The Gazette 1983

GAZETTE

APRIL 1983

Gifts and Distributions to U.K. Residents by Colin A. Chapman, Solicitor

A Press Release from the U.K. Revenue, following the recent Budget Speech of Sir Geoffrey Howe, con- firmed that the United Kingdom Finance Act, 1981, has important effects upon gifts and distributions to beneficiaries resident in the United Kingdom from donors or settlements in the Irish Republic — in addition to the Exchange Control and other difficulties which already beset an Irish benefactor. The value at which a U.K. resident beneficiary may acquire an asset from a non-resident donor or trust. Section 90 of that Act introduced new anti-avoidance provisions which have material consequences for U.K. resident beneficiaries from an Irish donor or trust. The section was introduced to counter certain tax avoidance schemes (Reverse Harrison v. Nairn Williamson Ltd., [1978] STC 67) but introduces what appears to be unfair treatment where a disposal is made by a non-U.K. resident person or trust in favour of a U.K. resident. Normally, the acquisition cost of an asset is deemed to be the market value of the asset at date of acquisition. Now, however, where a U.K. resident acquires an asset from an "excluded person", the market value rule no longer applies. An "excluded person" is defined to mean:— (a) a person neither resident nor ordinarily resident in U.K.; (b) a person exempt from U . K. C.G.T.; (c) a Charity or Friendly Society; (d) a person making a disposal for purposes of:— (i) an approved pension scheme which is exempt from U . K. C.G.T.; (ii) superannuation funds for employees outside the U . K. The effect of this is that the U .K. resident beneficiary who receives a gift or a distribution from an Irish or other non -U .K. resident donor or trust receives the asset distributed at a "nil" value for U .K. Capital Gains Tax and, on a subsequent disposal of that asset, will be chargeable to U . K. Capital Gains Tax on the total value realised from such disposal. (Indexation does not help, as a multiple of nothing is still nothing!). Examples 1. An Irish resident and domiciled person makes a gift of shares with a market value of, say, IR£30,000 (having ob t a i n ed t he appropriate Ex c hange Control permission) to a U.K.resident. The acquisition cost of the U . K. resident will be N I L and, therefore, on a disposal of the shares by him, the entire net proceeds will represent a chargeable gain.

2. Marketable securities valued at, say, £100,000 are held by Irish trustees upon trust for A for life, with remainder to B. B is now resident in England. On the death of A, if the trustees distribute the marketable securities to B in specie, B will receive the investments at a N I L base value for U .K. Capital Gains Tax purposes and, on subsequent disposal, will be chargeable to U.K. Capital Gains Tax on the full proceeds. A distribution of Sterling cash from an Irish trust would not, however, give rise to this problem and consequently the trustees, in such circumstances, should convert the assets for distribution to the U .K. resident into Sterling (having obtained all appropriate Exchange Control approvals) prior to distribution. This anti-avoidance section does not capture an inheritance by a U.K. resident beneficiary from the free estate of a non-U.K. resident and non-U.K. domiciled testator or intestate as, in such case, the deceased is deemed to have disposed of the asset on death at its market value to his personal representatives, whose acquisition is treated as the acquisition of the beneficiaries (Sec. 49, U .K. C.G.T. Act 1979). Liability for U.K. Capital Gains Tax on capital payments from non-resident trusts. Section 80 of the same U.K. Finance Act (1981) also changed the rules for the allocation of gains made by non- resident trusts which may be attributed to U . K. resident beneficiaries. Prior to 5th April 1981, U .K. legislation was capable of imputing to potential trust beneficiaries resident in the U.K. the gains of overseas trusts of which they were potential beneficiaries. Surprisingly, Section 80 of the U.K. Finance Act, 1981, which modified this legislation, offers some opportunity for deferral of U.K. Capital Gains Tax in such circumstances. However, it does impose upon non-resident trustees the necessity for keeping proper records, in a form suitable for U .K. tax purposes. The general scheme of the new rules is to attribute gains of non-resident trustees to beneficiaries who actually receive capital payments from such trustees. If a settlor was domiciled in the U .K. at the time a settle- ment was made, or if he was so domiciled at the time a gain was made, then from and after 6th April, 1981, the gains of the settlement in each year are computed as if the trustees were resident or ordinarily resident in the U.K., but only attributed to a beneficiary when a distribution is made. Those gains, together with gains brought forward from earlier years (but excluding the annual exemption for trustees) which have not already been attributed to a 101