Eurobonds held in international settlement systems

There are some unusual points about immobilised securities, such as Eurobonds that have led to some surprising UK tax consequences. Within this article, I have reviewed these in terms of how they affected one of my UK resident, but not UK domiciled clients.

In many cases clients acquire these securities through international clearing systems such as 'Euroclear' or 'Clearstream'. Euroclear is held in Belgium and Clearstream is in Luxembourg and they are different from normal securities because there is no paper trail to them. Instead, they are effectively 'suspended' in a mixed clearing house where no one security is assigned to the owner but they are mixed in a single instrument to a depositary.

In deciding the tax treatment there is no case law to guide us and we therefore need to rely on the interpretation of leading counsel.

1.  UK Inheritance Tax

There are currently two schools of thought, firstly, situs (Latin for site or location) of these securities follows the place of residence of the issuing institution. For example, a Tesco Plc Eurobond would be UK situs. The second is that situs follows from the place of the relevant clearing system ie Belgium or Luxembourg.

The second view is the more widely accepted one and this means that immobilised securities are non UK situs assets for inheritance tax. Therefore, for my non UK domiciled client who is not yet deemed UK domiciled, these securities are outside his estate for UK inheritance tax.

2.  Income Tax

As expected, interest arising on a Eurobond is treated as income from the country in which the issuing company is resident. For example, income from a Tesco Plc Eurobond is UK source income and is taxable in the UK. My non UK domiciled client is taxable on his UK source income. However if the Eurobond gives rise to non UK source income then there is scope for my non UK domiciled client, who is on the remittance basis, to avoid UK tax on that income.

3. Capital Gains Tax

Quite logically, if the securities are issued by a UK incorporated company then they are UK situate. This means that any gains arising are taxable in the UK for a UK resident taxpayer.

However, Eurobonds issued by non UK companies are in fact mostly situated where the creditor is resident. Therefore, my UK resident but non UK domiciled client will have a UK capital gain on disposal of his foreign bonds.

Given that many non domiciled clients enjoy the remittance basis for their foreign income and gains, the capital gains situs rules for these securities can give an unexpected and undesirable result.

Liz Cuthbertson is a partner at Mercer & Hole and advises a portfolio of high net worth clients on matters including wealth preservation, offshore tax planning, and inheritance tax and estate matters. You can contact Liz at lizcuthbertson@mercerhole.co.uk or call 020 7353 1597.

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