Re: Taxation of Chargeable Gains Act 1992 c. 12, s. 13 (nonresident companies)

CURRENT CAPITAL GAINS TAX PLANNING OPTIONS:

A LECTURE DELIVERED TO PANNELL KERR FOSTER

8th February 2008

Simon McKie
MA (Oxon), Barrister, FCA, CTA (Fellow), APFS, TEP

http://tinyurl.com/68o646
pp. 17-25

SECTION V

OFFSHORE TRUSTS AND COMPANIES

OFFSHORE COMPANIES

5.1.1 As, I am sure, Philip Dearden will explain in more detail later,
the attribution of the gains of non-resident companies under s.13 to
participators in those companies is extended to participators who are
not domiciled in the United Kingdom. Previously, gains were only
attributed under that section to participators who were resident or
ordinarily resident and domiciled in the United Kingdom.

5.1.2 A new s.14A applies where:-

(a) By virtue of s.13 part of a chargeable gain that accrues to a
company on the disposal of an asset is treated as accruing to an
individual in a tax year; and
(b) The individual is not domiciled in the United Kingdom in that
year.

5.1.3 Where those conditions are satisfied the part of the chargeable
gain treated as accruing to the individual is a foreign chargeable
gain and can therefore be taxable on the remittance basis. For the
purposes of the new remittance rules any consideration obtained by the
company on the disposal of the asset is treated as deriving from the
deemed chargeable gain and if the consideration so obtained is not
equal to the market value of the asset, the asset is to be treated as
deriving from the deemed chargeable gains.

5.1.4 So these provisions aim to reproduce the effect of the new
remittance basis rules in relation to the gains of non-resident
companies.

5.1.5 Although this may be bad news for non-domicillaries, s.13
companies could continue to be useful investment holding vehicles for
those who have either not opted for the remittance basis or,
alternatively, have done so but will remit significant capital gains.
That is because the gains of non-resident companies are calculated
under Corporation Tax rules which will give an allowance for
indexation but the rate of tax applicable to those gains will be the
individual’s rate of eighteen per cent. Thus, holding investments
through a non-resident company neatly combines Corporation Tax
Indexation Relief with the individual’s rate of Capital Gains Tax.

5.1.6 As we shall see, this advantage does not depend upon the
participator being a non-domiciliary. It applies as well to UK
domicillaries. The advantage also applies where gains arise within a
non-resident company held in an offshore trust.

5.1.7 Where gains are treated under s.13 as accruing to an individual
who is not domiciled in the United Kingdom there are two restrictions
on reliefs which would otherwise be provided by s.13. Section 13(8)
allows losses arising in a non-resident company to be apportioned to
participators for the purposes of reducing gains allocated under s.13
in respect of the same fiscal year. Where, however, a gain becomes
chargeable by virtue of being remitted in a year later than the year
in which it arises, losses arising in the offshore company in the year
of remittance cannot be set off. Nor will any losses arising in the
year of the disposal to be set off in determining the amount of the
gain. That is because s.13(8) works not by setting the loss off
against the gains of the company in determining the amount of a gain
which is allocated to the individual, but rather by allocating the
loss to the individual as well as the gain and allowing the set off at
the level of the individual.

5.1.8 TCGA 1992 s.12(2) deems chargeable gains in respect of foreign
chargeable gains where the remittance basis applies to accrue at the
time of remittance and not at the time of the disposal which gives
rise to them.3

5.1.9 That is a very significant disadvantage in comparing the effects
of the application of the remittance basis with being taxed on an
arising basis. It shows, that a decision to make the remittance
election will never be a simple one and will require detailed
predictions of future events to be made.

5.1.10 The second disadvantage under s.13 applies where the
participator is not c domiciled in the United Kingdom even if he is
fully taxable on an arising basis. Were it not for the provisions of
ss.13(5) and 13(7) the s.13 charge would lead to double taxation; a
charge on the attribution of the gain to the participator and
a charge on the participator when he disposes of the shares in the
offshore company. That of course mirrors the situation of a UK
resident holding assets through a UK resident company but at the time
that s.13 was enacted it was

3 At least, that seems to be the intention of the legislation,
although read literally it actually seems to
give rise to a double charge thought inappropriate. Section 13(5), as
subsequently amended, provides a credit for the tax suffered under s.
13 against the UK tax charged on a subsequent distribution in respect
of the capital gain made within three years of the end of the period
in which the gain is made.

5.1.11 To the extent that the tax has not been credited in this way, s.
13(7) allows the tax to be treated as a deduction in the computation
of a gain accruing on the disposal by the participator of any asset
representing his interest in the company.

5.1.12 Section 13(5A) can apply to gains allocated under s.13 to non-
domiciliaries but s.13(7) can not. It is difficult to understand why
it should not but it is particularly outrageous that it should not
apply to a non-domiciliary fully taxable on the arising basis.

