The confusion and lack of clarity surrounding the UK government’s proposed reforms to the tax regime for non-domiciliaries has been well documented.
Individuals who are resident but not domicilied in the UK have long enjoyed a more favoured tax regime in the UK. Accordingly the Finance Bill introduced in March 2017 provided for a number of significant changes to the taxation of non-UK domiciled individuals and non-UK trusts to make the UK tax rules are a more level playing field. These changes were withdrawn from the Finance Bill as a result of the General Election. However following draft legislation released Friday 8 September and further draft legislation released on Wednesday 13 September, the position finally seems to be clearer.
The draft legislation confirms that most of the changes are due to come into force with effect from 6 April 2017 as first anticipated. The changes are broadly set out in this briefing.
Overseas born non-domiciliaries – Those non domiciled individuals who have been resident for fifteen out of the past twenty tax years will be deemed domiciled in the UK for all tax purposes.
The change means that from that point they will no longer be able to claim the remittance basis of taxation for income and capital gains tax and will therefore be subject to tax on an arising basis on their worldwide income and gains.
The change also brings forward the date on which a UK resident non-domiciliary is subject to UK Inheritance Tax (“IHT”) on their worldwide assets (currently seventeen out of the last twenty tax years).
UK born non-domiciliaries – There are a number of non-resident individuals who may have been born with a UK domicile but whose subsequent actions and intentions have established a domicile of choice in a different state. If they then return to the UK, the moment they become UK resident they will acquire a UK domicile for all tax purposes.
Any trust structure that they may have established whilst they were non domiciled will no longer benefit from any favourable tax treatment.
UK Residential Property – A further change will affect non domiciled individuals who hold UK residential property through an intermediary (e.g an offshore Trust holding shares in a non-resident Company which in turn owns UK residential property). Under the current tax rules such structures are regarded as “excluded property” and so not subject to IHT.
From 6 April 2017, UK residential property, however held, will be subject to IHT. Furthermore loans used to finance the acquisition of UK residential property will also be brought within the scope of IHT.
There will no longer be an IHT benefit to using an offshore company to hold UK residential property, and where relief from the Annual Tax on Enveloped Dwellings is not available, it will usually make sense to unwind the structure.
Mixed Funds– It is usually not possible for a non-domiciled individual to separate out their income, capital gains and clean capital when such funds are all held together in a “mixed fund” bank account. However, all non-domiciliaries who have claimed the remittance basis will have the opportunity until 5 April 2019 to separate out the different elements of a mixed fund and be able to remit the clean capital to the UK. There are significant planning opportunities for individuals who can use both the rebasing relief and this cleansing opportunity. These are “one-off” opportunities for affected individuals to preserve and use clean capital in the UK tax efficiently and so advice should be sought well before the 5 April 2019 deadline.
Offshore Trusts– From 6 April 2017, a new tax regime for trusts will apply to offshore trusts. Broadly:
- Beneficiaries will continue to be taxed on benefits they receive to the extent that the benefits can be matched against trust income or gains. A non-domiciled beneficiary will 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 (under the new 15 out of 20 year rule) 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 generally will not be taxed on a benefit received from a trust if he is non-UK resident or a non-domicilary and claiming the remittance basis as long as they do not remit the benefit received. However, if he is a close family member of the settlor, the settlor will be taxed instead on matched trust income, 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.
Advisors will need to ensure that their client’s UK tax affairs relating to their offshore assets are in order before 30 September 2018 if they are to ensure that they do not face penalties of up to 200% of the tax due.