The Budget announcement today includes some welcome clarifications and relaxations on the extension of the offshore trust capital gains tax rules to non-UK domiciled individuals from 6 April 2008. The main points to note are that :

• Non-UK domiciled settlors will not be taxed on gains arising to offshore trusts under the “settlor charge”.
• Non-UK domiciled beneficiaries will not be subject to effective retrospective taxation on gains, or capital payments, arising before 6 April 2008. Offs
• hore trustees will be able to make an election to rebase assets to 6 April 2008 values so that gains accruing before that date will fall outside the charge to tax for non-UK domiciled beneficiaries.
• Offshore trust gains arising and matched with capital payments on or after 6 April 2008 will potentially be taxable on non-UK domiciled beneficiaries.
• Gains arising in respect of UK as well as non-UK assets can be taxed on the remittance basis.
• The requirement to provide detailed disclosure of information on offshore trusts to HMRC has in large part been dropped.
  

The changes clearly reflect many of the concerns raised during the consultation process on the draft legislation published in January and are perhaps more generous than expected. This does remove much of the pressure to take significant actions in respect of offshore trusts before 6 April 2008. However, specific advice should be sought in all cases.

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It was previously announced that paying interest out of foreign income would be treated as a remittance with effect from 6 April 2008. Today’s Budget has relaxed this proposal in respect of existing mortgages.

Interest payments on existing mortgages, which are secured on a residential property in the UK, that are funded out of untaxed foreign income will not now be treated as a remittance. This will continue for the remaining period of the loan, or until 5 April 2028 whichever is shorter. If the terms of the loan or further advances are made after 12 March 2008 the grandfathering provisions will stop.

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Currently Non-doms do not get the benefit of capital losses on foreign assets as the remittance basis is compulsory for capital gains tax. From 6 April 2008 it will be possible to elect in and out of the remittance basis on a year by year basis.

Legislation will be amended so that Non-doms who have not claimed the remittance basis from 2008/09 will get relief for foreign losses. Those non-doms who do claim the remittance basis will be able to elect into a regime that gives them relief for foreign losses in the UK in the years they are taxed on an arising basis. The election will be irrevocable and will require disclosure of unremitted capital gains.

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Proposed changes to the tax rules for Non-Doms had meant that UK residents who took advantage of the remittance basis would lose personal allowances and annual capital gains tax exemptions where their unremitted foreign income and capital gains exceeded £1,000 a year.

Today’s Budget has relaxed this rule slightly and the limit has been increased to £2,000 a year.

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There have a number of changes announced in today’s Budget to the proposed levy of £30,000 for taking advantage of the remittance basis.

The first change to note is that it will only apply to adults. Children will not have to pay the charge until the year in which they turn18. Secondly the de-minimis limit of £1,000 has been raised to £2,000.

The most significant change is that it will now a tax charge rather than a stand alone charge and, as a result, will be treated as such for the purposes of Double Taxation Agreements. This follows serious lobbying by the, particularly American, ex-pat community as it looked like US citizens would not get credit for the £30,000 against their US tax liability.

The charge will be attributed to unremitted income or gains (at the choice of the individual) and when these are eventually remitted to the UK they will not be taxed again. However there will be ordering rules that will ensure that untaxed unremitted foreign income and gains will be treated as remitted before income or gains upon which the £30,000 has been paid.

The £30,000 charge will also be available to cover Gift Aid donations.

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The main VAT changes announced in the Budget today are;

1. With effect from 1 April 2008, the annual VAT Registration/deregistration limits have
   increased to £67,000/£65,000 respectively. 
2. Revised fuel scale charges will apply for VAT return periods beginning after 1 May 2008.
3. A transitional period has been announced for VAT refund claims to 31 March 2009. This follows recent litigation relating to the three year capping rules introduced in 1996/7.
4. Withdrawal of the staff hire concession with effect from 1 April 2009.
5. A package of simplification measures for the option to tax.
6. Extension of the VAT exemption for fund management services.
7. The limits for correcting errors on VAT returns have increased from £2,000 to the greater of £10,000 and 1% of turnover.
   
   Full details of these changes will be contained in our Budget Tax Bulletin to be issued shortly.
   
   

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Dividends paid by UK companies carry a non-repayable tax credit equivalent to one ninth of the dividend. This means that a basic rate taxpayer has nothing further to pay and a higher rate tax payer pays additional tax at an effective rate of 25%. Dividends from non-UK companies, however, do not currently carry a tax credit and so a basic rate taxpayer will be liable at 10% and a higher rate taxpayer will pay 32.5%.

It was previously announced that from 6 April 2008, provided the dividends did not exceed £5,000 a year, non-UK dividends would carry the same tax credit for shareholders who own less than 10% of the company. Today’s Budget announcement has removed the £5,000 limit. It is not clear what happens where foreign tax has been paid on the dividends.

In addition, the tax credit will be available, from 6 April 2009, for shareholders with more than 10% provided that the source country levies a tax on corporate profits similar to corporation tax. Further details can be found here.

Remittance basis

When the legislation relating to the taxation of overseas dividend was re-written in 2005 an error was made so that remitted dividends (for those claiming the remittance basis) were taxed at 32.5% rather than 40% as they had been in the past. Today’s Budget has announced that this will be corrected with effect from 6 April 2008. The Budget Notice can be found here.

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Today’s Budget has relaxed the proposed rules for counting the days spent in the UK when determining whether someone is resident in the UK for Tax purposes. It had previously been announced that days of arrival and departure would be counted.

Today’s announcement means that only days where the individual is present in the UK at midnight will be counted as a day of presence in the UK for residence tax purposes. That is days of arrival but not departure.

There is an additional exemption for passengers in transit between two places outside the UK even if they are here at midnight.

Further details can be found here.

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Chancellor Alistair Darling will deliver his first full Budget on Wednesday 12 March 2008. The 2008 Budget comes amid the gloomiest economic situation for more than a decade, with volatile financial markets, a credit crunch and falling house prices.

Mr Darling will present the Budget to the House of Commons at 12.30pm and we will of course be blogging on SME Plus Blog and Tax Plus Blog during the course of the afternoon, providing analysis on the key highlights.

If you do not already subscribe to our blogs click here for SME Plus Blog or here for Tax Plus Blog to ensure you get our comment and analysis as and when it happens.

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