STEP Calls for CGT Re-Think on Resident Non-Domicile Regime

26th November 2007

The Society for Trusts and Estate Practitioners (STEP) have suggested that the major changes proposed by the Pre-Budget Report to the capital gains tax treatment of trusts for foreign domiciled UK residents (Resident Non Domiciliaries - RND) should be postponed to give time to assess the impact on inward investment, philanthropy, tax revenue and the financial services industry.

PBRN 18 provided, in paragraph 12:

“Anomalies in the current rules mean that individuals using the remittance basis of taxation can avoid paying UK tax on their foreign income and gains effectively brought into the UK. A number of changes are being made to ensure that where foreign income and gains are remitted to the UK then tax is charged on those remittances. The changes include:

Correcting a flaw in the current claims mechanism which allows income arising in one year to be remitted tax free the following year by claiming the remittance basis in the first year but not in the second;

Reducing the scope for the alienation of income and gains through the use of offshore structures, such as companies and trusts, which convert taxable income and gains into non-taxable payments;

Extending those existing anti-avoidance measures which currently do not apply to remittance basis users so that in future they do;

Removing the ‘ceased source’ rule; and

Extending the definition of remittance in relevant foreign income.”

STEP have taken this to be, as appears to be the case, as a proposal to introduce capital gains tax on foreign trusts. They say:

“However as the proposals introduce CGT at 18 per cent when it was previously not applicable they represent a major policy shift which may have a significant negative economic impact for UK business and negate the government’s aspirations for a more entrepreneurial Britain.

Trusts are used widely by wealthy foreigners whether or not UK resident to hold assets which are situated in different jurisdictions. Gains realised by such trusts are currently not subject to capital gains tax in the UK either on the foreigner or on the trust assets. This proffers a significant competitive advantage attracting investment to the UK, rather than to other economies. The new proposals will tax a foreign domiciliary if a gain is realised in the UK. This is a significant disincentive to invest in the UK as against other investment destinations.”

They say that there are two likely impacts of this major change in policy:

“These mobile trust investments will go to other jurisdictions with more favourable CGT regimes. A study by Oxera Consulting, a leading econometrics firm, has suggested that tax is a major influence on location of investments decisions.

RND, many of who are highly mobile, will physically re-locate to jurisdictions with a more favorable tax regime. “

They give as examples: