Changes to taxation of non-UK domiciled individuals
On 5 December 2016, the Government published its responses to the August 2016 consultation on the reforms to the taxation of non-UK domiciled individuals and non-UK resident trusts, together with further draft clauses to be included in the Finance Bill 2017.
The rules will come into force on 6 April 2017 as originally proposed and we are still disappointed that not all of the essential details have been published.
The Main Key Developments
The Government has confirmed that non-UK domiciled individuals will be treated as deemed domiciled for all tax purposes once they have been UK resident for 15 out of the past 20 tax years and individuals who were born in the UK with a UK domicile of origin will be treated as UK domiciled whenever they are resident in the UK – even if they have acquired a domicile of choice elsewhere.
Additionally, UK residential property will be within the scope of UK inheritance tax (‘IHT’) even if held within an offshore structure.
Deemed domiciled individuals
In order to ‘break’ their UK deemed domicile status for income tax and capital gain tax (‘CGT’), long-term UK resident non-domiciled individuals will, from 6 April 2017, need to have been non-UK resident for six complete tax years.
Individuals will lose their deemed domicile status for IHT purposes at the start of their fourth consecutive year of non-residence.
In August, the Government announced that those who become deemed domiciled on 6 April 2017 and who have paid the remittance basis charge will have their directly-held offshore assets automatically rebased (with an option to elect that this does not apply to particular assets).
It has now been confirmed that this rule will not apply to any such assets held in the UK since 16 March 2016. The ability to rebase will not apply to individuals who become deemed domiciled in a later year and there will be no extension of the rules to allow trustees or the holders of non-reporting offshore funds (that are subject to income tax) to take advantage of the relief.
Those who have previously elected to be taxed on the remittance basis will be able to segregate their offshore bank accounts containing capital, gains and income into separate accounts and the window has helpfully been extended from one tax year to two, although there is no real detail around how the procedure will be monitored.
Non-UK resident trusts
The announcements have provided further clarity, but some crucial details around income tax and the long-awaited carried interest provisions remain outstanding.
The Government has confirmed that liability to income tax and CGT will arise only to the extent that benefits are received from an offshore trust. Further rules will be introduced in relation to the valuation of benefits.
Any payment made to a close family member from April 2017 that is matched to existing income or gains of the trust will be taxed on the settlor unless the recipient is taxed personally.
Capital payments to a non-UK resident beneficiary will no longer reduce the pool of trust gains, regardless of the domicile of the settlor. This will ensure that gains cannot be ‘washed out’ by making distributions to non-resident beneficiaries, except in the year that a trust is wound up. ‘
Recycling’ rules will be introduced to prevent a non-UK resident beneficiary, who is not a close family member, from receiving a benefit from the trust and then giving or lending it to a UK resident beneficiary within the following three years.
UK residential property held in offshore companies/partnerships
From 6 April 2017, shares in non-UK companies and partnership interests will no longer be ‘excluded property’, whether owned by an individual or an offshore trust, to the extent that their value derives from UK residential property.
The draft legislation now provides that any debt taken out to acquire or maintain a UK property will be allowed as a deduction from the value of an estate for IHT, although the loans – or any collateral or security for them – may be within the scope of IHT in the hands of the lender. It has been confirmed that no relief will be available for unwinding property holding structures.
Business Investment Relief (‘BIR’)
The Government has advised that it will make changes to BIR to simplify the rules and enhance its appeal, including:
increasing the time limit before which the investee company must start to trade – from 2 to 5 years;
allowing relief on the acquisition of existing shares as well as new shares; and
allowing the invested funds to remain in a company that has ceased to operate for up to two years.
Your Next Steps
Now that we have seen draft legislation in respect of most of the changes, individuals and trustees will want to consider the implications and what their next steps should be. Please call our team to discuss the implications of these changes before the start of the tax year