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Other measures announced
Tax treatment of offshore funds
Changes are being made to the tests that determine whether an offshore fund qualifies for
distributor status. This in turn determines the tax treatment of a UK investor. A UK investor in a
qualifying fund is subject to a chargeable gain on a disposal of units or shares in the fund. If a fund
is non-qualifying, the gain is taxable as income.
The following new rules will reform the tests for ‘distributor’ status and apply to the first accounting
period of an offshore fund ending on or after the date of Royal Assent of the Finance Act.
- The existing investment restrictions will be abolished, but if a fund crosses certain investment
thresholds the underlying investments must also satisfy the ‘distributor’ tests.
- The computation of the notional UK taxable profits of the fund will follow UK corporation tax rules
more closely than at present. In particular, the loan relationship rules will be applied.
- Separate sub-funds and share classes of funds can qualify in their own right and not be affected
by non-qualifying sub-funds or share classes in the same fund or sub-fund.
Promoters of tax avoidance schemes
Promoters of tax saving schemes will be required to provide the following details of the scheme to
the Inland Revenue shortly after the scheme is sold:
- A description of the scheme,
- The types of transactions planned which form part of the scheme,
- The tax consequences of the arrangements,
- The statutory provisions that are relied upon.
A registration number will be issued for each scheme, and a UK taxpayer will usually only be
required to note the registration number on his or her tax return. The operative date of the new
rules will be announced in the Finance Bill. These conditions are designed to target schemes and
arrangements based on financial products and employment based products.
If the scheme is devised in-house, or purchased from an offshore promoter, then it will be the
responsibility of the taxpayer to provide details of the scheme to the Inland Revenue
Avoidance using life insurance policies
Individuals have been able to use life insurance policies to manufacture deficiency relief in order to
avoid higher rate tax. Deficiency relief arises when a maturing life insurance policy, life annuity
contract or capital redemption policy realises a loss. Under the existing legislation, relief is restricted
to the amount of any gains that arose on earlier part surrenders or assignments of the policy. There
is no requirement that the earlier gains formed part of the income of the same individual who is
entitled to the deficiency relief.
The amount of deficiency relief will now be restricted to the amount of gains, which formed part of
that same individual’s total income in an earlier year of assessment for all policies made on or after
3 March 2004. It will also apply to all existing policies and contracts which are assigned in part or
whole, or become used as security for a debt, or into which policyholders choose to pay further
premiums, on or after 3 March 2004.
National insurance on securities
Employers are currently able to ask employees receiving share options to agree to pay the
employer’s class 1 national insurance liability on gains made from those options. The employee
receives an income tax deduction equivalent to the amount of the employer’s liability that they pay.
Changes to the legislation are necessary to provide the same income tax relief to employees who
bear the employer’s national insurance liability on post-acquisition earnings derived from restricted
and convertible securities. The revised legislation will come into force at a time to be provided for
by way of a Treasury Order following Royal Assent of the National Insurance Contributions and
Statutory Payments Bill 2004. The provision of the income tax relief to the employee will not affect
the capital gains tax liability on any subsequent disposal of the securities.
We trust you will find the tax calendar helpful
Don’t forget to check the tax calendar for a selection of filing, issuing, and payment
deadlines. Remember, under self assessment, late payment or filing can cost you dearly in
penalties, surcharges and interest.
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