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When the levy breaks

I am about to leave the UK due to the tax changes for non-domiciled residents. I have a business and investments to sell. What do I need to be aware of, particularly in regard to capital gains tax?

In the pre-Budget report in October 2007, Chancellor Alistair Darling announced that he would introduce a £30,000 levy for people resident in the UK for more than seven years but not domiciled, if they want to pay tax on foreign income and gains when theyare remitted into theUK, rather than on worldwide income.

After pressure grew on the Chancellor to revise his original proposals, clarification was given last week that the tax changes will not be applied retro-spectively to historical gains within offshore trusts and that non-doms will not have to make additional disclosures about their income and gains arising abroad or the nature of offshore trusts. However, the £30,000 levy remains.

As you have two children, the amount payable for your family under this charge will be £120,000 and needs to be paid from taxed income. I can understand your unwillingness to pay this levy.

There were also a number of capital gains tax changes announced in the pre-Budget report that apply to all disposals taking place on or after April 6, 2008. The removal of taper relief, which reduces the amount of tax paid the longer an assetis held, means that if the proposals are brought in as outlined, some taxpayers will see an increase inthe rate of CGT they pay from 10 to 18 per cent.

The Chancellor has also announced that from April, he will introduce a new CGT relief designed to help entrepreneurs such as yourself. Under this proposal, a lifetime allowance of up to £1m on certain gains will be taxed at 10 per cent, with 18 per cent payable on the residual gain. The new 18 per cent rate is still planned for all other business assets and all non-business assets.

The Chancellor estimates that more than 80,000 small business owners and investors will benefit from the changes, with 90 per cent of this group eligible to have their entire gain taxed at 10 per cent.

Tax commentators have remarked that the associated risk of investing in businesses will be treated no differently in terms of CGT from investing in less risky non-business assets.

As you have business interests worth well over £1m, built up over a 12-year period, the amount of CGT will be considerable.

We need to plan now to decide whether disposals are made in this tax year or the next and to try to minimise the CGT paid. Working with your UK accountant, we need to look at all your business interests and calculate which parts of the business are sold this tax year or the next. Some parts of your interests, such as the furnished holiday lets and business premises let to traders, are subject to CGT of just 10 per cent under the current regime as you have held them for more than two years.

Be aware that, at the time of writing, we still havenot seen the tax legislation for the new entrepreneurs’ relief, so we do not have much time to agree your financial planning actions.

As for your investment portfolio, CGT is currently charged at a rate depending on your overall income. Your total taxable gainsare added to your taxable income for the year and treated as the top part of that total. The gains are then charged to CGT at the following rates for 2007-08:

  • 10 per cent where they fall below the starting rate limit for income tax (£2,230)

  • 20 per cent where they fall between the starting rate and basic rate limits for income tax (£2,231 to £34,600)

  • 40 per cent where they fall above the basic rate limit for income tax (£34,601 and above)

    Therefore, if your investments were cashed in this tax year, the financial gain made on the holdings, not the value they were sold for, would be subject to 40 per cent CGT. After April 5, 2008, the CGT due on the gain will be calculated at 18 per cent. It therefore makes sense to wait until the new tax year to cash in your investments.

    If you were to stay in the UK, I would recommend that your portfolio is geared for growth as you would only be subject to 18 per cent on gains while income would be liable to your top rate of 40 per cent.

    As you are to leavethe UK and move your remaining business interests to Switzerland, I assume that you will sell the two houses that you and your family reside in. As you have owned these homes for nearly two years, you need to make an election as to which of the two homes is your principal residence to avoid a charge to CGT being triggered on the disposal of the properties.

    Kim North (kim@techandtech.co.uk) is director of Technology and Technical

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