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Capital Tax Review by Matthew Hutton MA, CTA (fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, comments on the withdrawal of a proposed trust residence rule, and points out cases where action may be required before 6 April 2007 due to the new residence rules

Context

The draft Finance Bill legislation issued on 2 February 2006 provided that, for both income tax and capital gains tax (CGT) purposes, trustees of a settlement who act as trustees in the course of a business and who are UK resident could, in relation to settlements created by non-domiciled, non-resident and not ordinary resident settlors, make an election to be treated as non-UK resident. This measure was subject to not constituting State Aid for EU law purposes.

Non-resident election for certain trustees withdrawn

Following advice [though it is not stated by whom – DTI? European Commission?] that the extension and modification of the current professional trustee test and application for both income tax and chargeable gains would constitute a State Aid, this aspect of the proposals has been withdrawn. There seems to be no indication that the issue is being reconsidered.

This will come as something of a blow to many trusts which in the past have taken advantage of the rule in TCGA 1992 s 69(2). The new unified regime for income tax and CGT will come into effect from 2007/08.

(Regulatory Impact Assessment for Trust Modernisation para 15.19, 22.3.06)

Comment

The original proposal for a trustee residence election was announced as abandoned at Budget 2006, on the grounds that the DTI had advised that it would contravene the EU State Aid rule. It seems unfortunate both that HM Revenue & Customs had apparently not put the point to the EU and that no proposals have been made for anything to take the place of the proposed ‘son of s 69(2)’. Both James Kessler QC and STEP have written to HMRC to ask for a copy of the advice given to them by the DTI – though it may be some time in coming!

The New Rules for Trustee Residence: When is it Necessary to take Action Before 6 April 2007?

Context

From 2007/08, Finance Act 2006 will apply the present income tax rules for CGT purposes (see CTR Issue No.14, Spring 2006, Item 20).

Three common areas of change

(1) Trustees relying on the professional trustee rule in TCGA 1992 s69(2) to secure non-residence will become UK resident (for CGT).

(2) Non-UK resident trustees with a UK branch, agency or permanent establishment will become UK resident for income tax and CGT.

(3) Trusts with a ‘UK-linked’ settlor and a minority of trustees will become UK resident for CGT.

Application

In these cases action is essential before 6 April 2007.

(LexisNexis Conference Tax Planning with Trusts 24 May 2006 London, lecture by James Kessler QC, p11)

Matthew Hutton MA, CTA (fellow), AIIT, TEP
June 2006

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.

THE FIFTH ESTATE PLANNING CONFERENCE: CURRENT ISSUES 2006

West
Thursday 14 September
Bailbrook House, Bath

North
Tuesday 3 October
Weetwood Hall, Leeds

London
Tuesday 31 October
The Law Society’s Hall

For further details, brochures and booking forms please contact Matthew Hutton: email – mhutton@paston.co.uk or telephone – 01508 528388 (Ref: TaxationWeb).