OFFSHORE TRUSTS

5.2.1 The offshore settlor charge imposed by TCGA 1992 s.86 currently
does not apply if the settlor is not domiciled in a country of the
United Kingdom in the fiscal year concerned. As from next year, that
exclusion will no longer exist. Similarly, under the capital payments
charge imposed by TCGA 1992 s.87 a beneficiary is excluded from the
charge to tax on gains treated as accruing to him under the provisions
of that charge if he is not UK domiciled. That exclusion is also
removed with effect from 2008/2009 onwards.

5.2.2 Where a settlor has elected for the remittance basis to apply,
provisions exist to allow a form of the remittance basis to apply to
gains attributed to settlors under s.86.

5.2.3 The net effect of all these rules and their interaction has been
much criticised primarily because, events taking place on or after the
6th April 2008, can bring into charge gains realised many years ago.
The reason for that is that s.87(7) which currently provides an
exemption for non-domicillaries under the Capital Payments Charge does
not operate by deeming gains not to accrue to a non- domiciliary but
rather by providing that gains which do accrue to a non- domiciliary
under s.87 should not be chargeable. Thus, capital payments made from
the 6th April 2008 onwards can be matched with gains realised in
previous years and lead to a charge, whereas if the capital payments
had been made in a previous year the gains treated as accruing would
not have led to a charge to tax.

5.2.4 The legislation also provides provisions which are aimed to
prevent a charge arising on the same gain under both ss. 86 and 87 but
they do not prevent charges under both sections arising by reference
to the same capital payment.

5.2.5 These provisions are of the greatest complexity, particularly
when you begin to take account of groups of companies held by
trustees. It is highly likely that detailed arithmetical anomalies
will continue to emerge over the coming months. But even now what are,
at the least, odd results, are emerging.

5.2.6 I am sure that Phillip Dearden will be providing more detailed
examples this afternoon but an example here might suffice.

5.2.7 Example

Mr A is not domiciled in the United Kingdom. He made an election for
the remittance basis to apply in 2008/2009 and all succeeding years.
He had settled a non-resident trust of which he was a beneficiary in
1999/2000 and the trustees had made a gain of £1,000,000 in that year.
No other transactions took place until 2008/2009 when the trustees
made a further gain on a foreign situs asset. In 2009/2010 the
trustees made a capital advance of £1,000,000 to Mr A in the UK.

The gains realised in 1999/2000 were not treated as accruing under s.
86 but they were trust gains for the purposes of s.87.

An amount equal to the gains realised in 2008/2009 were deemed accrue
to Mr A in that year under s.86. That amount of deemed chargeable
gains were foreign chargeable gains and so, not having been remitted
in 2008/2009, Mr A was not chargeable in respect of them.

The trust gains in that year would, under s.87(2), have included the
gains of previous years of £2,000,000 (£1,000,000 – £1,000,000) exc
ept
that s.87(2) excluded the gain of 2008/2009 from being included in
trust gains.

In that year, Schedule 5 para 5B would have added back an amount to
the trust gains for 2008/2009 equal to the unremitted deemed
chargeable gains.

In 2009/2010 the foreign chargeable gains which had been treated as
accruing to him under s.86 were deemed to have been remitted by Mr A
and so were chargeable on him.

For s.87 purposes, no addback was made to trust gains because the
gains were remitted in that year. So trust gains in 2009/2010 were
£1,000,000. The result was that the trust gains of £1,000,000 were
matched with the advance in 2009/2010 which was a capital payment and
gains of that amount accrued to Mr A under s.87.

So it is at least arguable that the interaction of ss.86 and 87 has
not resulted in double taxation. The assessment under s.86 brought
into charge in 2009/2010 the gain realised by the trustees in
2008/2009. The assessment under s.87 brought into charge in 2009/2010
the gain made by the trustees in 1999/2000. But it should be noted
that a single payment of £1,000,000 has caused to be brought into
charge gains of £2,000,000. This, in spite of the fact that some eight
years had passed between the realisation of the first gain and the
publication of the draft legislation which, when enacted, brought it
into charge. What is more, the tax on the gain assessed under s.87
will be increased by the supplementary charge by sixty per cent
because over six years has passed between its realisation and the
capital payment of which it is matched.

The CIOT intends to say that it assumes that this cannot be HMRC’s
intention but I think that it is highly unlikely that it is not. It
should be noted, however, that if the trustees had accelerated the
disposal in 2008/2009 and the advance in 2009/2010 to 2007/2008 the
problem would largely have been avoided. The gain in 2007/2008 would
not have been a gain within s.86 and although the advance to Mr A
would have resulted in gains accruing to him under s.87 because of the
exemption which currently exists in s.87(7) that gain would not have
been chargeable. The situation would have been less favourable, had
there been a transfer of value by trustees linked to a trustee
borrowing within TCGA 1992 Schedule 4B.
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