CORREN TROEN - Budget 2007

	Consultant Solicitor
	Elizabeth Kristensen heads our Private Client Team working with UK and foreign domiciles.
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Introduction

The Government’s recent Pre-Budget Report introduced a number of significant changes, and proposals for change, to the taxation of private individuals. The indication from the Treasury is that the majority of these changes will take effect from 6 April 2008 and the following briefing sets out some of the main proposals.

Domicile & Residence

Perhaps most relevant to our many Danish clients, is the proposed reform of the taxation of those who are resident, but not domiciled in the UK. These proposals are currently in outline form and once the draft legislation is published, there will be a period of consultation. This is expected at the end of the year. The suggested proposals, which will apply from 6 April 2008, are as follows:
	Those who have been resident in the UK for 7 years or more will have to pay an additional tax charge of £30,000 per year, if they elect the remittance basis of taxation in respect of foreign income and gains. It is possible to avoid the charge by electing to be taxed on an arising basis (i.e. to be taxable on worldwide income and gains as they arise) and it may be possible to elect between the two types of taxation each year.
	If the remittance basis of taxation is elected, entitlement to income tax personal allowances will be lost, unless un-remitted foreign income is less than £1000 per year.
	The additional tax charge will not apply to those whose foreign income/gains are less than £1000 per year.
	The 7 year period is determined by reference to the number of UK tax years a person has been resident and years of residence before 6 April 2008 will be taken into account. Those who have been resident for 7 years, or more, on 6 April 2008 will have to choose whether to accept the new charge before 31 January 2009.
In addition to the above proposals, the Government is also considering whether to impose a higher tax charge on those who have been resident in the UK for more than 10 years. There are plans to extend the definition of remittance and to remove the current “ceased source” rule, so that it will no longer be possible to close down a bank account (or other income source), in one tax year and remit the funds to the UK in the next year, free of tax. It is also possible that techniques for remittance involving gifts offshore may be affected.
Another proposed change is to the rules for determining residence. An individual's days of arrival and departure will now be included when determining the length of time spent in the UK in each tax year. Whilst this change is perhaps less significant than the proposals outlined above, it is likely to result in a greater number of people being regarded as UK resident and therefore, potentially being subjected to the new £30,000 tax charge.

Inheritance Tax (IHT)

A welcome change to the treatment of inheritance tax between spouses/civil partners has been introduced with immediate effect by the Government. Currently, when a person dies, IHT is only payable if the overall value of their estate exceeds £300,000. This tax free allowance is known as the nil rate band. Anything in excess of this amount is taxed at 40%.

Previously, where one spouse died and left everything to the survivor, the nil rate band of the first to die was not used, because of the exemption from IHT between spouses. It was therefore often necessary to include a discretionary trust within wills in order to utilise the nil rate band of the first to die. From 8 October 2007, this will no longer be necessary, as the nil rate band is now transferable between spouses/civil partners. This means that when the first spouse/civil partner dies, the estate of the survivor will be able to benefit from their unused nil rate band (or percentage thereof). The value of the transferable nil rate band will be that which is in force at the date of death of the surviving spouse /civil partner. This effectively doubles the IHT threshold between spouses/civil partners to what would currently be £600,000. Incremental increases to £700,000 are proposed by 2010.

For those who have already made wills that include a nil rate band discretionary trust, there is no real need to make any changes in order to take advantage of the transferable nil rate band. The flexible nature of discretionary trusts means that when one spouse/civil partner dies, the trustees can usually choose whether to end the trust by appointing the trust assets in favour of the surviving spouse/civil partner. By doing this, the nil rate band on the first death will not have been used and so is consequently transferable.