Transferring assets to a child to avoid the £30,000 tax charge

The 2008 Budget announced that the new £30,000 annual tax charge that can apply to some non UK domiciliaries with overseas unremitted income or capital gains from April 2008 won't apply to individuals under the age of 18.

Therefore could you just transfer overseas income bearing assets to non domiciled children?

The children would be treated in the same way as the non domiciled adult except for the fact that no £30,000 tax charge would be due.

Children just as adults would have a personal allowance and basic rate tax band to offset. They would however need to be non UK domiciled to see any benefits from the transfer. As non UK domiciliaries they could then elect for the remittance basis of tax and avoid UK tax by retaining income or capital gains overseas.

They would lose the UK personal allowance and annual CGT exemption but the avoidance of the £30,000 tax charge would be the big advantage.

They could therefore avoid UK income tax and CGT on the overseas assets. The avoidance of CGT could be particularly beneficial.

There are though a number of other issues that should be considered:

Capital Gains

Any transfer of assets to the children would crystallise a capital gain for CGT purposes. Therefore any assets that are showing a significant gain to date would be taxed on the giftor. Of course if they're a non UK domiciliary they would themselves have two choices. Either opt for the arising basis and pay tax on the gain or elect for the remittance basis and only pay tax on any remitted proceeds (in practice likely to be none). The downside with the latter is that the non dom may themselves have to then pay the £30,000 tax charge.

The best option would therefore be to transfer assets that had a low gain to date (eg which may be covered by the annual exemption(s) or to simply transfer cash and for the assets to be purchased by the child.

Income tax

Although the child may avoid the £30,000 tax charge you would also need to consider whether there had been a settlement by the adult.

The tax legislation includes provisions to counteract the transfer of income bearing assets to minor children. The net effect of this is that where a parent transfers assets which bear income of more the £100 the income is then treated as the parents for tax purposes. Note that this £100 limit is per parent.

Therefore if this applied it would ensure that the income from the overseas asset held by the child could not avoid tax by being retained overseas. It would instead be treated as the parents and taxed as such.

In this case though the child is to be taxed under the remittance basis -- do the settlement provisions still apply?

The relevant section is S648. This states:

648 Income arising under a settlement

(1) References in this Chapter to income arising under a settlement include-- (a) any income chargeable to income tax by deduction or otherwise, and (b) any income which would have been so chargeable if it had been received in the United Kingdom by a person domiciled, resident and ordinarily resident there.

(2) But this is subject to the rule in subsection (3) which applies if, in a tax year, the settlor is-- (a) not domiciled in the United Kingdom, (b) not UK resident, or (c) not ordinarily UK resident. (3) The rule is that references in this Chapter to income arising under a settlement do not include income arising under the settlement in that tax year in respect of which the settlor, if the settlor were actually entitled to it, would not be chargeable to income tax by deduction or otherwise because of the settlor not being domiciled in the United Kingdom, UK resident or ordinarily UK resident.

(4) Subsection (5) qualifies the rule in subsection (3) if such income is remitted to the United Kingdom in circumstances such that, if the settlor were actually entitled to the income when remitted, the settlor would be chargeable to income tax because of being UK resident.

(5) The income is treated for the purposes of this Chapter as arising under the settlement in the year in which it is remitted.

This would look to depend on the status of the non domiciled parent. If they are themselves entitled to use the remittance basis of tax and wouldn't be taxed on the overseas income if they were actually entitled to the income then it shouldn't fall within the settlement provisions and shouldn't be taxed on the non domiciled parent.

If though the parent was taxed on the arising basis they would be taxed on the overseas income and therefore the income arising to the child would be taxed under the settlement rules on the parent (assuming it exceeds £100 etc). Of course this assumes that there is no amendment to this provisions as a result of the new legislation.

Even if the parent was claiming the arising basis it would only be income that would be attributed to the parent. If the asset was expected to result in a large capital gain, this would not be attributed to the parent, and the child could still use the remittance basis free of tax to avoid tax on the overseas gain.

In terms of the ownership of any overseas assets the parent could consider using a bare trust or nominee agreement. Both allow legal title to be separated from the beneficial ownership with the latter held by the child.

Another trusted adult could hold the legal title.

Of course another option could be to transfer assets to a grandchild or other child (eg niece or nephew). These would not be caught by the settlement rules (providing the non dom giftor and his spouse did not retain an interest in the asset transferred) and income could be generated offshore free of UK tax by using the remittance basis.

The child could later gift or transfer the income of asset to the parent or grandparent etc who could remit free of UK tax (given they nor their immediate family would be benefiting from the income or asset remitted).

There are therefore a number of potential tax planning options for transferring assets to a child to avoid the £30,000 remittance tax charge.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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