A recent decision from the Special Commissioners has highlighted the fact that UK advisers should not take too much of a hands on approach with regard to offshore trusts. The particular case (Trustees of the Trevor Smallwood Trust and HMRC) involved a tax scheme to avoid UK capital gains tax.

Briefly the facts were:

• A Jersey trust held shares that were pregnant with gain which would have been assessed on the UK resident settlor if they were realised. 
• On the advice of UK tax advisers new trustees were appointed who were resident in Mauritius.
• The plan was that the Mauritian trustees would sell the shares and subsequently, but in the same UK tax year, the Mauritian Trustees would resign in favour of UK trustees. 
• Under the Double Tax Treaty with Mauritius the gains would have assessable in Mauritius (with no tax payable) and not in the UK.
  
  

Whether this plan worked relied on a tie-breaker clause in the treaty. This referred to the Place of Effective Management (POEM) of the trust. The Commissioners found that, despite the fact that all the actions of the trustees were….

“..carried out correctly and were well documented”

… the “guiding hands” of the UK tax advisers were “evident throughout”. The fact that the settlor, who had the power to appoint trustees, was UK resident was also taken into account.

The Commissioners also made reference to the fact that there was no engagement letter between the Mauritian trustees and the UK Tax advisers confining their engagement to tax advice.

This decision seems to be limited to cases where relief under a double tax treaty is relevant but it is not a great leap to see it being extended to determining the residence of trustees generally.

Although not relevant to this case the Commissioners did compare POEM with Central Management and Control (CMC) which is used to determine whether offshore companies are resident in the UK for tax purposes. It may be, therefore that this decision could be applied in the corporate field as well.

It is not known whether this decision will be appealed but as there is £2.7million of tax at stake it is a possibility.

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The Telegraph is reporting a further climb-down on the proposed changes. According to senior HM Revenue and Customs officials.

“…non-doms will now be able to elect to make a "deemed sale" to rebase the value of their British and overseas assets.”

This appears only to relate to assets held with in offshore trusts and seems to have arisen following the letter from Dave Hartnett which stated…

“….there will be no retrospection in the treatment of trusts and the tax changes will not apply to gains accrued or realised prior to the changes coming into effect.”

No official announcement has been made and none is likely before the Budget on 12 March. So, if the trustees of your offshore trust were considering a “bed & breakfasting” exercise before 6 April 2008 they may want to put it on hold until the Budget.

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Following my blog of yesterday it now appears that the Chancellor has retreated on some of his proposals for the taxation of Non-Doms. Dave Hartnett, the Acting Chairman of HM Revenue and Customs has posted a letter on the Revenue website to clarify the Government’s intention in four areas where concerns have been raised.

According to the letter Hartnett wants….

“to make clear that the Government’s intention – which will be set out in legislation to be brought forward – has always been to ensure that:

• those using the remittance basis will not be required to make any additional disclosures about their income and gains arising abroad. So long as they declare their remittances to the UK and pay UK tax on them, they will not be required to disclose information on the source of the remittances; 
• there will be no retrospection in the treatment of trusts and the tax changes will not apply to gains accrued or realised prior to the changes coming into effect;
• money brought into the UK to pay the £30,000 charge will not itself be taxable;
  
  and
  
• it will continue to be possible to bring art works into the UK for public display without incurring a charge to tax.
  
  In addition, we will continue to discuss with the US authorities how the £30,000 charge can become creditable against US tax.”
  
  

The full text of Hartnett’s letter can be found here.

This clarification is being interpreted as a retreat or a climb down by the Chancellor. However, a Treasury spokesman has been quoted as saying that the intentions have not changed it is just that the draft legislation has gone “slightly awry”. There are still a number of issues to be resolved and I expect we will have to wait until the Budget on 12 March to get further details.

Keep on watching this space.

 

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It is being reported in The Times and elsewhere that Chancellor Alistair Darling is considering a rethink on the Non-Doms changes. According to The Times officials at the Treasury are:

“…considering introducing provisions to assure non-doms that the Treasury’s aim was not to pry into their world-wide tax affairs, but only to tax the earnings they bring to Britain.”

Watch this space...

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We have now had a chance to digest the draft legislation issued last week although it cannot be said to sit easily in the stomach. It is complex and retrospective in some key respects. I am chairing a working party of the ICAEW to lead its responses and meet with parliamentary and treasury representatives to lobby on our particular areas of concern. We will keep you posted of developments in this blog but it appears that the fundamental points of policy are fixed.

A detailed summary of the changes and how you might be affected are found in our latest edition of Tax Plus issued on Friday. You can read Tax Plus by clicking here.

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After some considerable wait HM Revenue & Customs and customs have finally published the draft legislation covering changes to rules for taxing UK residents who are not domiciled in the UK.

These are more wide ranging than expected and will have a significant impact on not only Non Doms but also beneficiaries and settlors of offshore trusts whether or not they are Non Doms.

There is a significant amount of new legislation to be considered and it may be amended before (or after!) 5 April 2008. Some points that are proposed are.

• Non Doms who have been here for seven years (out of ten) will have to pay £30,000 a year to elect for the Remittance Basis.
• All Non Doms claiming the remittance basis will lose personal allowances and capital gains tax annual exemptions. Subject to a de minimis limit of £1,000 of overseas income / gains.
• Bringing non cash items to the UK such as works of art, cars, furniture, and jewellery will be treated as a remittance after 5 April 2008. If those items were purchased with overseas income or gains then the remittance could be taxable in the UK. If such items have already been brought into the UK and are used after 5 April 2008 the legislation as presently drafted, indicates that there will be a remittance which will be taxable.
• Beneficiaries of offshore trusts who receive capital payments may be taxable on capital gains arising in the trust that have arisen as far back as 17 March 1998 (yes ten years ago!) or gains made at some point in the future.
  
  

There is much more to consider but if you are Non Domiciled or have an interest in an offshore trust it would be sensible to contact your accountant now. There are only a few weeks before the new rules become effective.

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