The Budget saw Chancellor Gordon Brown continue his now traditional attack on what the Inland Revenue terms tax avoidance. This year’s Budget again included Government attempts to end a number of ways of mitigating tax using offshore planning.A main focus of the Inland Revenue this year has been capital gains tax. In the Budget, the Government stopped individuals avoiding CGT through short-term emigration to a country with a double-taxation treaty with the UK. The Revenue has stressed that a double-taxation treaty does not override the five-year rule for CGT and the new legislation is meant to end any doubt about the issue. Macfarlanes partner Jonathan Conder says: “Measures were introduced in the 1998 Finance Act so if an individual emigrates, realises a gain while resident abroad but then returns within five complete tax years of his departure, he will be taxed on that gain on his return. “Some advisers have taken the view that CGT could still be avoided by short-term emigration to a country with a low local rate of tax on capital gains and with which the UK has a suitable double-taxation treaty. Belgium has been used by a number of taxpayers for this purpose. This year’s Finance Act, however, included provisions designed to prevent the avoidance of CGT by short-term emigration to a treaty jurisdiction. “It seems clear that for CGT planning based on a change of residence to succeed in the future, emigration for at least five complete tax years will be necessary. The five-year rule does not apply to income tax, so if the profits can be realised in an income form, then absence for just over a year may still be sufficient.” Another Budget measure is to stop UK-resident but non-domiciled individuals disposing of bearer shares outside the UK to avoid CGT. When ordinary shares are sold, the gain is taxed in the country of the registry. Until now, a non-domiciled resident individual could take the bearer shares outside the UK to sell them to avoid CGT in the UK. Conder says: “All shares and debentures of the company incorporated in the UK will be treated as being situated in the UK, including bearer shares. The physical location of a bearer instrument at any given time will be irrelevant. The new provisions are an unusual and worrying development as they are the first serious attack on the position of non-domiciled UK residents for some time.” The Revenue has also clamped down on offshore trusts which have used trustees based overseas to mitigate CGT. The offshore centre would usually need a double taxation treaty with the UK that gives it the exclusive right to tax chargeable gains and a low or nil rate of local tax on capital gains. Conder says: “Where an offshore trust held assets standing at an unrealised gain, trustees resident in the relevant offshore jurisdiction would be appointed who would subsequently dispose of their assets. Following the disposal but in the same UK tax year, they would retire in favour of UK resident trustees. The UK would have no taxing rights while minimal or no tax would be due in the offshore centre. “In recent years, the double-tax treaties with the main countries that enabled planning of this nature, such as Canada, New Zealand and Mauritius, have been amen-ded to prevent the scheme from succeeding. The amendments to the UK capital gains legislation in the 2005 Finance Bill are designed to defeat generic planning along these lines. This is clearly designed to ensure that if there are any remaining jurisdictions with treaties that lend themselves to the planning, the UK CGT legislation will no longer yield the right result.” But there has been some good news for advisers as one insurance company believes capital redemption bonds still offer tax planning opportunities to corporate clients despite changes to the loan relationship rules earlier this year. Skandia senior manager of market development Colin Jelley says the effect of the loan relationship rules is to stop corporate clients being able to take 5 per cent income withdrawals from offshore capital redemption bonds and defer tax on these withdrawals until the bond is cashed in. Since February 10, companies have been taxed on the growth on the assets withdrawn from a bond. But Jelley notes that certain corporate clients can continue to use offshore capital redemption bonds to defer tax. Whether companies can defer tax depends on the way they account for financial investments, he says. If they use fair value, in which they record the market price each year, a company cannot take advantage of tax deferral. But if a trading company uses amortised costs then they can still use capital redemption bonds for tax deferral. This is because no profit flows from the financial investments into the profit and loss accounts. Offshore capital redemption bonds are attractive to companies because they do not have any lives assured so if a director retires, leaves the company or dies, the bond does not trigger a chargeable event. A capital redemption bond has a term of up to 99 years. A company can take advantage of tax deferral to time its withdrawals from a bond to coincide with years when it has low profits or suffers a loss. These withdrawals can also be made when corporation tax rates are reduced. This is in contrast with the annual tax charge levied on money on deposits, for example.
Money Marketing is absolutely right to highlight the need for a debate on transparency, particularly in the area of how advisers select and recommend product providers.
NDF Administration has introduced he NDF growth plan, a six-year guaranteed equity bond which has the potential to mature earlier.
Park Row has appointed John Butterfield as group marketing and communications director. He was a broker consultant with Standard Life.
Legal & General is offering a medium-term Sandler-style investment plan. The MTIP, available as an Isa and unit trust, will invest via the L&G distribution trust and will be sold using the newly developed basic advice service. The total annual charges are 1.32 per cent, and the product is intended to provide an alternative to […]
Jelf’s Annual Health & Wellbeing event is here again, and once more we will be providing practical help to employers seeking to manage their employee healthcare commitments.
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