Further consultation released 19 August 2016
The 2015 Budget announced proposals to radically reform the taxation of non-doms from April 2017 and this was followed in September 2015 by the first of the consultation documents. The September 2015 consultant focused on the introduction of a deemed domicile status for long-term resident non-doms and the introduction of the ‘returning UK dom’ status relevant for individuals born in the UK with a UK domicile of origin, who have subsequently taken a domicile of choice overseas but then resumed UK residence.
The 2015 consultation also referred to proposals to change the taxation of offshore trusts set up by non-dom settlors, who subsequently become deemed UK domiciled and included the concept of ‘looking-through’ a foreign entity holding UK residential property whereby the underlying property is treated as forming part of the non-dom’s estate for inheritance tax (IHT) purposes. No specific details were given at that time on these issues and a further consultation was promised, but we have had to wait almost a year for it to materialise. There had been some hope that the delay could mean a year’s grace before the legislation takes effect, but the August 2016 consultation confirms that the April 2017 date is still in point, which leaves non-doms and offshore trustees having to consider how they are impacted and whether actions need to be taken in just a few months before the end of the current tax year.
In brief, the main topics of interest are as follows:
1. Foreign companies holding UK residential property – non-dom individuals and trusts settled by a non-dom will be treated as owing UK sited assets to the extent that their interest in the foreign wrapper relates to an underlying UK residential property. This will cause the property’s value to be within the scope of IHT for non-dom individuals and trusts to come within the IHT relevant property regime from 6 April 2017.
2. The consultation refers to how the value of a UK residential property held within a foreign wrapper will be determined. In particular, loans with connected persons are not due to be allowed as reducing the property’s value. This may cause double taxation – once on the non-dom/trust holding shares in the foreign wrapper and again on the individual owning the debt.
3. The period for deemed domicile status reduces from 6 April 2017 whereby long-term resident non-doms will become deemed domiciled if they have been UK resident for 15 out of the previous 20 tax years. This is one year sooner than under the current legislation.
4. The deemed domicile status is currently applicable only for IHT purposes so a non-dom can benefit from the remittance basis regardless of their long-term residence in the UK. From 6 April 2017, the deemed domicile status will be extended to income tax and capital gains tax so the remittance basis will no longer be available for those non-doms.
5. Non-doms who become deemed domiciled for capital gains tax purposes on 6 April 2017 by reason of their long-term presence in the UK may claim to rebase a personally held foreign asset to its value on 5 April 2017. This is good news as it will mean the gain accrued in the period to 5 April 2017 will be exempt from UK capital gains tax. However, the rebasing is only applicable if the individual has previously paid the remittance basis charge. It should be noted that a taxable remittance can apply if the foreign asset was originally acquired using foreign income/gains that benefitted from the remittance basis and the proceeds of a subsequent sale are brought to the UK.
6. There will be a grace period of one year after 5 April 2017 during which non-doms may organise their offshore affairs. This will include the ability for non-doms to segregate out the underlying components of their overseas bank accounts holding a mixture of capital, income and gains. It will be necessary to track funds within the offshore account which can be time consuming and in some cases the information may not be available to undertake this exercise. Non-doms who are not able to re-organise their affairs by 5 April 2018 will be taxed on remittances to the UK from the mixed account using the current complex (and often harsh) identification rules. Returning UK doms are excluded from the opportunity to re-organise their foreign mixed accounts.
7. The impact of the deemed dom status will affect individuals who settled excluded property trusts when they were non-dom. Certain protections are being offered for income tax and capital gains tax purposes, but these will only refer to trusts where benefits are not taken by the settlor, their spouse and their minor children after 5 April 2017. If offshore trusts benefit the deemed dom settlor’s close family after 5 April 2017, the UK tax treatment for the settlor will change significantly if he is UK resident.
8. Non-dom settlors will continue to receive IHT protection in respect of foreign assets held within trusts settled before they became deemed domiciled with the exception of foreign entities holding UK residential property which, as mentioned above, are to be treated as UK sited from 6 April 2017 to the extent of the interest held indirectly in the underlying UK property. Any further additions to the trust by the settlor once he becomes deemed domiciled after 5 April 2017 will cause the IHT protection to be lost in its entirety.
9. Returning UK doms will find they are treated as deemed domiciled for IHT purposes if they are UK resident for the year in question and were UK resident in either of the two preceding tax years. This would have a substantial impact on their personal IHT exposure for foreign assets held as well as the IHT position of any trust settled while they were non-dom.
10. If a returning UK dom resumes UK residence, they will be assessable on worldwide income and gains arising on both personal assets as well as assets held within an offshore trust they settled while non-dom, without the ability to claim the remittance basis.
The above is a summary of the main issues addressed in the recent consultation. Draft legislation has been released covering some of the proposals but is subject to debate and there is a chance changes may be made before it is finalised.
On the basis that the commitment to bring the new legislation into force on 6 April 2017 remains, there is now a short window in which non-doms and offshore trustees have to review how these changes are likely to impact them and to consider whether they need to take actions.
The legislation relating to non-doms and offshore trusts is particularly complex and riddled with anti-avoidance legislation that can easily catch out those who do not have a full understanding of issues. FCTC has experienced advisers who are able to help non-doms and trustees understand their options. We would recommend that advice is sought earlier rather than later to allow time to implement transactions (if deemed necessary) and to ensure access to the specialists in this area.