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Tax changes for non-domiciled individuals

Private Clients - 14 Jun 2016

Much publicized changes to the taxation of non-domiciled individuals are due to take effect from 6 April 2017.  Unfortunately we remain in a position whereby some of the important details of the legislation are still unknown.

We do know that from the start of the 2017/18 UK tax year,  non-domiciled individuals who have been resident in the UK for 15 out the last 20 tax years will be considered “deemed” domiciled for income tax and capital gains tax purposes.  The concept of deemed domicile already applies for inheritance tax purposes albeit the period of UK tax residency will be reduced from its current 17 to 15 out of 20 tax years.

For all individuals who will be considered deemed domiciled, the remittance basis of taxation will be a thing of the past.  There will be no option to pay an annual remittance basis charge, of any amount, to remove non-UK income, gains or assets from the scope of UK taxation. Taxation of worldwide income and gains in the UK will be the only option.  Structuring previously undertaken will need to be reviewed along with consideration of the UK tax treatment of certain offshore structures which could attract penal UK tax treatment (US LLC’s being a prime example) that were previously protected.

For people who are not already deemed domiciled for IHT purposes this may present opportunities to create excluded property trusts prior to 5 April 2017.  However the March 2016 Budget suggested that individuals who will become deemed domiciled on 5 April 2017 may have an opportunity to rebase their personally held assets for capital gains tax purposes.  This opportunity would be lost if the assets were transferred into an excluded property trust prior to that date and conversely the opportunity to gift the assets to an excluded property trust will be lost if you wait until they have been rebased.  Therefore if the rebasing makes it into the final legislation a decision would need to be made as to which was the most beneficial option taking into account your personal circumstances and long term plans.

Alongside the introduction of deemed domicile status for income and capital gains purposes, a review of the taxation of offshore trusts was also announced.  Currently where a non-domiciled settlor of a trust is able to continue to benefit from the trust assets then the income received by the trustees will be taxable on the settlor as it arises unless a claim for the remittance basis can be made.   When the remittance basis is no longer available to longer term residents these changes could have a significant tax impact on non-domiciled settlors.

HMRC’s consultation document entitled “Reforms to the taxation of non-domiciles” states that,

“the government will ensure that any individual who becomes deemed-UK domiciled will continue to be protected from UK tax on offshore trusts that they have settled while neither they nor their spouse or children receive any benefit from the trust”

The consultation goes on to discuss in broad terms taxing the value of any benefit received without reference to the income or gains in the offshore structure.  This was widely thought to be a flat rate charge on any monies or assets which were distributed from the trust.  This has received criticism from the profession, in particular in relation to dry trusts which have no income or capital gains.  HMRC have subsequently commented that this new approach is now unlikely to be a tax without reference to the underlying income or gains because there are doubts as to whether this would be EU compliant.

We are therefore likely to be left with a charge which is made by reference to the income and gains in the trust although this could mean that once the settlor becomes deemed domiciled he could be in a better position than a remittances basis user as, without paying a charge, he may no longer be subject to tax on the foreign income and gains unless he receives a distribution. The consultation further states that it may reconsider the position of all non-domiciled individuals and not just those who are deemed domiciled which could mean that all non- domiciled individuals, post April 2017, would be taxable only where an actual distribution is received.

There is planning which can be done around the proposed changes however, planning does require an element of certainty around the outcome of anything that is put in place. As advisors, this lack of clarity hampers our ability to provide clear advice as to the best current course of action for our clients for their personal position. 

We will continue to monitor this situation and will be in touch with our clients once HM Revenue & Customs provide specific details of the legislative changes. Hopefully, any issuance of guidance will allow sufficient time for any action plans to be appropriately considered and implemented but at this point in time we do not have any clear view on what that timing will be. HMRC have suggested off the record that a further consultation document may be released over the summer with a view to having final legislation towards the end of the year.

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Sarah Farrow

Sarah Farrow

Director

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