Clause 33 - Trustees both resident and non-resident in a year of assessment
Finance Bill
11:30 am
John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)
The clause introduces an anti-avoidance measure to counter certain tax avoidance schemes that, in tax planning circles, are commonly known as sunset schemes. They have been used by some trustees and settlers of settlements to exploit the gap in our capital gains tax rules that allows trustees to avoid capital gains tax by arranging their affairs so that they are both resident and non-resident in the UK in any given tax year. Under the existing rules only gains arising to trustees if they are resident in the UK throughout the year or are non-resident throughout the year are taxed
The schemes take various forms but the common feature is that they exploit the terms of our tax treaties to ensure that no UK tax is chargeable on gains that would otherwise be taxable in the UK and little or no tax is payable on the gains elsewhere. The schemes rely on the broad proposition that at any given moment trustees are resident for capital gains tax purposes in the country where the majority of the trustees reside. It is usually a straightforward matter for trustees resident in one country to be replaced by trustees resident in another. That can be done quite straightforwardly on paper, and that, of course, makes residence for trust taxation purposes highly mobile.
In the simplest case, we start with a long-established settlement with trustees resident in a tax haven. Those arranging the tax avoidance have the trustees replaced by trustees resident in another foreign country with little or no tax on capital gains and a treaty with the UK that gives the foreign country sole taxing rights in respect of any gains. While resident in that country, the trustees realise the gains. Finally, the trustees are replaced by a further set of trustees resident in the UK for the rest of the tax year in which the gains are realised. The result of the interaction of the tax treaty and the existing tax rules means that the UK cannot tax the gains, so they are realised free of UK tax and, in many cases, free of any tax whatever.
As a Government, we have sought to negotiate protocols with our tax treaty partners to counter these schemes but with over 100 separate treaties, it is a slow process, as the Committee will appreciate. Also, as soon as we prevent schemes from making use of one country by amending the relevant treaty, the tax avoiders move on to another country. In other words, we are chasing avoidance around the world and never quite catching up with it, and all the while the tax avoiders are costing the UK Exchequer lost revenue. That is unacceptable and unfair to those who do not avoid the tax due to them.
The clause ensures that the avoidance device cannot work in respect of disposals made by trustees on or after Budget day. It does so by ensuring that if residence changes during the tax year the terms of our tax treaties do not interfere with our right to tax gains under our existing domestic legislation. It does not affect the foreign country’s right to tax that gain, and established mechanisms are in place to prevent double taxation of the trustees in a similar way to that which we discussed when the hon. Member for Eastleigh questioned me on clause 32.
The clause puts a stop to some highly artificial and tax-motivated avoidance schemes and I commend it to the Committee.