Sweeping reforms to non-dom rules
Current Issues | Tax | 2nd September 2016
A consultative document published by HM Treasury on 18 August 2016 includes more details on the major changes to the rules for non-UK domiciled individuals proposed in the summer 2015 budget, which may materially increase their exposure to UK income tax (IT), capital gains tax (CGT) and inheritance taxes (IHT).
From 6 April 2017, anyone actually domiciled outside the UK who has been a UK resident for 15 of the 20 preceding tax years will be deemed UK domiciled for income tax, capital gains tax and inheritance tax purposes.
This is a change from the current rule for inheritance tax under which a non-dom is deemed UK domiciled if they have been UK resident for at least 17 of the 20 tax years then ending. However, it’s proposed that deemed domicile for IHT is to fall away once the person is non-resident for four consecutive years. Double tax treaties may apply and could have an impact on this.
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 for income tax, CGT and IHT if they become UK resident.
Recommended action: Quantify the potential effect and consider planning opportunities.
Offshore companies holding UK residential property
The government also proposes that the value of interests in offshore companies attributable to UK residential property will be subject to UK IHT from 6 April 2017. The government says that it intends that any loans made between connected parties will be disregarded when determining the value of the property which will be chargeable to IHT.
At the time of the summer 2015 Budget, the government said that it would consider the cost associated with de-enveloping of properties. However, it now ‘does not think it would be appropriate to provide any incentive to encourage individuals to exit from their enveloped structures at this time.’
Recommended action: Consider the cost and effect of removing properties from ownership through offshore corporate entities and monitor HMRC’s definition of ‘residential’.
CGT re-basing at 5 April 2017
Those who become deemed domiciled on 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 for any tax year up to 2016/17, are to be entitled to ‘re-base’ any of their offshore assets held at 8 July 2015 that are disposed of after 5 April 2017, paying CGT only on the gain arising over 5 April 2017 market value. Any gain that had already accrued by that date on the asset disposed of would therefore be tax-free.
Thus, if the asset was originally acquired with clean capital, it would be possible to bring the entire proceeds from the disposal into the UK without triggering a remittance charge. However, if it was acquired using previously unremitted foreign income or gains, an element of the disposal proceeds would still relate to such income or gains and will be taxed as a remittance.
Those who become deemed-domiciled in years after 2017/18, as well as those who become deemed-domiciled because they were born in the UK with a UK domicile of origin, will not be able to re-base their foreign assets. As drafted, re-basing will inevitably be denied to non-doms under 18 who become deemed domiciled because of the 15/20 rule.
Recommended action: Remain alert to the need to make an election and the time limits which apply.
The treatment of non-resident trusts now proposed differs markedly from earlier suggestions.
Currently the non-domiciled settlor of a ‘settlor-interested’ trust (one which may benefit the settlor, the settlor’s spouse or civil partner, children or grandchildren) is not subject to CGT on the trust’s gains. Instead, any UK resident beneficiary who receives a benefit from the trust that may be matched with trust gains may be charged CGT. This is to continue if property was settled while 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) until any benefit is provided from the trust to the settlor, the settlor’s spouse or civil partner or the settlor’s infant children.
Trustees were able to re-base assets for CGT purposes as at 5 April 2008, which affects the trust gains that might be attributed to non-domiciled beneficiaries who receive capital payments from non-resident trusts. The benefit of this is to be retained for those who become 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).Otherwise the CGT treatment of non-resident trusts is unchanged.
Currently the settlor of a non-resident ‘settlor-interested’ trust (one which may benefit the settlor, the settlor’s spouse or civil partner, or the settlor’s infant children) 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), the foreign-source income is only to be taxable to the extent it is distributed.
Settled property situated outside the UK, interests in authorised unit trusts, shares in open-ended investment companies - and gilt-edged securities in certain cases - will remain excluded property for IHT purposes despite the settlor becoming deemed domiciled in the UK, if he was not domiciled when the settlement was made; unless he or she was born in the UK with a domicile of origin here and is currently UK resident and was also UK resident for at least one of the two immediately preceding tax years.
Recommended action: Ask us for a copy of our specialist guidance note.
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 a window – the year to 5 April 2018 - 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 funds deposited in banks etc. Where the mixed ‘fund’ is in the form of an asset such as a painting the condoc suggests that the asset should be sold in order to realise cash which may then also be segregated.
Recommended action: Identify the origin of mixed funds and be ready to take action to segregate them.
Business investment relief (BIR)
BIR applies to remittances of foreign income or gains that are used to make loans to, or subscriptions for shares in, unquoted companies carrying on a qualifying trade, generating income from land, etc. Such remittances then escape tax. The government is inviting suggestions to improve the effectiveness of BIR.
Recommended action: Be aware that the relief exists and claim it when appropriate.
Please speak to your usual Shipleys contact or one of our experts to determine what you need to do next. Specific advice should be obtained before taking action, or refraining from taking action, on the basis of this information.