Following pressure by Brussels, which had ruled that the existing rules on offshore tax avoidance were “disproportionate”, the Treasury has issued proposals to prevent the practice, which is widely used by investors.

Currently under consultation, the proposals affect tax laws dating back 80 years, under which the taxman could “look through” the foreign company in which a taxpayer has invested and tax its income and capital gains.

The consultation also proposes changing the rules for capital gains of foreign private companies, so that UK resident shareholders would only be taxed on them in cases where there was no genuine commercial activity and assets had been “enveloped” in a foreign company wrapper.

It is likely that the change to the capital gains tax rule could cost around £5m in 2016-17, while the impact of the “transfer of assets” change is expected to be negligible.

Several experts have welcomed the proposed changes, as they are likely to reduce the uncertainty caused by the existing rules.  It is also possible that the rule change could open up the possibility that some taxpayers would be able to claim back millions of pounds from the government, as the previous rules breached EU law.

The new proposed rules would also require investors to seek advice on whether or not their activities could be considered commercial.

However, the Treasury has stressed that it is “critical” that any change in legislations “continues to be effective in preventing tax avoidance”, recently described by Exchequer Secretary David Gauke as “morally repugnant”.

The consultation ends on October 15 this year, at which point Treasury officials will meet with representative bodies and other interested parties before publishing a summary of responses.  If the hallmark proposals move to the next stage, draft legislation will be published at that point.

As an accountant, Sarah Jenkins, specialises in management accounting, business development and financial reporting.