We have uplift off

Last week, I looked at some of the anti-avoidance provisions announced in

this year&#39s Budget. I will now continue the theme by considering some more

proposals which are directed at the use of non-resident trusts to avoid or

defer UK taxation.

The first proposal which I will review is that relating to beneficial

interests in trusts moving abroad.

Special capital gains tax rules apply to UK-resident trusts which become

non-UK-resident trusts. At the time of emigration, there is:

A tax charge on unreali sed gains.

An uplift to the market value of beneficiaries&#39 interests in the trust.

The purpose of the uplift is to prevent a potential double charge on any

increase in value prior to the trustees&#39 migration of the trust property

(which is charged on exit) and of a beneficiary&#39s interest in that property

(which is charged if the beneficiary later sells the interest).

However, this rule does give opportunities for tax avoidance.

Having realised gains which have not been charged to tax on either the

settlor or beneficiaries of the trust – stockpiled gains – the trusts are

brought onshore and then taken offshore again.

The gains on the trust property escape a tax charge because they were

realised while the trust was offshore. The beneficiary pays little or no

tax on the sale of an interest in the trust because of the rule providing

for its value to be uplifted on the trust&#39s exit from the UK.

To prevent this abuse, there will be no uplift in the value of any

beneficial interest in a trust where, on or after March 21, 2000, the

trustees become non-resident at a time when there are stockpiled gains in

the trust.

Having looked at this aspect of emigrating trusts, I would like now to

look at the position where trustees (usually offshore trustees) participate

in offshore companies as an investment of the trust.

Special tax rules exist to combat tax avoidance where a UK-resident person is a shareholder in an offshore company which is a close company, that is a company under the control of five or fewer participators.

Broadly speaking, where such a company sells an asset (which is not

tangible property used in a trade) at a gain, the gain is attributed to

participators in proportion to their interest in the company.

These rules are being avoided where assets are held in an offshore company

that is owned by a trust – usually an offshore trust – rather than held

directly by the trust. Where the company is resident in a country with

which the UK has a tax treaty and the treaty provides for gains arising to

residents of the other country to be exempt from UK tax, the UK resident

settlor or beneficiaries (or trustees if resident) of the trust cannot,

under present rules, be charged on the gains of the offshore company.

Legislation will be introduced to prevent this avoidance by ensuring that

tax treaties do not prevent gains of offshore companies being attributed to

resident or non-resident trustees as participators of those companies. The

new rules will apply to gains accruing on or after March 21, 2000.

Next week, I will consider what these proposals mean for trusts.