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CLAUSE 78: ATTRIBUTION OF GAINS OF NON-RESIDENT COMPANIES

SUMMARY

1.                This clause introduces limited relaxations to the rules that attribute gains of non-resident close companies to participators of those companies who are either resident in the United Kingdom or are non-resident trustees.  The changes apply to gains accruing on or after 7 March 2001.

DETAILS OF THE CLAUSE

2.                Subsection (1) provides for section 13 of the Taxation of Chargeable Gains Act 1992 (TCGA) to be amended as set out in the following subsections.

3.                Subsection (2) amends subsection (4) of section 13 TCGA.  The effect of the amendment is to ensure that gains of non-resident close companies are not attributed to participators whose participation in the company is such that 10% or less of the gain accruing to the company is apportioned to them or their associates.  This replaces the existing limit of 5%.

 4.       Subsection (3) substitutes a new provision for the existing subsection (5)(b) of section 13 TCGA.  The effect of the new subsection is to ensure that gains on assets used only for the purposes of 

• a trade carried on by a non-resident close company wholly outside the UK, or
  
  
• the part of a trade (carried on by such a company only partly outside the UK) that is carried on outside the UK, are not to be attributed to participators of the company. 

This replaces the existing rule which provides an exemption only for gains on tangible assets used only in a trade carried on wholly outside the UK.  So the amendment introduces two relaxations on the current rules.  The first is that any assets used in a trade, including intangibles such as goodwill and intellectual property, are now covered by the exemption.  The second is that any assets used in a trade which is carried on only partly outside the UK (provided the assets are used only in that part of the trade) are now exempt.

5.        Subsection (4) replaces the existing subsection (5A) of section 13 with two new subsections (5A) and (5B).  These new subsections provide for credit for tax paid on gains attributed to participators to be credited against tax on a subsequent distribution by the non-resident close company.  In order for credit to be given the distribution has to be made within the earlier of

• three years from the end of the period to which the company makes up its accounts, or
  
  
• four years from the date the gain accrues.

Under the existing subsection (5A) the distribution has to be made within two years of the date the gain accrues for credit to be given.

6.        Subsection (5) introduces a new subsection (10B) into section 13 TCGA.  This provides exemption from the attribution rules of section 13 for gains which would otherwise be attributed to pension schemes that are exempt from tax on capital gains on their own direct investments. 

7.        Subsection (6) provides for the changes set out in the clause to apply to gains arising on or after 7 March 2001.

8.        Section 13 TCGA provides special capital gains rules to prevent UK residents obtaining a tax advantage by disposing of investments through a non-resident company that is “close” (a company under the control of five or fewer participators).  It provides for gains on certain assets disposed of by the non-resident company to be charged on UK resident (and domiciled, if individuals) participators of the company.  It also attributes gains of the non-resident company to trustees of a non-resident trust who are participators of the company so that gains may, where appropriate, be charged on UK resident settlors and beneficiaries of the trust under the tax rules that apply to non-resident trusts.

9.        The changes made by this clause relax these rules in certain limited situations.  The purpose is to reduce compliance difficulties for participators who have only a small interest (10% or less) in a non-resident close company and to provide increased flexibility for close companies trading overseas.  They also allow credit for the tax charged on the attributed gains to be given against tax on a subsequent distribution of those gains under a longer time-scale than previously.