19 March 2019 - Article
A Rebasing Election restricts the amount of gains that can be charged on a UK resident but non-domiciled (so called ‘non-dom’) beneficiary to the proportion of the gain which accrued after 6 April 2008. It does not (as its name might suggest) trigger an actual ‘rebasing’ of trust assets.
Why were the Rebasing Election rules introduced?
The rules were included in the 2008 ‘non-dom’ changes’ to restrict the retroactive effect of those changes.
Prior to 6 April 2008 a non-dom beneficiary of a non-UK resident trust could have trust gains attributed him if he received a capital payment from the trust, but those gains did not trigger a UK capital gains tax (CGT) charge in his hands. From 6 April 2008 that non-dom beneficiary can be chargeable to CGT but only if the capital payment he receives is matched with trust gains realised after 5 April 2008.
A rebasing election ensures that gains accrued but not realised before 6 April 2008 will also escape a CGT charge in the hands of the non-dom beneficiary. Without such election the whole gain will be chargeable when matched, regardless as to when the asset disposed of was acquired and the non-dom beneficiary could end up paying more tax than necessary.
Who is able to make a Rebasing Election?
Only the trustee of a trust which was non-UK resident throughout 2008/09 is able to make the election. If there is more than one trustee it must be made by all – unless they are empowered to act by majority.
Time limit for making a Rebasing Election
An election can only be made before 31 January following the end of the first tax year in which either a capital payment is received by a UK resident beneficiary; or there has been a transfer of assets from the trust to another trust.
Trustees who made such a capital payment (which can include the rent free occupation of property or an interest free loan) or a trust to trust transfer during 2008/09 only have until 31 January 2010 to make the election.
Procedure for making a Rebasing Election
The prescribed procedure must be followed and a two page form completed. An election can be made before a triggering event but once made is irrevocable. It must cover all assets held as at 5 April 2008.
To elect or not elect?
- Rebasing elections do not affect CGT payable by UK domiciled/resident beneficiaries.
- A review of all trusts is required to determine whether the time limit for the election has been triggered.
- The election may seem irrelevant if the trust has no UK resident beneficiaries but beneficiaries move. The time limit for making the election may be triggered by a trust to trust transfer and the ability to make the election lost before the beneficiary moves to the UK.
- Disclosure: Making the election will require the disclosure of information (albeit limited) to HMRC. But this is likely to lead to HMRC seeking to encourage the trustees to provide more and regular information. The ‘non-dom’ beneficiary may consider this to be for his benefit as it will assist in his obligation to be UK tax compliant and may save him tax. Other beneficiaries, who may have no reason to be on the HMRC radar, may not share this view.
- Costs: In addition to the costs incurred in relation to the dialogue with HMRC, valuations as at 5 April 2008 will need to be obtained in relation to every asset held by the trustees at that date. These valuations will not, however, be used to calculate gains unless and until there is a disposal of the relevant asset.
- Assets held through underlying holding companies give rise to additional complications and care is needed to ensure that the rebasing election can be used effectively to reduce CGT for non-doms. Bad exit planning can ensure a missed opportunity to reduce the ultimate tax bill.
Withers LLP can assist trustees, settlors and/or beneficiaries with the impact of Finance Act 2008. We can guide you through the legal issues, including the process of deciding whether to make a rebasing election now and what arrangements you should put in place to avoid missing a future deadline.