Clause 33 - Trustees both resident and non-resident in a year of assessment

Finance Bill – in a Public Bill Committee am 11:30 am ar 28 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of John Healey John Healey The Financial Secretary to the Treasury

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.

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

As we have heard, the clause prevents the UK from breaching any taxation treaties and ensures that in innocent cases, where there is a tax   charge overseas, that can be credited against the UK tax bill arising on the same disposal. Hence the Bill seeks to prevent the rules from causing a tax penalty to arise when such a disposal is made in normal commercial circumstances.

The Government are right to highlight any possible abuse of so-called sunset schemes, but it has become general practice for anti-avoidance legislation to be introduced without prior notice. It is perhaps not surprising that the Bill contains clause 33 to counter a perceived mischief, whereby trustees change residence in order to obtain a tax advantage. It appears to be part of a general movement against what the Revenue considers to be a manipulation of residence. However, it is surprising that legislation has been introduced while the question of trust residence is still under debate. As is often the case, the measure appears to assume that all international movement takes place purely for tax reasons; it might therefore penalise trusts that make genuine disposals during a period of non-residence.

The prior notice point is still valid in that although we knew from the first Finance Bill of 2005 that the clause was likely to be included post-election, the effective date for the legislation remains at 16 March, so there was effectively no notice period for the change. The point about the outstanding issue of trust residence is also still valid, as draft legislation is not expected until spring 2006. We need clear reassurance that this anti-avoidance legislation, which we support in principle, will not catch innocent changes of residence. That point was made to us by outside, interested organisations and bodies. As a general point, we have been informed that the moving target of trust legislation under the modernisation review is making life extremely difficult for trustees, especially those who have primary interests in the interests of that trust.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

I struggle with some of these issues, but I want to ask my hon. Friend the Financial Secretary a question. Given the complications of these cases, would it not be simpler to reintroduce capital transfer tax?

Photo of John Healey John Healey The Financial Secretary to the Treasury

Perhaps I can take my hon. Friend’s point as an early Budget representation and leave it at that.

The hon. Member for West Suffolk pointed out—and, I think, accepted—that for many moves to counter tax avoidance it does not make sense to offer prior notice. The clause does not contain what I would regard as retrospective legislation. It takes effect from the Budget date on which it was announced. How it would work was clearly spelt out at that time in a Budget notice. We published the draft legislation in the first Finance Bill and prior to the election we made it clear that if we were re-elected, we would reintroduce the provision. We have done that.

The hon. Gentleman is concerned about trustees who might be caught, as he put it, for “innocent” actions. That follows on from what I have just said; the measure will apply only to disposals made by trustees on or after 16 March, which was Budget day. We have   made our intention to proceed with the legislation clear. Therefore, trustees were in a position to know the potential effect of the measure if they changed residence after Budget day. I am sure that they accept, and take seriously, their responsibility to consider carefully any effects of their actions on the beneficiaries.

Although the hon. Gentleman was not very direct about it, I think that he referred to the general review of residence and domicile provision. Once again, we made that matter quite clear in the Budget. We are continuing that review and continuing to review the rules as they affect the taxation of individuals. We are keen to proceed on the basis of evidence and we will do so. We welcome further contributions to that process, including those from the sort of trustees with whom he might have been in contact. We plan to take the process forward with the publication of a consultation setting out the possible approaches for reform.

In the meantime, the measure does not pre-empt that review and it has provoked an interesting reaction from some of the specialists in the field. BDO Stoy Hayward remarked:

“These measures do not come as a surprise given that over the past couple of years the authorities have sought to renegotiate some relevant DTAs to give the UK taxing rights on gains.”

I have explained why that approach was too slow and allowed, in the meantime, those who were keen to continue their tax avoidance to switch their attentions to other countries. On that basis, I hope that the Committee accepts the clause.

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

I am grateful for the Minister’s explanation. We will wish to make a contribution to the review. I suggest that if he wants to get some excellent personal feedback and experience on trusts and their efficacy and ability—particularly offshore trusts—to help him reduce tax bills, he might wish to consult his noble Friend Lord Drayson, a Minister who appears to be expert beyond parallel in these matters.

Question put and agreed to.

Clause 33 ordered to stand part of the Bill.