Tucked away in the Budget were three items that cause us real concern. The detail will be in the forthcoming Finance Bill, but the first item is pretty clear anyway and of considerable importance. The second appears as if it just might be a precursor of even worse to come!
First was the change putting beyond all doubt the Inland Revenue’s view on people who go abroad to shelter capital gains. The good news here is that what follows only relates to capital gains tax (CGT) and not to the rules for income tax which will remain more lenient.
Over the last few years many UK residents have sought to become UK non-resident in a low/no tax jurisdiction before realising substantial capital gains on selling shares, for example in their private company which they have founded and built up. So as to avoid having to spend five complete UK tax years as a UK non-resident they have often become resident in a country (and Belgium was the most popular) where capital gains are covered by the relevant double tax treaty giving the taxing rights to Belgium in such a case rather than the UK, but where the detailed local domestic legislation actually exempted this class of asset from local CGT. Nirvana!
Now the UK Revenue is saying that although it never accepted this anyway, it will legislate to make it clear that the five-year rule applies wherever you go. Simple and clear for the future – but we await the fine print to see how someone with, for example, 18 months already served in Belgium is positioned! Anyway, one must expect locations like the Bahamas, Channel Islands, Monaco and Gibraltar, to become even more popular than in the recent past.
Second, again for CGT (and fortunately not for inheritance tax) the Revenue will legislate to change the existing rule that the UK resident but UK non-domiciled individual is only liable to CGT on UK sited assets (or on the remittance to the UK of gains on assets abroad).
While the basic rule remains unchanged, UK CGT will be incurred in future specifically where bearer shares in UK incorporated companies are sold, whether they are located in the UK or outside it.
This will stop the practice of being able to put UK assets into a UK registered bearer share company and then move the shares (and hence the underlying asset for CGT purposes) outside the UK as the shares were then deemed to be sited where they were physically present (e.g. in a Swiss bank). Not so from Budget Day – and of course this is retrospective in its effect on those who have already done it and still hold the assets in the company.
One can see this as possibly the first attack from a new angle on the UK non-domiciliary’s coveted tax position – perhaps there really is no need to actually change the law of domicile itself if you start from a different base like this!
The Chancellor has also taken steps to increase his revenue take from inheritance tax. Many families have quite legitimately set up IHT planning schemes that would enable the family home to pass to the children without the financial burden of this punitive tax having to be paid. However, contained within some radical changes to the law from April 6, 2005, the Chancellor will now be able to tax the people who have used such schemes. He has countered this by stating that over the next three years he will raise the IHT threshold to 300,000 pounds sterling. However, this is of little help to middle band home owners in the UK.
All in all it looks like this Chancellor is determined to increase UK taxation substantially and by using quite subtle methods to do so.
Finally, there is to be a further tightening up of a loophole, much exploited about two or three years ago, of making a UK resident trust temporarily non-resident in certain specific countries with advantageous double tax treaties, so that during the short non-resident period capital gains could be realised free of UK CGT before the trust was brought back onshore again as UK resident. This planning method will now be closed.
As always, careful planning can still assist and professional advice should be sought on this ever more complex subject.