Clause 32 - Temporary non-residents
Finance Bill
11:15 am
John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)
This is the first of a series of clauses dealing with capital gains tax and common avoidance schemes.
In 1998 the Government introduced legislation to counter the widespread use of certain tax avoidance schemes that relied on the fact that in most circumstances the rules for capital gains tax did not generally impose a charge on people who had been non-UK resident for the entire tax year in which they disclosed financial information. Under the rule that was introduced in 1998 the gains of people who leave the UK temporarily are taxed; it applies only if they had a close connection with the UK before they left and they are absent for fewer than five complete tax years. However, some people took advantage of the interaction between the terms of some of our tax treaties and the capital gains tax rules in such a way that they could return to the United Kingdom before the stipulated five years had elapsed without having to pay any UK tax from gains realised while they were resident outside the UK.
The measure in clause 32 removes this avoidance opportunity. It stops the exploitation of our double taxation treaties and ensures that a charge to capital gains tax is imposed when the individual’s absence from the UK is of a temporary nature. It does that by ensuring that the tax treaties cannot have the effect of preventing the UK’s rules that were introduced in 1998 from applying.
The measure also deals with a situation in which the individual is regarded as resident in a foreign territory for tax treaty purposes, while simultaneously being resident in the UK. In such cases, the 1998 legislation will have no effect as the individual concerned will not have ceased to be resident in the UK. In certain circumstances, therefore, treaty non-residents could also be exploited by tax planners to enable people to avoid tax on capital gains; this measure closes that opportunity.
The Government are introducing the measure to put beyond doubt the question whether the terms of our tax treaties prevent the application of the 1998 temporary non-residence anti-avoidance rules. Her Majesty’s Revenue and Customs has changed its view on that. It no longer accepts that our tax treaties have that effect, but to avoid uncertainty it seems sensible, wise and reasonable for us to legislate in clause 32 so that everyone is clear and individuals cannot seek to avoid capital gains tax in that way. The effect of this measure is to ensure that an appropriate amount of tax is charged in respect of gains made while individuals are temporarily absent from the UK. Whenever foreign tax has been paid, the double taxation relief will be available in line with the normal rules.
Reaction to this clause has been relatively muted since we announced it in the Budget and published it in the first Finance Bill. Deloitte’s, for instance, has said:
“The measures proposed are an example of the closure of a specific tax avoidance idea which had been widely used to avoid capital gains tax by emigrating to certain treaty friendly jurisdictions”.
In tax-planning and advisory circles, that has become widely known and promoted as “the Belgian wheeze”.
The measure in clause 32 is targeted at avoidance—the avoidance that we are seeing. I suggest to the Committee that the measure is proportionate and fair, and I commend the clause to the Committee.