When I first sat down to write this article, I thought Christmas had come early as the initial commentary on the Finance Bill 2017 was in the main positive (the “Good”). However, my early Christmas cheer soon became a more sobering reflection as more details emerged (the “Bad”) and then I came to the section on loans (the downright “Ugly”).
The end of permanent non-dom status - From April 2017, non-doms who have been resident in the UK for more than 15 out of the past 20 tax years will become deemed domiciled for all UK tax purposes. Some may not regard this as a reason to crack open the champers, but it will be possible to re-set the clock, by being non-UK resident for 6 consecutive UK tax years for income tax and CGT and 3 years for IHT. Perhaps it’s time to consider that sabbatical…!
If not, then the Government has provided a couple of concessions:
Rebasing - Non UK assets held personally can be rebased for CGT purposes to their April 2017 value meaning future exposure to UK CGT is mitigated. This is only available to those who become deemed domiciled from April 2017 (and have paid the remittance based charge “RBC”) and for assets held between 16 March 2016 and 5 April 2017. Those impacted will need to identify relevant assets and obtain valuations as at April 2017.
Cleansing - Non-doms (importantly not just those becoming deemed dom on 5th April 2017) who have claimed the RBC, can “cleanse” their mixed funds, into clean capital, income and gains pots. This concession has been extended from one year to two, from 6 April 2017 to 5th April 2019. It applies to bank accounts only, and provides a potentially valuable opportunity for clients to access their clean capital and remit it to the UK tax free. Consideration will need to be given as to when during this two year window assets are liquidated.
Business investment relief (BIR) – This Government initiative aims to encourage non-doms to invest their foreign income in the UK without triggering a taxable remittance. Whilst the rules have been broadened e.g. with regard to the type of qualifying investments, it was hoped they would go further to increase take up and investment in UK businesses. BIR has not been extended for investments in partnerships and the legislation now explicitly excludes investments in corporate partners of partnerships.
Offshore trusts – Thankfully for us and our clients, there is positive news for offshore trusts and they have retained many of their benefits and protections.
As things stand, Trusts created by non-doms before they become deemed domiciled will continue to provide complete protection from income tax (in relation to non-UK source income), CGT (UK and non-UK assets, other than UK residential property and carried interest capital gains) and IHT (for non-UK assets and UK assets held in overseas companies with the exception of UK residential property).
Consequently, trusts continue to work for long term roll up and non-doms can continue to shelter non-UK assets from UK IHT permanently. Furthermore, deemed doms will no longer need to pay the RBC in order to benefit from income protection.
Trusts will therefore remain an important planning tool for non-dom clients. For those becoming deemed domiciled on 6th April 2017, there is a short window of opportunity to settle a new trust or additional assets into an existing trust, so don’t delay or the opportunity will be lost forever (unless you reset the clock).
In relation to benefits, deemed domiciled settlors will now only be taxed on those benefits made to themselves, their spouse and minor children, where the recipient is outside the scope of UK tax. So, adult beneficiaries and grandchildren can still benefit without a charge on the settlor. Consideration should be given to accelerating distributions to close family members and to non-UK resident beneficiaries before 5 April 2017. Wills should also be updated to account of any additional assets held personally following a distribution.
IHT on UK residential property – Non-doms will no longer be able to shelter UK residential property from IHT through the use of offshore structures. This is a momentous change. Non-dom individual shareholders and partners and Trusts with non-dom settlors will be subject to IHT on interests (e.g. loans or shares) in closely held companies or partnerships which directly or indirectly derive their value from UK residential property.
The intended tax charge applies to any inheritance tax events occurring after 5 April 2017. These include the death of the property owner, or the settlor (who is also a beneficiary) of a trust or the life tenant of a pre March 2006 trust which holds UK residential property as well as trust 10 year anniversaries.
A review programme of our structures which hold this asset class is underway to identify those caught by the new rules and when any IHT charges are likely to apply.
Loans and UK residential property – Rather than disallowing connected party loans in calculating the value of UK residential property for IHT, loans provided for the acquisition, maintenance or enhancement of a UK residential property will now be within the scope of IHT in the hands of the lender instead. This is regardless of lender’s residence and domicile position and could potentially bring other persons within the scope of IHT who previously were not. In a surprise move typical of Eli Wallach, any offshore assets used as collateral will also be caught and brought within the scope of IHT, as will the sale proceeds for a period of two years post the sale.
Tainting – Whenever resident in the UK, a deemed domiciled settlor will become taxable on the income and gains of a trust on an arising basis if any additions are made to the trust either directly or inadvertently, after the settlor becomes deemed domiciled.
Returning non-doms – In the eyes of HMRC these appear to be the true “villains”. Any returning non-dom will immediately be subject to UK tax on their worldwide income and gains and those of any offshore trust they settled while non-domiciled.
After one year of residence in the UK, they will be subject to IHT on their personally held worldwide assets – offshore trust assets do not receive such a period of grace. These rules have far reaching implications for those wishing to return to the UK and advice must be taken before returning.
A new era is fast approaching with a set of complex rules which must be meticulously applied. We have been busy since the release of the Finance Bill meeting and speaking with our clients and their advisors to discuss these changes and how their structures are impacted. The film The Good The Bad and The Ugly was the third part of the “dollar” trilogy, and it is clear that HMRC are certainly looking for their fistful of dollars!
* Neither Affinity Trust Limited or any of its officers or employees are qualified to provide tax advice and the above should not be relied upon as such.
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