Trustees and Tax - Impending Changes to the Rate of UK Capital Gains Tax

Following the General Election on 6 May 2010, the United Kingdom has now found itself with the first peacetime Coalition Government since the 1930s and the first ever Conservative / Liberal Democrat coalition.

On 11 May 2010, a short summary of the agreements reached between the Conservative Party and the Liberal Democrat Party was published. In this agreement the Coalition Government has pledged to 'seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income'. There will (apparently) be 'generous exemptions' for 'entrepreneurial business activities'. The Government has announced it will hold an Emergency Budget on 22 June at which time it is expected that they will formally announce the changes to UK capital gains tax.

Although historical changes to tax rates have taken effect from the beginning of the following tax year (i.e. 6 April 2011) the considerable time between the Emergency Budget and next April may increase the likelihood of an immediate change with transitional measures to divide the current tax year.

For trustees of non-UK resident trusts with UK resident beneficiaries, the following points should be borne in mind:

• Where a non-UK resident trust realises a capital gain that is not assessable on the settlor (so-called 'section 87 trusts'), the gain is added to the trust's 'pool' of gains and is only charged to tax when matched to distributions made to (on benefits conferred on) beneficiaries. Where the gains are not matched to payments made in the year in which the gains were realised, there is also an interest surcharge which increases the effective capital gains tax rate. This charge can run for a maximum of six years and at present this gives a maximum effective capital gains tax rate of 28.8%. If the capital gains tax rates are aligned with current income tax rates, this would make the maximum effective rate for a higher rate taxpayer 64% and for an additional rate taxpayer (i.e. those earning over £150,000), a maximum effective rate of 80%.
• When distributions are made to UK resident beneficiaries taxed on the arising basis, the applicable capital gains tax rate will be the rate in force when the distribution is made. When distributions are made to UK resident beneficiaries taxed on the remittance basis, the applicable rate will be the rate in force when the proceeds are actually brought to the UK. As such, there may be an opportunity to distribute and remit funds from trusts with stockpiled gains before the prospective rate rises this year.
• Where a non-UK resident trust with a pool of stockpiled gains immigrates to the UK, this will not by itself crystallise the capital gains tax charge nor will the trust be treated as having disposed of its assets. Rather, it would be necessary for the trust to make capital payments to beneficiaries in order to match any gains or to dispose of existing assets after immigrating in order to crystallise the gains.
• Non-UK resident companies with UK resident shareholders could also be affected by the changes as where those companies are 'close companies', any gain realised would be apportioned to the shareholders on a pro rata basis. Again, it might be advisable for the company to dispose of its assets now in order to crystallise the gain at the current favourable rate.

If you would like to discuss the contents of this note in more detail, please contact a member of the Private Client team.

Lawyers Mark Buzzoni, Andrew Hine, Andrew Goodman, Ryan Myint, Nick Warr, Steven Kempster