Non-dom tax refom; offshore trusts
Current Issues | Tax | 18th January 2017
More detail have emerged iof the proposed changes affecting the taxation of non-domiciled individuals (‘non-doms’). Draft clauses were published of December 2016 and 26 January 2017, together with proposals on offshore trusts which don't only affect non-doms.
Most of the changes apply from 6 April 2017, so there is a very brief window during which action may be considered. Although further amendments are possible, there is a commitment at a high level to implementing these proposals and we therefore recommend that matters affected by them are considered at the earliest opportunity. Frustratingly, we still await some of the legislation in draft.
Deemed domicile from 6 April 2017
- Anyone actually domiciled outside the UK who has been a UK resident for at least 15 of the 20 preceding tax years will be deemed UK domiciled for income tax and capital gains tax.
- Anyone actually domiciled outside the UK who has been a UK resident for at least 15 of the 20 preceding tax years and for at least one of the 4 tax years ending with a particular tax year will be deemed UK domiciled for inheritance tax purposes in that year.
- Furthermore, anyone born in the UK with a UK domicile of origin who has acquired a new domicile elsewhere will be deemed domiciled in the UK in relation to a tax year for income tax and capital gains tax if they are resident for that year, and for inheritance tax if they are UK resident for that year and were UK resident for at least one of the two preceding years.
All non-doms should review their period of UK residence, to identify when they will become deemed domiciled – if they remain UK resident after 5 April 2017.
Inheritance tax (IHT)
Trusts created by a non-domiciled individual (unless born in the UK with a UK domicile of origin) can remain protected from IHT to the extent the trust assets are non-UK situs, despite the settlor becoming deemed domiciled.
Trusts created by a non-domiciled settlor who was born in the UK with a UK domicile of origin will lose excluded property status when the settlor becomes deemed domiciled for IHT.
Shares in close offshore companies and interests in partnerships are to be subject to IHT to the extent their value is attributable to UK residential property, from 6 April 2017.
Loans made to such companies and partnerships to finance the acquisition of UK residential property and ‘money or money’s worth made available as security, collateral or guarantee’ for such loans are to be subject to UK inheritance tax from 6 April 2017 As drafted, the value of loans and assets offered as security etc. is not limited to the value of the property, but it is assumed that this will be corrected.
Furthermore, if such shares or partnership interests (or the underlying UK residential property) are disposed of, or such loans are repaid, the proceeds will continue to be subject to UK inheritance tax for two years.
Those affected should review the potential inheritance tax liability, and consider the tax consequences of de-enveloping.
Currently the settlor of a non-resident structure which may benefit the settlor may be subject to income tax on the trust income, but claim the remittance basis on foreign-source income.
If the property was settled when the settlor was non-domiciled but the settlor becomes deemed domiciled under the 15/20 rule (and not because of being born in the UK with a domicile of origin here – termed a ‘formerly domiciled resident’), the foreign-source income might from 6 April 2017 remain taxable only when remitted, but the draft clauses published on 5 December do not cover this area.
Re-basing for capital gains tax and income tax as at 5 April 2017
Those non-domiciled who become deemed domiciled on or after 6 April 2017 because of the 15/20 rule (and not because they were born in the UK with a domicile of origin here), and who have paid the remittance basis charge as long-term UK residents for any tax year up to 2016/17, will be deemed to have acquired at 5 April 2017 at market value all of their offshore assets held on that date that were not situated in the UK at any time in the period beginning on 16 March 2016 (or subsequent acquisition) and ending on 5 April 2017 in computing the gain or loss on disposal thereof after 5 April 2017 (except any they elect to exclude). . This will include not only assets on which a gain subject to capital gains tax arises but also gains realised on interests in non-reporting offshore funds that are subject to income tax.
Those affected should assemble details of assets affected. Any non-doms who would otherwise not have paid the remittance basis charge for any year up to 2016/17 should review the possible benefit of doing so.
Non-resident trusts and capital gains tax after 5 April 2017
The tax position of all UK resident beneficiaries of offshore trusts (not just non-doms) is to change.
