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Draft Finance Bill 2017: private client points

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Capital payments: It was interesting to note that capital payments to a UK resident beneficiary who becomes non-resident before the trustees of the offshore trust make a matching gain, will not be chargeable. However, capital payments to a non-resident who later becomes UK resident will be chargeable when the trust makes a gain to which the capital payment can be matched. That is really tough – and although these rules are sort of parallel, it will come as an unpleasant surprise to somebody who becomes resident here for the first time, that he can be taxed on money that he received years ago, when he was non-resident.
Two year rule: Just to make matters more difficult, the Finance Bill provides that property which is caught by the detailed provisions relating to UK residential property will not be excluded property for inheritance tax for two years following its disposal – that is the sale of the property or the repayment of the loan.
This provision is of seriously wide application. I have often suggested that when HMRC starts seeking to tax the foreign assets of foreign individuals living abroad, it will truly have gone completely mad. I think we are getting close.
Imagine the position of a foreign domiciled and resident person who has never been to the UK; he does not even speak the language and he has never had any UK assets. He has lived all his life in Ruritania. Nevertheless, he will be chargeable to inheritance tax on his death just because he lent money to a friend in Ruritania who used it to buy an investment property in the UK which he sold less than two years ago.
It is no justification to say that HMRC would probably never know, and would not pursue the foreign person in these circumstances. Why not? If there are tax obligations, they should be adhered to and all tax liabilities properly collected and paid.
Inheritance tax TAAR: The targeted anti-avoidance rule which had been proposed in earlier drafts continues and is intended to supplement the GAAR. The definition of when the TAAR will apply has been extended and will now include arrangements (whenever made) the purpose of which is ‘to secure a tax advantage by avoiding or minimising the effect of [the new rules]’.
On a strict reading, this could include giving away property now while it is excluded property in the knowledge that it will cease to be excluded property on 6 April 2017. The same would apply to a third party sale for the same reason. That would seem to be an extreme view – and let us hope, too extreme. After all, it would not be avoiding the effect of the new rules because the new rules would still be of full effect and would continue to apply with full force to the taxpayer. It is just that the rules do not come into force until 6 April 2017. There would be no point in saying that the rules don’t come into force until 6 April 2017 if they are going to apply anyway to transfers before that date.
It is to be hoped that some clarification is forthcoming soon. 
Issue: 1337
Categories: In brief