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GAZETTE
APRIL 1983
Gifts and Distributions to
U.K. Residents
by
Colin A. Chapman, Solicitor
A
Press Release from the U.K. Revenue, following the
recent Budget Speech of Sir Geoffrey Howe, con-
firmed that the United Kingdom Finance Act, 1981, has
important effects upon gifts and distributions to
beneficiaries resident in the United Kingdom from donors
or settlements in the Irish Republic — in addition to the
Exchange Control and other difficulties which already
beset an Irish benefactor.
The value at which a U.K. resident beneficiary
may acquire an asset from a non-resident donor
or trust.
Section 90 of that Act introduced new anti-avoidance
provisions which have material consequences for U.K.
resident beneficiaries from an Irish donor or trust. The
section was introduced to counter certain tax avoidance
schemes (Reverse
Harrison v. Nairn Williamson
Ltd.,
[1978] STC 67) but introduces what appears to be unfair
treatment where a disposal is made by a non-U.K. resident
person or trust in favour of a U.K. resident.
Normally, the acquisition cost of an asset is deemed to
be the market value of the asset at date of acquisition. Now,
however, where a U.K. resident acquires an asset from an
"excluded person", the market value rule no longer
applies.
An "excluded person" is defined to mean:—
(a) a person neither resident nor ordinarily resident in
U.K.;
(b) a person exempt from U . K. C.G.T.;
(c) a Charity or Friendly Society;
(d) a person making a disposal for purposes of:—
(i) an approved pension scheme which is exempt
from U . K. C.G.T.;
(ii) superannuation funds for employees outside the
U . K.
The effect of this is that the U .K. resident beneficiary
who receives a gift or a distribution from an Irish or other
non -U .K. resident donor or trust receives the asset
distributed at a "nil" value for U .K. Capital Gains Tax
and, on a subsequent disposal of that asset, will be
chargeable to U . K. Capital Gains Tax on the total value
realised from such disposal. (Indexation does not help, as a
multiple of nothing is still nothing!).
Examples
1. An Irish resident and domiciled person makes a gift of
shares with a market value of, say, IR£30,000 (having
ob t a i n ed t he appropriate Ex c hange
Control
permission) to a U.K.resident. The acquisition cost of
the U . K. resident will be N I L and, therefore, on a
disposal of the shares by him, the entire net proceeds
will represent a chargeable gain.
2. Marketable securities valued at, say, £100,000 are held
by Irish trustees upon trust for A for life, with
remainder to B. B is now resident in England. On the
death of A, if the trustees distribute the marketable
securities to B
in specie,
B will receive the investments
at a N I L base value for U .K. Capital Gains Tax
purposes and, on subsequent disposal, will be
chargeable to U.K. Capital Gains Tax on the full
proceeds.
A distribution of Sterling cash from an Irish trust would
not, however, give rise to this problem and consequently
the trustees, in such circumstances, should convert the
assets for distribution to the U .K. resident into Sterling
(having obtained all appropriate Exchange Control
approvals) prior to distribution.
This anti-avoidance section does not capture an
inheritance by a U.K. resident beneficiary from the free
estate of a non-U.K. resident and non-U.K. domiciled
testator or intestate as, in such case, the deceased is deemed
to have disposed of the asset on death at its market value to
his personal representatives, whose acquisition is treated
as the acquisition of the beneficiaries (Sec. 49, U .K.
C.G.T. Act 1979).
Liability for U.K. Capital Gains Tax on capital
payments from non-resident trusts.
Section 80 of the same U.K. Finance Act (1981) also
changed the rules for the allocation of gains made by non-
resident trusts which may be attributed to U . K. resident
beneficiaries.
Prior to 5th April 1981, U .K. legislation was capable of
imputing to potential trust beneficiaries resident in the
U.K. the gains of overseas trusts of which they were
potential beneficiaries. Surprisingly, Section 80 of the
U.K. Finance Act, 1981, which modified this legislation,
offers some opportunity for deferral of U.K. Capital Gains
Tax in such circumstances. However, it does impose upon
non-resident trustees the necessity for keeping proper
records, in a form suitable for U .K. tax purposes.
The general scheme of the new rules is to attribute gains
of non-resident trustees to beneficiaries who actually
receive capital payments from such trustees.
If a settlor was domiciled in the U .K. at the time a settle-
ment was made, or if he was so domiciled at the time a gain
was made, then from and after 6th April, 1981, the gains
of the settlement in each year are computed as if the
trustees were resident or ordinarily resident in the U.K.,
but only attributed to a beneficiary when a distribution is
made. Those gains, together with gains brought forward
from earlier years (but excluding the annual exemption for
trustees) which have not already been attributed to a
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