The UK government has released its final response to the further consultation on reforms to the taxation of non-UK domiciliaries (non-doms), together with draft legislation that will take effect from 6 April 2017. As well as the expected changes, some significant new changes were announced concerning offshore trusts, which did not feature in the government’s previous public consultation documents. Affected individuals should seek advice urgently to allow enough time to act before the reforms come into force.
The UK government has released its response to the further consultation on reforms to the taxation of non-domiciles (non-doms), together with draft legislation that will take effect from 6 April 2017. There is mixed news for affected individuals, including far-reaching changes relating to offshore trusts that did not feature in the government’s previous public consultation documents.
The following are highlights from the government’s response and the draft legislation.
- Deemed Domiciled: Non-doms will become deemed domiciled (deemed dom) for all UK tax purposes once they have been resident for 15 out of the previous 20 tax years (the 15 out of 20 rule). They will therefore be unable to claim the remittance basis of taxation and their worldwide estates will potentially be within the scope of UK inheritance tax (IHT). Individuals who were born in the United Kingdom and have a UK domicile of origin will be treated as UK domiciled during any period of UK residence, subject to a grace period for IHT.
- Rebasing: Only non-doms who become deemed dom on 6 April 2017 under the 15 out of 20 rule will benefit from having their personally held foreign assets rebased to their market value on 5 April 2017. This relief will only be available to individuals who have previously paid (or will pay for the 2016/2017 tax year) the remittance basis user charge. Individuals who have not previously claimed the remittance basis should consider whether or not it is worthwhile paying the charge this year in order to benefit from the rebasing. Rebasing will not be available to assets held in trust.
- Mixed Funds: Individuals who have been taxed on the remittance basis will have a window of two tax years from April 2017 to rearrange their mixed funds held in overseas bank accounts. Where adequate records have been kept, amounts can be remitted to the United Kingdom from such accounts free of tax and/or subject to Capital Gains Tax (CGT) before income tax.
Offshore Trusts Tax Reforms
- Trust Protections: The good news is that neither foreign income nor gains will automatically be taxed on the arising basis on a UK resident non-dom or deemed dom settlor whilst assets are retained in trust, provided that the trust is not tainted post 5 April 2017 (the Trust Protections).
- Trust Income: Foreign income will only be chargeable on the settlor by reference to benefits received by the settlor or a close family member (spouse, cohabitee or minor child), and only where those benefits are not already subject to tax in the hands of the recipient. A non-dom settlor or beneficiary can benefit from the remittance basis, but a UK resident deemed dom settlor or beneficiary will pay income tax on the benefit, regardless of where it is received.
- Trust Gains: Similarly, UK resident non-dom or deemed dom settlors will only be subject to CGT on capital payments, received by them or a close family member, that are matched to trust gains. If the close family member is UK resident, they will be taxed on the capital payment in priority over the settlor. Non-dom settlors and beneficiaries can claim the remittance basis in respect of payments received offshore, but deemed dom individuals will be taxed on such payments on the arising basis. Where the beneficiary who receives the payment is either a non-UK resident or claims the remittance basis in respect of the benefit, the payment will be attributed to the UK resident settlor.
- The Trust Protections will, however, be lost if a settlor adds further funds to a trust whilst he or she is deemed dom. If the Trust Protections are lost, the UK resident deemed domiciled settlor will be taxed on trust income and gains on an arising basis.
Changes Not Consulted on Publicly
The big changes that were not publicly consulted on are as follows.
- No Washing Out: From 6 April 2017, it will no longer be possible for any offshore trusts (regardless of the status of the settlor) to “wash out” gains by making distributions to non-UK resident beneficiaries. Such payments will no longer reduce trust gains, so they will remain available to be matched to payments taxed on the settlor or other UK resident beneficiaries. This washing out of gains has been a key planning tool used by offshore trustees. Trustees of offshore trusts with UK resident and non-UK resident beneficiaries should carefully consider their options as a matter of urgency.
- No Recycling: In certain circumstances, capital payments from trustees to an individual that are not immediately taxable under the new rules described above, will still be bought into charge if they are subsequently gifted or lent to a UK resident beneficiary within a period of three years. Where this provision applies, the payment will be chargeable on the UK resident beneficiary. If there is an “arrangement” for a trust distribution to a non-close family member/non-UK resident beneficiary to ultimately be received by a UK resident beneficiary, there is no time limit for making the benefit received by the UK resident beneficiary chargeable to UK tax. Again, this change will affect a number of beneficiaries of offshore trusts. They should consult with their advisers and the trustees to discuss what action should be taken prior to 6 April 2017.
UK Residential Property Tax Reforms
- Inheritance Tax: UK residential property owned through offshore partnerships, close companies and similar entities will be subject to IHT, regardless of the domicile of the individual who established the structure.
- De-Enveloping: No relief from CGT or Stamp Duty Land Tax will be provided for individuals required to de-envelope their property-owning structure. Structures currently paying the Annual Tax on Enveloped Dwellings (ATED) should consider de-enveloping as, from April 2017, they will continue to have an ATED liability but receive no IHT protection. It should be noted that after 5 April 2017, the proceeds of the disposal of UK residential property held in an offshore structure will still be treated as within the scope of IHT for a period of two years following the disposal.
- Loans: Any loans taken out in order to acquire or maintain UK residential property (Relevant Loans) will be within the charge to IHT in the hands of a lender. This will apply to all loans, not just those made between connected parties, including loans to trustees. Similarly, assets provided by way of guarantee, security or collateral for a Relevant Loan will be brought within the charge to IHT.
Individuals who may be affected by the reforms should take advice as soon possible to ensure that they have time to plan for the new regime.