citizens. It is written by James Paul Sabo, who writes a similar monthly column on US Tax Issues.

The 1998 Budget made significant changes to the UK individual income tax laws, particularly with respect to UK expatriates. Coupled with increasingly negative rulings from the Inland Revenue as to what income an expatriate must pay taxes on, the UK is on a path to move inexorably closer to the US concept of global taxation on the income of their citizens. The changes made by the 1998 Budget are generally effective for the tax year beginning on April 6, 1998 and in some instances are effective as of 16 March 1998.

100 percent Deduction Abolished Under prior tax law, a UK citizen who was resident and ordinarily resident, but who worked abroad for a qualifying period of 365 days or more, could receive their salary earned abroad free of UK income tax. The Foreign Earnings Deduction was commonly known as the "100 percent Deduction'' or the "365 Day Relief''. The qualifying period was created by the UK citizen working abroad and not returning to the UK for a single visit lasting more than 62 days and the total number of days spent on cumulative visits to the UK could be no more than one-sixth of the total number of days in the qualifying period. The new tax law is effective for compensation earned after March 17, 1998. The Inland Revenue has not provided any guidance as to the effect on individuals who were in the middle of the qualifying period, or even at 364 days as of that date.

Now all income earned during the qualifying period is taxable in the UK. In some cases, double taxation may be eliminated under double tax treaties which the UK has, but this exemption will not apply to UK citizens working in Bermuda.

Capital Gains Tax The 1998 Budget offers a classic case of the tax man giveth and the tax man taketh. For the tax year 1998/99, the capital gains tax exemption will be increased to 6,800 of gains. As the increased capital gains tax exemption applies to both spouses, capital gains of 13,600 can be made tax free. If the exemption is not used in a current year, it can not be carried forward and is lost, if not used.

The savvy individual took advantage of this tax break by indulging in the so called "bed and breakfast'' tax scheme. This would involve selling stocks at year end to realize the maximum capital gains tax exemption, and then buying back the shares shortly afterwards (the next day). This effectively exempted the realized capital gains from tax, and resulted in a higher tax basis for computing future capital gains, thus reducing a potential future tax charge.

Effective as of March 16, 1998, any stock sold after this date, which has either been acquired or disposed of within 30 days, will no longer be eligible for the capital gains tax exemption. The same rule also applies to losses realized to offset gains. Interestingly, the Inland Revenue tax legislation is almost copied, word for word, from the same US tax law.

Taxation of Unrealised Capital Gains on Departing UK Citizens Several countries around the globe tax departing citizens on unrealized capital gains upon long term departure from the country. Most countries refer to this as an "exit'' tax. The UK is proposing their own version of this tax, but in reverse form, which we will call an "entrance'' tax which will be imposed on UK citizens returning to the UK from foreign assignment. The proposal is as follows. UK citizens who undertake a foreign assignment that lasts less than five full UK tax years (6 April to 5 April) will become liable to UK income tax on capital gains realised during the period of non-residence on assets acquired before they left the UK. Simply, if you own any stock prior to departure on an assignment that will last less than five full UK tax years, and you sell that stock at a gain during the period you are abroad, the gain must be reported on the tax return filed in the year of return. This new rule is applicable to citizens who left the UK after March 16, 1998.

Gains realized in a country with whom the UK has an income tax treaty may escape UK taxation, dependent on certain wording in the treaty. The UK/US income tax treaty does not contain such language, and a UK citizen may very well be liable for capital gains tax in both the US and the UK in certain circumstances.

UK Budget raises tax capital gains concerns for expatriates The Inland Revenue has not announced as to how they will enforce this proposal. It could very well be that citizens leaving the UK will be required to furnish the Inland Revenue with a detailed net worth statement both on departure and return. Under prior law it was possible for a UK citizen to be outside the UK for as little as one year to avoid the capital gains tax.

Income Tax Rates -- 1998/99 Rate of Tax Taxable Income 20% 0-4,300 23% 4,301-27,100 40% over 27,100 The UK tax law changes made by the 1998 Budget may make it attractive for a UK citizen residing in Bermuda to extend their assignment to minimise or eliminate the new UK income taxes.

James Paul Sabo, CPA, is the President of Expatriate Tax Services, PO Box 617, Bernardsville, NJ 07924 and is associated with GulfStream Financial Ltd. in Bermuda.