issues, looks at the effects on British expatriates of the recent United Kingdom Budget in the second part of a special series.

The 1998 Budget made significant changes to the UK individual income tax laws, particularly with respect to UK expatriates. The November column discussed the capital gains tax which has been extended to include all gains realised during an absence from the UK of less than five full UK tax years. The 1998 Budget also has made changes to the exercise of stock options during an individuals absence from the UK.

Corporate Stock Options Under prior law, if a UK citizen undertook an assignment outside the UK and they qualified for what was commonly known as the "100 Percent Deduction'' or the "365 Day Relief'', any gains realised from the exercise of stock options which has been granted to them while resident in the UK, went untaxed. The 1998 Budget and a intransigent Inland Revenue position have conspired to abolish this tax planning scheme and to increase the tax on exercise.

The Inland Revenue's position is that an employee is usually granted a stock option as a reward with respect to their employment. If the grant was made at the time the individual was resident and ordinarily resident in the UK, its full value is subject to tax. However, the Inland Revenue concedes that the full value cannot be ascertained at time of grant, at the time the option is exercised. Thus, regardless of the individual's residency at the date of exercise, the Inland Revenue requires the individual to file a UK individual income tax return and pay UK income tax on the difference between the grant price and the exercise price.

The 1998 Budget has increased the income tax that will be paid on stock issued through Long Term Incentive Plans. Many companies have schemes through which employees can obtain corporate shares at a discounted price. The value of the stock can be further depressed through "risk of forfeiture'' clauses. Gains realised when the "risk of forfeiture'' lapsed escaped income tax and were only subject to capital gains tax on sale. For shares awarded after March 16, 1998 under such schemes, income tax will be due on the date when the "risk of forfeiture'' lapses.

To collect the income tax due on the exercise of stock options and the lapse of "risk of forfeiture'' clauses, the Inland Revenue has announced that they will be especially vigilant in enforcing PAYE by the corporate employer.

PAYE Avoidance For the past 25 years, employers and employees have avoided the payment of NIC and deferred the payment of income taxes by providing the employee with compensation in the form of a readily convertible asset. Usually the schemes had a life of a year or two before being eliminated by the Inland Revenue.

However, a new scheme always appeared each year. In a drive to do away with all existing as well as anticipated future schemes, the 1998 Budget has deemed that the following schemes will not avoid income tax and NIC: Property held in "bonded'' warehouses; Assets that convert into cash automatically; Assets for which trading arrangements have been arranged by the employer; and The enhancement of a asset already owned by the employee.

Offshore Trusts Effective on March 19, 1991 (no this is not a typo) the Chancellor made extensive changes to the tax treatment of offshore trusts. Some seven years later, the 1998 Budget has now changed the taxation of trusts set up prior to March 19, 1991, to conform to those set up after this date. If you are a settlor or beneficiary of such a trust, you need to speak to your tax advisor immediately.

The above legislation in the UK, and recent similar retroactive legislation in the US, makes it increasingly difficult for a tax advisor to do long term planning for a client. The reality of the above legislation is that tax planning which was properly done for a client in the 1980s, has now been mitigated, or done away with, 10 or more years after the fact. Clients should now expect tax planning advice to be accompanied by a disclaimer.

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.