HMRC have now rectified an anomaly to ensure that trust income from settlor-interested trusts forms the top slice of income and non-trust income no longer suffers a higher tax liability than intended.

Anomalies in the taxation of dividends from foreign companies have also been corrected. UK resident doms are currently taxed on foreign dividends at 32.5%. They will now be given a notional 10% tax credit, so that only higher rate taxpayers will pay tax on these dividends, at an effective rate of 25%. UK resident non-doms remitting foreign dividends will pay tax at 40%.

Corporation Tax

The main rate of corporation tax will be reduced from 30% to 28%. However, the rate for small companies will increase from 20% to 21% from April 1, 2008. The Chancellor talks widely about supporting small businesses, but he has introduced a number of measures in recent years which suggest otherwise.

Anti Anti-Avoidance Provisions

No Budget is complete without a number of anti- avoidance rules, and this one is no exception: Over the last 10 years or so, taxpayers have mitigated their liability to income tax by investing in trading partnerships, which have generated initial losses which can be offset against their other income. HMRC have clamped down on these investments in successive Budgets, with the result that, more recently, individuals have been trading on their own account. As from March 12, however, losses generated in any trade will only be capable of being offset against other income of the trader if he spends an average of at least 10 hours a week in conducting his trade.

There will be transitional provisions for such arrangements entered into before March 12; although we have no specific information on these, we anticipate that arrangements entered into unconditionally before this date should escape the tax changes.

The wording of certain double tax treaties, most notably those with the Isle of Man and the Channel Islands, has apparently enabled taxpayers to avoid paying UK tax on the profits arising in a foreign partnership from the sale of business assets, particularly UK land subject to planning permission, but which has not yet been developed. Ominously, the press release announces that, notwithstanding the wording of the relevant double tax treaty, UK residents have always been liable to pay UK tax on their profits from foreign partnerships. It seems likely that this provision will result in tax being payable retrospectively.

Inheritance Tax: Transfer Of Nil eritance Nil-Rate Band Between Spouses

The Press Releases confirm the announcement in the pre-Budget Report that, on the death of a surviving spouse after October 9, 2007, their estate will benefit from any unused portion of their deceased spouse’s nil rate band in addition to their own.

Alternative Investment Funds

To make way for a new FSA regime, certain funds will be able to elect to move taxation on offshore income gains from the fund to its investors.

Qualifying Offshore Funds

HMRC have now removed the distribution requirement for funds to qualify; instead income is ‘reported’ to investors, and they are subject to tax on this reported income. We will be watching to see how this is implemented as it may give rise to double taxation; income tax on deemed income, and capital gains tax on the increase in value of the fund due to the income being kept within the fund!

Notes:

This publication has been issued by RBC International Wealth Planning* and RBC Regent Tax Consultants Limited. The summary contained herein has been carefully prepared based upon information that is believed to be accurate at the time of writing and is intended for general guidance only. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors. On any specific matter you are advised to take professional advice. Telephone calls to RBC may be recorded for training and evaluation purposes. *RBC International Wealth Planning is a trading name of RBC Wealth Planning International Limited. RBC International Wealth Planning and RBC Regent Tax Consultants Limited are both members of RBC which consists of a number of separate companies. A full list of these is available at www.rbcprivatebanking.com ® Trademark of Royal Bank of Canada. ™ Trademark of Royal Bank of Canada. Used under licence. Taxo8 Taxo8-06b