Currently the UK resident but non-domiciled settlor of a non-resident trust which may benefit the settlor, the settlor’s spouse or civil partner, children or grandchildren is not subject to capital gains tax on the trust’s gains as they arise (unlike a settlor who is UK domiciled and resident). Provided that no property or income is added by the settlor, at a time when the settlor is domiciled in the UK or deemed domiciled.
this is to continue to apply if the trust was ‘created’ when the settlor was non-domiciled, despite the settlor becoming deemed domiciled after 5 April 2017, but only if deemed domicile is on the 15/20 basis and not because of being born in the UK with a domicile of origin here.
Instead, any UK resident beneficiary who receives a benefit from the trust that may be matched with trust gains may be charged capital gains tax.
A further change, which affects all non-resident trusts, is to disregard all capital payments to non-residents after 5 April 2017 unless -
- the recipient is a ‘close member of the settlor’s family’ and the settlor is UK resident in the tax year the payment is received;
- the payment is made in the year the settlement ceases to exist, two or more beneficiaries receive capital payments and at least one is non-resident and one is resident in the UK; or
- the recipient is temporarily non-resident, in which case the payment is treated as received in the beneficiary’s period of return to the UK.
Also to be disregarded are capital payments to UK resident beneficiaries who migrate before the payment is matched to trust gains.
The disregarded capital payments therefore leave intact the pool of trust gains available to be matched with capital payments.
Where chargeable gains are treated as accruing to a ‘close member of the UK resident settlor’s family’ who is either non-resident or the remittance basis applies to the beneficiary, and none of the gain is remitted to the UK in the year, the settlor is chargeable to capital gains tax as if the gains accrue to him. The settlor may then recover the tax he has paid from the beneficiary or any trustee of the settlement.
A ‘close member of the settlor’s family’ is the settlor’s spouse or civil partner (treating two people living together as if they were married and treating two people of the same sex living together as if they were civil partners) or a child under 18 of the settlor or the settlor’s spouse or civil partner [or unmarried ‘partner’ of the settlor].
Furthermore, if a capital payment is received from a non-resident trust by someone who is non-resident or a remittance basis user and either not a ‘close member of the settlor’s family’ or the settlor is non-resident (including a payment received before 6 April 2017), and, after 5 April 2017 and within three years of the original payment, while the original beneficiary has either remained non-resident or a remittance basis user, the original beneficiary makes a gift to a UK resident (or a gift is made before the original payment is received, in anticipation thereof), the recipient of that gift is treated as receiving a capital payment equal to the gift or, if less, the original capital payment (the latter amount as reduced in certain circumstances).
This is so widely drawn that it would catch perfectly innocent unconnected gifts, and it is assumed this proposal, at least, will be modified.
Non-resident trusts and companies and income tax
Currently the settlor of a non-resident structure which may benefit the settlor is subject to income tax on the trust income, but may claim the remittance basis on foreign-source income.
If the property was settled when the settlor was non-domiciled but the settlor becomes deemed domiciled under the 15/20 rule (and not because of being born in the UK with a domicile of origin here – termed a ‘formerly domiciled resident’), the foreign-source income will, from 6 April 2017, remain taxable only when remitted, provided that no property or income is added by the settlor or the trustees of any other settlement of which the settlor is a settlor or a beneficiary at a time when the settlor is domiciled in the UK or deemed domiciled.
A similar provision to that described under capital gains tax is proposed to catch onward gifts made by recipients of income benefits.
Mixed funds offshore
Non-domiciled individuals (not just those about to become deemed domiciled, but not those born in the UK with a domicile of origin here), even those not currently UK resident, are to be given the two years to 5 April 2019 in which they may re-arrange their mixed funds overseas to separate them into their constituent parts: clean capital, foreign income and foreign gains. They will then be able to remit from these separate parts as they wish, in whichever order suits them. It can only apply to transfers of money. If the mixed ‘fund’ is in the form of an asset such as securities, they should be turned into cash which may then be segregated.
All UK resident non-doms should review the scope for action as described.
This new legislation is still in draft, and may be amended before becoming law. Please speak to your usual Shipleys contact or one of our experts to determine what action is recommended. Specific advice should be obtained before taking action, or refraining from taking action on the basis of this information.