H.M. TREASURY

EXPLANATORY NOTE

CLAUSE 93: ATTRIBUTION TO TRUSTEES OF GAINS OF NON-RESIDENT COMPANIES

SUMMARY

1. This clause ensures that the current anti-avoidance legislation that enables gains of certain offshore companies to be charged on UK residents in circumstances where trustees are participators in those companies (either directly or indirectly through a chain of companies) is not prevented from applying by the provisions of double taxation arrangements.

2. The new rules apply to gains accruing to offshore companies on or after 21 March 2000

DETAILS OF THE CLAUSE

3. Subsection (1) provides for a new section, section 79 B, to be inserted into Taxation of Chargeable Gains Act 1992.

4. Section 79B(1) provides that the section is to apply where trustees are participators in a UK close company (a company under the control of 5 or fewer participators) or a non-resident equivalent.

5. Section 79B(2) secures that double taxation arrangements cannot prevent a charge to tax arising as a result of the attribution, under the relevant anti-avoidance legislation, of gains of non-resident close companies to trustees.

6. Section 79B(3) and (4) provide for gains to be attributed to trustees through a chain of companies where the chain includes one or more UK companies which, under the terms of a double taxation agreement, would otherwise not have been charged to UK tax on the gains.

7. Subsection (2) provides for the section to apply to gains of non-resident companies arising on or after 21 March 2000.

BACKGROUND

8. Special tax rules to combat avoidance of capital gains tax apply where a UK resident is a participator in an offshore company which is a close company (a company under the control of five or fewer participators). Broadly, where such a company disposes of an asset (which is not tangible property used in a trade) at a gain, the gain is attributed to participators in proportion to their interest in the company.

9. These rules are being circumvented where assets are held in an offshore company owned by a trust (sometimes through a chain of companies), rather than held directly by the trust. If the offshore company is resident in a country with which the UK has a tax treaty and the treaty provides for gains arising to residents of the other country to be exempt from UK tax, the UK resident settlor or beneficiaries (or trustees if resident) of the trust cannot under present rules be charged on the gains of the offshore company. In many cases, to take advantage of the exemption, valuable assets are being shifted by trustees from tax havens to countries with which the UK has a tax treaty just prior to the sale taking place. This is an abuse of the tax treaty arrangements, which were never intended to facilitate tax avoidance.

10. This clause will prevent this abuse by ensuring that tax treaties do not prevent gains of offshore companies being attributed to resident or non-resident trustees as participators of those companies.