Case Study 2

Circumstance

A US citizen, Mr X, has been resident in the UK for seven years. The individual is married to a UK citizen with children. They have their home here which, for career reasons and the children's education, now means they will remain here for the next few years.

The individual has exhausted untainted funds and has a substantial offshore mortgage. It has suited them to fund interest commitments on the mortgage without a remittance problem from offshore funds. They aim to settle the loan after leaving the UK. The individual needs to consider a method for bringing family wealth onshore but recognises the current problem of the mix of gains and other investment income which taints the funds.

Prior to the pre-budget announcement, a number of assets with large accumulated capital gains were settled in trust. The plan was to look for capital growth in the trust to guard against other remittance problems and, for gains to be realised in the future which could be remitted freely and used to settle the offshore mortgage etc without UK tax implication.

What steps should he take in the light of the PBR?

Considerations

(a) The proposed changes in the taxation of non-domiciliaries seeks to broaden the attribution rules so as to first attribute the trust gains to settlors with interests in their non-resident settlements. Any gains on UK assets within the trust will, in future, be taxable as realised. With regard to gains on foreign assets, it is proposed following the 12 February clarification these will be taxable on the settlor on a remittance basis. Additionally, the proposals widen the attribution of gains to resident but not non-domiciled beneficiaries on a worldwide basis irrespective of whether remittances are made.

Factors to consider include:

(b) The trust appoints all capital out of trust before tax year-end.

(c) Remitting all gains (if any) within the trust prior to year-end to fund living requirements in the UK providing funds to potentially repay the offshore mortgage if staying longer-term and the impact of future interest payments on the mortgage becoming taxable remittances. Watch risk of attributions of gains to capital payments on beneficiary interested foreign trusts post 6 April (and accrued gains pre-6 April may still be caught in the same way).

(d) Break the trust and distribute all assets. If Mr X is here for work and children's education years, but unclear on future plans, should he consider the benefit of assets within offshore trust for inheritance tax purposes; would it make sense to move some assets outside trust structure but leave some assets within trust as excluded property?

Case Study 3

Circumstance

Mr Z is a US citizen partner of a private equity group.

The individual carry and co-investment participation in funds is held through an offshore trust structure with significant unrealised gains built up.

He has only been here in the UK for three years or so; he is not concerned given he may leave the UK prior to the seven year point. On the other hand, there is a chance he may stay, in which case he will want to bring his funds onshore as effectively as possible.

Considerations

(a) see 'case study 2' considerations regarding offshore trusts

Seven years is therefore not the key consideration for any existing planning and arrangements. They will need to be reviewed both in terms of the structure of the trust and what assets form a part.

(b) Individual planning and circumstances surrounding the structure must be reviewed; ideas may include:

• Trust appointing all capital out of the trust before tax year-end to individual, be aware of inheritance tax consequences and whether this is sensible.

• By sale or liquidation of certain assets within a structure, a step-up in basis may be achievable. However, this carries caution about the order and timing of the steps and the risk of being taxed on distributions after 6 April 2008 from gains as a resident beneficiary of a foreign trust.

• Become non-resident of the UK (with recognition of the new day count rules that will apply from 6 April 2008).

Case Study 4

Circumstance

Non-domiciled taxpayer Mrs Y, a US citizen, has been resident in the UK for ten years. The individual is a partner in a US law firm and expects to remain in the UK for many years. Mrs Y is reconciled to the fact that she will remain here because of career demands and ideally wants access to funds as years go by.

The taxpayer has actively sought to separate out original principal and UK post-tax income (which can be freely remitted) from other sources which have offshore income and gains and which carry with them a 'taint' (taxable in the event of remittance here).

She has significant unremitted foreign partnership income and other gains accumulated from years prior to 2007/08, and wants some ideas about issues to consider in the light of the proposed changes in this area.

Considerations

(a) Understand the benefits or otherwise of electing the remittance basis and paying £30,000 as opposed to being taxed on the arising basis.

(b) Consider her portfolio of investments in due course to understand if she is to be taxed on the arising basis; ensure items of offshore investment will not be treated as income or gain at a different time in the US and UK or, as capital gains in one jurisdiction and subject to income tax in another.

(c) Consider the arising basis of taxation and work with advisors in the period to the end of tax year to see whether further comfort can be found against the prospect of potentially not being able to credit actual UK tax suffered under this new proposed legislation.

(d) Reflect whether choosing the arising basis of tax in 2007/08 and other actions with accumulated offshore funds before year-end better prepares the taxpayer for a future regime as proposed.