By now, you will have read our special publication - Taxation of UK Non-Domiciled Individuals (click text right to download a copy). The consultation period draws to a close and we await Mr Darling delivering the Budget to the House of Commons on 12 March 2008.

Speculation will continue up to that point on whether any adjustments will be made to these wide ranging proposed changes. Rather than continue this speculation, we thought we may be able to raise some of the issues in the form of some case studies. Hopefully, this brings out a selection of issues that may be faced to help illustrate some of the possible consequences and act as a discussion point to a myriad of possible solutions.

You will need to focus on the particular circumstances you face with advisers, armed with your own specific fact pattern. It is not intended that any of the considerations raised in the studies are suitable to act on.

Case Study 1

Circumstance

Mr A, a US citizen resident in the UK for ten years, holds a controlling interest in a UK trading company through an offshore company structure in the BVI.

Mr A holds a 40% interest in the BVI company. The remainder of the BVI company is owned equally by three non-UK resident and non-US national individuals, i.e. 20% each. The BVI company owns 100% of the share capital of the UK company.

(a) The UK company is currently valued in excess of $40m and it is envisaged that the shares in the UK company will be sold at some time in the future - are there any changes in the taxation treatment on sale in light of PBR changes? What, if any actions can be taken to improve the position?

(b) What would the situation be if the BVI company was a US LLC instead?

Considerations
There has long been anti-avoidance legislation to protect against UK tax avoidance involving such structures centred on income tax and capital gains tax but the latter has only applied to UK domiciled persons. We will not discuss the income tax implications any further here but please contact your tax manager for more detail if desired.

Currently, where a UK domiciled and resident individual is holding an interest in a foreign company (where it would be considered to be a “closely held company”) then any capital gains arising to the foreign company in respect of UK assets will be deemed to arise directly to the individual in proportion to their ownership in the foreign company. This applies irrespective of whether or not any distributions of proceeds from the sale were made to the individual, who would then be subject to UK tax on the attributed gain in the same manner as any other personal capital gain.

For this purpose, a “closely held” company is one which is under the control (in general >50% share holding), of five or fewer persons (a persons holding also includes the holding of any connected person).

If Mr A, together with one of the other owners, holds 60% of the BVI company the BVI company would meet the “closely held” test.

The new legislation proposes to extend this capital gains tax anti-avoidance measure to individuals like Mr A who are not domiciled but resident in the UK, irrespective of whether the proceeds are even distributed by the foreign company let alone remitted or deemed remitted to the UK.

There is no “bona-fide commercial” escape clause under these proposals as can be seen with the income tax anti-avoidance legislation.

(a) Mr A is not domiciled in the UK so the current anti-avoidance on capital gains would not apply, and as the BVI company is not subject to UK capital gains tax then no UK taxation arises on the sale of the UK company if it takes place before 5 April 2008.

However, if the disposal occurs after 5 April 2008, then the proposed legislation will generate a charge to UK capital gains tax on Mr A at the date of disposal without regard as to whether there is any remittance.

(b) For the purpose of this new legislation, a US LLC is not considered any differently to an offshore corporation.

Where tax arises in another country on the same transaction, e.g. the US, then consideration is required with regard to the matching of tax credits to avoid potential double taxation. This may be problematic in some cases so specific advice is required.

It should also be noted that these changes also apply to non-resident landlord corporations owning UK real estate. Non-UK companies may continue to be beneficial for income tax and other practical/legal reasons but any capital gain arising on the sale of the UK property may now be subject to UK capital gains tax.

Action To Be Taken?

Review on a case by case basis is required as the facts and circumstances surrounding the structure will vary considerably, along with any overriding non-tax issues to consider.

Ideas being considered range from simple sale of the UK assets before 5 April 2008; constructing forward sale arrangements whereby the tax point is triggered pre-5 April but the actual realisation point is deferred; ensuring the offshore corporation does not meet the definition of a “closely held” corporation. The latter is likely to be used more as a planning tool for new structures than as a solution for existing ones. There has also been some discussion as to whether certain double taxation treaties offer any protection against this legislation.