity. There is no minimum.

There are also now value-protected annuities which are a response to one of the key criticisms of traditional annuities, that if your relatives die shortly after buying annuities, you and the rest of the family will lose out on the value of their pension fund as the money is retained by insurance company which is providing the annuity.

With value-protected annuities, if the pension fund used to purchase the annuity has not been totally paid out to the annuitant and they are under age 75 when they die, the balance will be paid to their estate after a tax charge of 35 per cent has been deducted.

Be aware that if your relatives choose a flexible annuity or third-way retirement product, this brings an element of risk to the value of the retirement income and there will be a cost for any guarantees.

According to research from MetLife, around 38 per cent of advisers have said that they will be advising clients to use guarantees in their pension planning in the next 12 months. Around 48 per cent of the advisers expect to recommend more guaranteed pensions over the next five years.

You should tell your relatives to seek independent whole of market advice to ensure they make the right retirement funding decision.

Kim North is the founder of Technology and Technical


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