The Government is to introduce legislation with specific reference to an avoidance scheme for UK residents.
UK residents are taxable on their income wherever it arises. This scheme seeks to avoid this UK tax by diverting the income (mainly the profits of UK property development) of a UK resident individual to a foreign partnership based in certain countries with the partners being foreign trustees. The scheme is based on the wording of certain double tax treaties and designed to ensure that the income is taxed solely in the foreign country at a low rate to the exclusion of the UK, whilst allowing the UK resident beneficiary of the foreign trust access to the income.
Legislation to be introduced in the Finance Bill will:
• attempt to clarify, retrospectively, legislation introduced in 1987, which itself was retrospective, so that it has the effect intended; and
• prevent the perceived tax avoidance through the ‘misuse’ of Double Taxation Treaties by UK residents.
The first measure will be treated as having always had effect. The second measure will have effect for income arising on or after 12 March 2008.
The schemes at which the new legislation is aimed were set up in such tax jurisdictions as the Isle of Man, Guernsey and Jersey, and involved the individual being both the settlor and beneficiary of an offshore trust. The foreign trustees of these trusts are members of a partnership. The individuals have the ongoing right to all income and as a consequence of the provisions of the relevant Double Taxation Treaty the UK is not entitled to tax the partnership income of these foreign trustees.
The new proposed legislation sets out to establish, notwithstanding the provisions of the treaty, that the UK beneficiaries will be liable to tax in the UK, to the extent that they are entitled to the profits of the partnership.
These proposed changes, in effect, are HMRC’s attempt to reinforce previous legislation and as such are an attempt to attack the schemes since their inception without any time limit. Thus anyone involved with a scheme of this type should obtain expert guidance very soon.
With reference to the second of these changes in relation to the perceived misuse of Double Taxation Treaties, this gives HMRC very wide powers to look at, and question, any international tax planning using Double Taxation Agreements anywhere in the world.
