The Budget 2008 - International

Double Taxation Relief: Income Tax

New legislation will be introduced to ensure that the UK credit for foreign tax paid in respect of income of a trade or profession does not exceed the amount of UK income tax payable in respect of those earnings.

The current rules have led to some doubts as to the maximum amount of credit available in the UK in respect of non-UK tax. The change is intended to clarify the existing law.

This legislation will take effect for foreign tax payable on or after 6 April 2008 and for non-UK source income from a trade or profession arising on or after that date.

Double Taxation Relief: Income Tax – budget notice

Residence and Domicile

At present higher rate tax payers who pay tax on a remittance basis are liable at 32.5% on foreign dividend income remitted to the UK.

This is due to a mistake in previous legislation.

This has now been corrected. Remittance of foreign dividend income on and after 06 April 2008 remittance basis users at the higher rate will be taxed at 40%.

Changes announced in the budget mean that after 06 April 2008, any day where an individual is present in the UK at midnight will be counted as a day of presence in the UK for residence test purposes.

There will be an exemption for passengers who are in transit between two places outside the UK. The exemption is wider than that which had been initially proposed in the pre-budget report as it caters for changing airports or terminals.

Entitlement to personal income tax allowances (including the basic personal allowance, age related allowances, blind person's allowance, tax reductions for married couples and civil partners and relief for life insurance payments) for individuals resident in the UK who claim to use the remittance basis of taxation will be stopped with effect from 06 April 2008.

Individuals resident in the UK who claim to use the remittance basis of taxation will also lose access to the Annual Exempt Amount for capital gains.

A de-minimus limit of £1,000 had been announced in the pre-budget report but it was confirmed today that this limit will be £2,000.

It was confirmed that legislation will be introduced to remove various loopholes and anomalies which allow remittance basis users to remit income and gains to the UK without paying tax on them. There will be a number of changes, as previously announced. The majority of the changes will have effect on and after 06 April 2008. However, some changes will take effect from today.

From 06 April 2008 works of art will be exempt from being taxed under the remittance basis if they are brought into the UK for public display.

Following consultation, from 06 April 2008 non domiciled adults or non-ordinarily resident individuals who have been in the UK for more than seven of the past ten tax years, will only be able to continue to use the remittance basis on payment of an annual charge of £30,000 unless their unremitted foreign income and gains are less than £2,000.

Residence and Domicile – budget notice part one
Residence and Domicile – budget notice part two
Residence and Domicile – budget notice part three
Residence and Domicile – budget notice part four
Residence and Domicile – budget notice part five
Residence and Domicile – budget notice part six

Controlled Foreign Companies – Anti-avoidance

HMRC are blocking a number of artificial avoidance schemes intended to avoid a tax charge arising from the Controlled Foreign Company rules. In their usual style, HMRC note that they "[do] not believe that these schemes work but these measures will put the question beyond doubt".

A controlled foreign company ("CFC") is one that is controlled by UK residents. Unless the CFC falls within one of the exemptions, the UK will tax the profits of the CFC to ensure that UK companies do not divert profits to low-tax jurisdictions.

The changes ensure that any partnership income to which the CFC is entitled will be considered to be part of its gross income, together with any trust income in respect of which the CFC is either a settler or a beneficiary. Both of these forms of income will, therefore, be potentially subject to a UK tax charge as part of the income of the CFC.

HMRC note that, where a CFC is put in place for a wholly commercial purpose, that CFC will be exempt from the UK tax charge even where a trust is involved in the structure. The use of the word "wholly" in the Budget Note is interesting, as the relevant legislation provides the exemption where "it was not the main reason or, as the case may be, one of the main reasons for the company's existence … to achieve a reduction in United Kingdom tax by a diversion of profits from the United Kingdom" – the statute imposes a lower standard than the "wholly commercial purpose" test implied by HMRC's commentary.

Controlled Foreign Companies – Anti-avoidance – budget notice

Investment Manager Exemption

Pursuant to arrangements known as the Investment Manager Exemption (IME), non-residents (companies, individuals and funds) are able to appoint UK-based investment managers to carry out transactions on their behalf without exposure to UK tax provided certain conditions are met.

For accounting periods of businesses ending on or after the date of Royal Assent to the Finance Bill (or for the 2008/9 tax year in other cases), a change will be made so that if one or more transactions fail the IME conditions, then exposure of the non-resident to UK tax will only arise in respect of those particular transactions rather than all the transactions of the non-resident effected through that investment manager.

Also after Royal Assent to the Finance Bill, there will be a new Treasury Order to create a single consolidated list of "investment transactions" for the purposes of IME, replacing the current multitude of different statutory provisions.

Investment Manager Exemption – budget notice

Offshore funds: new tax regime

Unitholders in a qualifying offshore fund have a more favourable treatment than those in a non-qualifying fund. To benefit as a qualifying fund, the fund must distribute at least 85 per cent of its income.

Regulations – which will not take effect until the Treasury says so – will provide that income need not be physically distributed in order for the test to be satisfied, provided income is "reported" to investors (who then pay tax on it).

Certain criteria for obtaining and maintaining qualifying fund status will be relaxed.

Offshore funds: new tax regime – budget notice

Funds of alternative investment funds

The FSA is to introduce a new regulatory regime for "Funds of Alternative Investment Funds". Such funds will be able to elect for a new tax treatment, the effect of which is to exempt the fund from tax on offshore income gains and charge investors to income tax on gains made on the disposal of units. The new elective regime will take effect when the Treasury says so.

Funds of alternative investment funds – budget notice
Funds of alternative investment funds – draft regulations