So, finally, the draft legislation – or at least most of it – has now been published. This briefing covers the main points.
Long term UK resident non-doms – rebasing
Non-doms who have been resident for more than 15 of the previous 20 years will become deemed domiciled for all tax purposes after April 2017. To avoid taxing non-doms on historic gains that accrued on non-UK assets acquired before they became deemed domiciled, the value of those assets is to be rebased for CGT purposes to their April 2017 value. Rebasing will only be available to those who become deemed domiciled from April 2017.
Long term UK resident non-doms – cleansing of mixed funds
This valuable concession will allow non-doms time to separate their mixed funds into the constituent parts (clean capital, income and gains). This was originally being offered for just one year from 6 April 2017 but has now been extended to two years. However, it will still only apply to bank accounts and not other assets or investments.
Offshore trusts – Income Tax and Capital Gains Tax
The big question for those becoming deemed domiciled – and indeed all non-domiciled settlors and beneficiaries – was how offshore trusts would be affected. We now have many of the answers.
- If any benefits are received from the trust by the settlor, or a close family member, that does not mean all future trust income and gains will automatically be taxed on the settlor as they arise. This harsh rule had previously been suggested as a possibility.
- Beneficiaries will continue to be taxed on benefits they receive to the extent that the benefits can be matched against trust income or gains (with income taking priority). A non-domiciled beneficiary can still enjoy the remittance basis provided the benefits from the trust are received outside the UK and are matched with non-UK income or gains. In contrast, a deemed domiciled beneficiary will be taxed on the arising basis on all benefits received, to the extent that they can be matched with trust income or gains
- A beneficiary will not generally be taxed on a benefit received from a trust if he is non-UK resident or a non-dom claiming the remittance basis who does not remit the benefit received. However, if he is a close family member of the settlor then the settlor will be taxed instead on matched trust income and gains, either on the arising or remittance basis depending on the settlor’s domicile status. A close family member will include spouse, cohabitee and minor children.
- Trust distributions to non-resident or non-domiciled beneficiaries who are not close family members of the settlor will not be taxed on anyone. However, the beneficiary will no longer be able to “recycle” the benefit by gifting or lending it to a UK resident beneficiary. If the gift or loan is made within three years of receipt then it will be treated as if the UK resident beneficiary received the benefit directly from the trust and taxed accordingly.
- Trust distributions to non-residents from April 2017, whilst not being taxed on the recipient, will no longer reduce the pool of gains in a trust available for matching. This means it will no longer be possible for the trustees to “wash out” gains by paying them to a non-resident beneficiary (who could include the settlor) with a view to then making a further tax-free distribution to a UK resident beneficiary on the basis that there are no more gains left to match.
Trusts and Inheritance Tax
It will still be possible for deemed domiciles to shelter their non-UK assets from IHT on a permanent basis provided they transfer the assets into trust before they become deemed domiciled. This continues the existing position except that the non-doms’s assets will need to go into trust within 15 years of moving to the UK rather than 17 years, at present.
Returning non-doms born in the UK
There are no changes to the rules originally announced. Those who were born in the UK with a UK domicile of origin but who later lost their UK domicile will immediately be treated as UK domiciled for most tax purposes as soon as they return to the UK and become UK resident. This will be a major deterrent to non-doms thinking of returning to the UK for a few years.
Inheritance and UK residential property
As was previously announced, where residential property is held in a non-UK company, the company will effectively be tax transparent after April 2017 and the underlying property will be exposed to inheritance tax. This will affect thousands of non-doms who own their UK property in exactly this way. Many of them will be advised to dismantle (or “de-envelope”) the company and have the property owned directly by family members as the company will now offer few, if any, tax benefits and will often be positively disadvantageous. The problem is the de-enveloping process can trigger large capital gains tax and stamp duty land tax charges. Despite strong lobbying, the Government has maintained its position that there will be no de-enveloping relief.
One welcome clarification is that the Government has agreed to scrap its earlier proposal of restricting the deductibility of loans for IHT purposes where the loan is from a connected person. However, this is not as big a concession as it sounds since the loan will remain within the taxable estate of the lender. This could have unexpected ramifications for non-domiciled connected party lenders, who might otherwise have expected not to be subject to IHT on the benefit of the loan.
On the vexed question of enforcement, the Government has accepted respondents’ comments that it would be unduly harsh to impose an IHT liability on directors of offshore companies who may be unaware of a chargeable event such as the death of the shareholder. How the tax charge will be enforced remains to be seen.
Business Investment Relief
Business Investment Relief (or BIR) enables non-doms to remit non-UK income and gains to the UK without incurring a tax charge when they invest in a UK business. The Government has now agreed to widen the scope of the scheme with a focus on simplifying the rules and increasing the incentives and opportunities to invest through the scheme.
In particular, the ‘extraction of benefit rule’ was widely regarded as punitive and a disincentive to use BIR. It had the effect of treating the investment as a taxable remittance if the non-dom received any benefit from the target company, even in circumstances where the benefit was not connected to the investment. The Government has amended the legislation so that the ‘extraction of benefit’ rule will be breached only if the benefit received was attributable to the investment.
Additionally, the time limit for investing in a company before it starts to trade will increase from the current two years to five years. Acquisitions of both existing and new shares will qualify for BIR. In situations where the target company has become non-operational, the grace period before any invested income or gains become chargeable has increased to two years.
The Government will look to widen the scope for BIR, but has not provided further details at this point.
It is clear the changes will happen. Those affected should now use the limited available time to take professional tax advice, and devise a plan of action. In the case of trusts, non-domiciled settlors and beneficiaries should liaise with their trustees and tax advisers to see what steps can be taken before April 2017 to mitigate their tax position. Similarly, those who own their UK property through an offshore company should seek urgent tax advice on whether or not to de-envelope, with a view to instructing liquidators in good time.
Mayfair Private can help you by implementing the following process:
- We can perform a review and appraisal of current private wealth structures, particularly if they include UK real estate and offshore trust structures.
- Organising a formal UK tax opinion and for detailed technical advice on the steps that can be taken in order to mitigate exposure to the new legislation, once finalised.
- Composing and managing an action plan and timetable to restructure private wealth arrangements in order to address the new legislation.
- Organising the incorporation / establishment of any new wealth vehicles that future private wealth structures might need.
- Coordinating the effective and timely transfer of assets from clients’ existing wealth structures to the new ones.
We will send further updates on the changes over the coming months. In the meantime, if you would like us to organise a review of your particular circumstances and obtain advice on a tailored mitigation strategy, please contact Alistair Morgan or Deepak Malhotra.
This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific advice.