Non-domicile changes - the final chapter
The changes will however all have effect from 6 April 2017 and so, in effect, already apply. There are no significant changes to the previous drafts of the legislation which we have seen and which were issued in March and July this year.
We also now have draft legislation for some further tightening up of the anti-avoidance rules relating to offshore trusts.
These changes will take effect from 6 April 2018 and are summarised in the attached briefing note.
Certainty at last
Barring an election, the main package of changes to the taxation of non-domiciliaries which was first announced in July 2015 will be passed into law in November this year.
The changes will however all have effect from 6 April 2017 and so, in effect, already apply.
There are no significant changes to the previous drafts of the legislation which we have seen and which were issued in March and July this year.
We also now have draft legislation for some further tightening up of the anti-avoidance rules relating to offshore trusts. These changes will take effect from 6 April 2018 and are summarised below.
Still an attractive regime
Despite the changes, the UK’s tax regime for foreigners who come to live in the UK is still very generous.
- There is no tax on overseas assets / income for 15 years.
- There is no charge for accessing these benefits for the first seven years.
- Even after that, the charges are relatively low (£30,000 after seven years and £60,000 after 12 years).
- Even after 15 years, overseas assets / income are outside the scope of UK tax if they are held in an overseas trust. Tax is only paid on benefits received from the trust.
- The benefits are available whether or not the individual is working in the UK.
- Earnings for work done outside the UK are not taxable for the first three years.
In order to make the most of these tax benefits and to avoid unnecessary tax charges, it is important for non-domiciliaries to take proper advice, ideally before taking up UK residence and before reaching the 15 year residence milestone for deemed domicile.
Summary of the 2017 changes
An individual will be deemed to be domiciled in the UK tax year starting with the 2017/18 tax year if:
- he is UK resident and was born in the UK with a UK domicile of origin; or
- he has been UK resident for 15 out of the previous 20 years.
Capital gains tax rebasing
- Individuals who became deemed domiciled on 6 April 2017 and who have previously paid the remittance basis charge will not be taxed on gains arising on personally held non-UK assets which relate to the period prior to 6 April 2017.
Separating mixed funds
- All non-domiciliaries who have cash which consist of a mixture of income, capital and / or capital gains can separate out those funds into their constituent parts at any time before 6 April 2019.
Business investment relief
- The rules which prevent there being a taxable remittance where money is brought to the UK to invest in certain UK businesses (including property investment businesses) have been expanded so that the relief is much more attractive and will apply in more situations.
A note explaining these aspects of the changes in more detail can be found here.
Inheritance tax on UK residential property
- Interests in non-UK companies which derive their value from UK residential property are brought within the scope of UK inheritance tax. This includes tax charges on death or on gifts and periodic / exit charges in relation to trusts.
- Loans and collateral for loans used to purchase UK residential property are also brought within the scope of UK inheritance tax.
- The changes apply to all non-domiciliaries, even those who are non-UK resident.
A note explaining the inheritance tax changes in more detail can be found here.
Trust protections for deemed domiciliaries
- No income tax, capital gains tax or inheritance tax is payable on overseas income / assets held in a trust set up before becoming deemed domiciled.
- Tax is only payable on benefits received from the trust.
- The protections are lost if additions are made to the trust after becoming deemed domiciled.
New rules for valuing certain benefits from offshore trusts
- These changes apply to all trusts/beneficiaries and not just to those involving non-domiciliaries.
- Statutory rules are introduced to determine the value of benefits consisting of loans, the use of real estate and the enjoyment of chattels (such as works of art, aircraft, yachts, etc).
A note explaining the trust changes in more detail can be found here.
2018 changes – further anti-avoidance provisions relating to offshore trusts
These changes were originally intended to be part of the overall package of changes related to the taxation of non-domiciliaries. However, some of the measures have been deferred and will only take effect from 6 April 2018.
Some of these provisions are aimed principally at non-domiciliaries / deemed domiciliaries whilst others apply to all offshore trusts.
Capital gains tax
Trustees of non-UK trusts are generally not subject to UK capital gains tax.
Instead, gains realised by the trustees are attributed to beneficiaries who receive a benefit from the trust.
