Finance Act 2008 |
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| Written by By Deborah Feldman, Associate in the Tax Department, Davenport Lyons | |
| Monday, 06 October 2008 | |
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The Finance Act 2008, which was originally trailed in the Finance Act 2007 and indeed in the 2006 Pre-Budget Statement, has finally received Royal Assent. The Finance Act is particularly complex this year, especially for those who are UK resident but not domiciled here. Schedule 7 of the Act establishes a new regime for such individuals and it runs to a hefty 71 pages. It is the first attempt at a statutory definition of the remittance basis of taxation.These UK residents who are domiciled elsewhere will be subject to income tax and capital gains tax when funds are transferred or remitted to the UK. We will need to absorb all this and act quickly before the game begins again in November with the next Pre-Budget Report. Of course, the present economic climate makes it most unlikely that there will be many tax giveaways when that time comes. Schedule 7 – who is affected A thorough consideration of Schedule 7 of the Finance Act 2008 needs to be undertaken urgently (usually by the trustees or the settlor) where an individual falls within the following definitions: 1. S/he is not domiciled in the UK but is resident in the UK 2. S/he has set up an offshore trust to own property in the UK in which s/he or members of his or her family reside 3. Such a trust may also hold shares in a non UK-based company which in turn owns a property also not in the UK. Income and capital gains tax Such an individual may find themselves liable to income and capital gains tax if any funds from the trust are distributed to a UK resident individual or family. The funds may be traceable to offshore income and gains which have not been ‘matched’ by an earlier capital payment to a beneficiary. Mixed funds Any funds held in such a trust may be ‘mixed’ funds, in other words, representing accumulated income, gains and pure capital. Any such gains may be treated and taxed as those of the settlor (ie the person who made the original settlement of property). For example, a settlor who is a UK resident but not domiciled here might transfer a UK property into a non resident trust to mitigate their inheritance or Capital Gains tax liability. Any funds invested in the UK by the trustees, whatever the source of the income or gains, will be treated as a remittance by the settlor and will be taxed accordingly. It is still possible to ‘match’ any benefit received by a UK resident beneficiary with relevant income of the trust. Any such matching needs to be done on a year-by-year basis, beginning with the earliest UK income which will be taxable followed by any non-UK income and then post 6 April 2008 gains. Holding a UK property in a non-UK company This continues to protect the beneficiaries from a charge to inheritance tax, but does not protect them from a potential capital gains tax charge on the distribution of funds originating from such a property, for example, when it is sold. If such an individual makes a gift of income or gains arising offshore to his or her spouse, that spouse may bring the funds into the UK without exposing the settlor or themselves to any charge to tax on the gift providing that the original settlor does not benefit or enjoy such funds. If a property has been purchased in the UK by the trustees and it is now sold, that sale will be treated as a remittance at that time by the settlor. It is not unusual for trustees to purchase a UK property through a non-UK company which will protect the ultimate beneficiary from inheritance tax. The sale of such a UK property may suffer a capital gains tax charge at the time of sale. Any gain realised on the property will now be matched with the most recent trust gains and, once those gains are exhausted, any surplus will be matched with any earlier pre-6 April 2008 gains. Transferring unused nil rate band for inheritance tax between spouses For individuals who are domiciled in the UK, or deemed to be domiciled in the UK for inheritance tax purposes, it is now possible to transfer any unused nil rate band for inheritance tax between spouses or civil partners. At the present time, the effect of this is that the nil rate band for a surviving spouse may be £624,000. Of course, it is likely that the nil rate band will increase again in next year’s budget and these figures will be subject to the Chancellor’s overall monetary review in the changed climate. Any lifetime chargeable gifts or legacies made in a Will combine to reduce the amount of the nil rate band available to the surviving spouse or civil partner. |
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