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A wealthy United Kingdom resident and domiciled client was an employee of a United States quoted company until he retired about five years ago, although he remained trustee of the employee pension fund.
He has been exercising valuable options on an annual basis, throwing up large capital gains tax gains. His holding is well under ten per cent. Is there any possibility of claiming business asset taper relief now or perhaps after April 2002? The client might go to Belgium for a year or so. How can capital gains tax be mitigated?
A wealthy United Kingdom resident and domiciled client was an employee of a United States quoted company until he retired about five years ago, although he remained trustee of the employee pension fund.
He has been exercising valuable options on an annual basis, throwing up large capital gains tax gains. His holding is well under ten per cent. Is there any possibility of claiming business asset taper relief now or perhaps after April 2002? The client might go to Belgium for a year or so. How can capital gains tax be mitigated?
(Query T15,932) – Option Opinion.
There is now a requirement in paragraph 6(1)(a)(iii) of Schedule A1 to the Taxation of Chargeable Gains Act 1992 that the individual has at all relevant times been able to exercise not less than five per cent of the voting rights in the company (if otherwise qualifying).
As the individual may not have had holdings of at least 25 per cent prior to 6 April 2000, the earlier period as a non-business asset may necessitate apportionments, as illustrated in 'Tapering Through' by Andrew Hubbard in Taxation, 13 April 2000 at pages 42 and 43.
As regards escaping capital gains tax by a temporary absence abroad, success depends on the correct application of double taxation treaties. Although Belgium has attracted favourable mention, it suffers disadvantages, as described in Readers' Forum replies to Query T15,726 in Taxation, 14 December 2000 at page 306.
The treaty with Switzerland (SI 1978 No 1408) includes Article 13 which allows Switzerland (only) to tax Swiss residents on capital gains from movable property in the United Kingdom, except shares in companies mainly owning immovable property there. The client's shares appear to represent assets situated in Delaware or elsewhere where registered, perhaps requiring consideration of the Swiss/United States tax treaty. – M.C.N.
Assumptions: the United States company is a trading company and is also quoted on the London Stock Exchange. The client can exercise (at present) more than 5 per cent of the voting rights in that company.
Shares acquired under option are treated as acquired when the option was exercised. On a disposal of shares by an individual, the shares are treated as business assets at any given point in time, if at that time the company in which they were held was a qualifying company. In determining whether the company qualifies at any time after 5 April 2000:
(1) the company was unlisted in the United Kingdom; or
(2) the individual was an officer or employee of that company (or a company having relevant connection with it); or
(3) the individual can exercise at least 5 per cent of the voting rights in that company.
For the time before 6 April 2000, the shares were a business asset if the company was a qualifying company, if it was a trading company (or holding company of a trading company) and either:
(1) the individual can exercise at least 25 per cent of the company's voting rights; or
(2) the individual can exercise at least 5 per cent of the company's voting rights and was a full-time working officer or employee of the company (or of a company which at that time had relevant connection with it).
Therefore as the client is now no longer an employee of the company and with the ownership of the shares acquired via the exercise of an option(s), then at present in order to qualify for the post 5 April 2002 business asset taper relief the shares would have to be held for a minimum of two complete years and at all times he would have to have at least 5 per cent of the voting rights in the company.
The shares in the United States company are treated as situated in the United States, as even though they may be registered in the United Kingdom, the principal place of register takes preference (section 275, Taxation of Chargeable Gains Act 1992).
Under the double taxation agreement between the United Kingdom and Belgium, capital gains are only taxable in the taxpayer's country of residence (i.e. where his main home is situated). However, if the client were to spend at least a complete tax year resident in Belgium and be treated as 'temporary non-resident' then the usual 'out of the United Kingdom for less than five years' rule would not apply and any capital gain made during the period abroad would not be subject to tax. – N.K.