Historically, gains have been allocated to beneficiaries whether or not the beneficiary is UK resident. This means that capital gains tax could in some cases be avoided by making distributions to non-resident beneficiaries to “wash out” the gains before making a distribution to a UK beneficiary in a subsequent year.
From 6 April 2018, benefits conferred on non-UK residents will be ignored and so will not reduce the pool of trust gains which can be taxed when benefits are received by UK resident beneficiaries.
As this provision will only apply from 6 April 2018, it is worth considering whether any payments should be made to non-UK residents before that date.
In some cases, distributions from trusts have been made to non-UK resident beneficiaries (who are not taxable) who have subsequently made onward gifts to UK resident individuals (who would have paid tax had they received a direct distribution from the trust).
New rules are being introduced both for income tax and for capital gains tax purposes which have the effect of treating the UK resident in these circumstances as having received a direct distribution from the trust.
The result of this is that the UK beneficiary may be subject to income tax or capital gains tax on the amount of the gift or the benefit which they receive although the benefit of the remittance basis is available if the UK beneficiary is a non-domiciled remittance basis taxpayer.
The conduit rule only applies for income tax purposes if the settlor is (or has been) non-UK domiciled or deemed domiciled in the UK. For capital gains tax purposes, the rule applies to all trusts.
The good news is that these provisions have been more tightly focused than the original draft and will only apply where:
- there is an intention to make an onward gift at the time the original distribution from the trust is made; and
- the onward gift can be traced to the trust distribution or it is shown that the trust distribution was intended in some way to facilitate or was connected to the onward gift.
This prevents the conduit rule from applying if there was no intention to make an onward gift at the time the original distribution was received or in circumstances where the recipient of the distribution had other funds out of which the onward gift was made.
In other respects, the provisions are widely drawn and so, for example, include provisions which prevent the conduit rule from being circumvented where there is a series of gifts between non-residents / non-domiciliaries before the final gift is made to the UK resident.
These new rules apply wherever there is an onward gift after 5 April 2018, even if the original distribution from the trust was made before this date.
If non-UK resident or non-UK domiciled recipients of trust distributions are thinking about making gifts to anybody who is UK resident, it is therefore worth considering whether these gifts should be accelerated so that they are made before 6 April 2018.
Close family member rule
The purpose of this provision is to tax a UK resident settlor on a benefit received by a close family member (spouse / civil partner (or unmarried equivalent) or minor child) who is either non-UK resident or is a non-domiciled remittance basis taxpayer and who therefore does not pay tax on the benefit.
In these circumstances, the benefit is treated as if it had been received by the UK resident settlor who will potentially be subject to income or capital gains tax on the amount of the benefit.
If the settlor is himself a remittance basis taxpayer, he will only be taxed if the benefit is received in or remitted to the UK.
The close family member rule can also work in conjunction with the conduit rule. So, for example, if trustees make a distribution to a non-resident beneficiary who then makes an onward gift to a UK resident individual who is a close family member of the settlor of the trust, it will be the settlor (if he is UK resident) who will be taxable on any income or gains rather than the close family member.
Action to be taken
These new rules make very significant changes to the taxation of non-domiciliaries and the taxation of offshore trusts.
It is likely to make sense to review existing structures for all non-UK domiciliaries (and not just those who are (or may shortly become) deemed domiciled in the UK) in the light of the new rules.
As far as the 2018 changes are concerned, there is a window of opportunity to take action prior to 6 April 2018.
Structures holding UK residential property in particular need to be considered carefully.
Non-domiciliaries who will become deemed domiciled (as a result of having been in the UK for 15 years) in the foreseeable future also need to review how their personal assets are structured.
Those individuals who became deemed domiciled on 6 April 2017 will need to see how to make best use of the benefits of rebasing.
All individuals who have, in the past, paid tax on the remittance basis should think about whether it may be possible to separate out the constituent parts of mixed funds in order to reduce (or even eliminate) tax on future remittances.
Anybody thinking of becoming UK resident should plan carefully, if possible in the tax year before arrival, particularly as the changes restrict the availability of split year treatment in certain circumstances. With good advice, the UK remains an attractive destination for overseas individuals.