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Pools of thought

Last week, I considered some proposals directed at the use of non-resident

trusts to avoid or defer UK taxation.

So what are the implications for trusts?

Well, most of the provisions deal with avoidance of capital gains tax

using overseas structures, whether they are trusts or companies.

For those investors who wish to achieve legitimate long-term tax

mitigation on both income and capital growth, a pooled offshore investment

such as an offshore roll-up fund or an offshore life insurance bond will

look very attractive.

For example, a long-term investment in a pooled offshore life insurance

bond will provide the investor with:

Potential capital appreciation with no UK taxation on investment growth as

it arises.

The ability to control the eventual time of the tax liability depending on

when encashment arises.

Access to the investment with no immediate tax liability via the 5 per

cent withdrawal facility.

The ability to switch between different investment funds with no immediate

tax liability.

Minimal tax administration in terms of tax returns because the bond is a

non-income and non-capital gains producing asset.

Of course, special tax rules apply to personal portfolio bonds.

One can see an overall strategy on capital gains tax emerge that is not

unlike that which has been adopted for corporation tax and income tax with

a reduction in rates and a clampdown on avoidance.

This year&#39s Budget included the much discussed relaxation of taper relief

which, if enacted, will reduce the effective rate of capital gains tax for

business disposals.

Broadly speaking, a rate of 10 per cent could be secured for disposals of

qualifying assets that have been owned for a period of four years from

April 6, 1998 or the date of acquisition if later. If the 10 per cent rate

were payable on disposal, one has to consider how many people would be

motivated to enter into complex avoidance schemes or even emigrate to

favourable jurisdictions where double tax treaties can be used to ensure

capital gains tax freedom for relatively short (one-year) periods of non-UK

residence.

Regardless of this, the Government&#39s anti-avoidance provisions have closed

down a number of the more popular avoidance mechanisms founded on the use

of offshore trusts, thus giving a kind of “carrot and stick” incentive to

would-be capital gains tax avoiders.

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