Finance Bill 2017: clarity at last for non-doms?
On 5 December 2016, HMRC published its responses to the August 2016 consultation regarding the proposed changes to the taxation of non-UK domiciled individuals (“non-doms”) along with the draft clauses of Finance Bill 2017. The information published provides welcome clarification on the proposed changes and answers many of the areas of uncertainty. We are still digesting the new legislation and will circulate a more detailed analysis, particularly in relation to the tax treatment of offshore trusts, in the near future. However, below is a summary of the key points for non-doms with offshore structures to be aware of.
As expected, from 6 April 2017 non-doms who have been UK resident for 15 out of the previous 20 years will become deemed domiciled in the UK for all tax purposes. As a result, a deemed UK domiciled individual will be subject to UK tax on their worldwide income and chargeable gains and will no longer be able to claim the remittance basis.
It will be possible for a deemed UK domiciliary to “reset the clock” (ie to shed their deemed UK domicile status) for income and capital gains tax purposes if they are non-UK tax resident for 6 consecutive tax years. A period of non-UK residence of 4 years will be required to cease being deemed UK domiciled for inheritance tax purposes.
An individual who is born in the UK with a UK domicile of origin will also be deemed UK domiciled for all tax purposes if they have been UK tax resident for at least one of the previous two tax years (in effect, they have a one year grace period before becoming deemed UK domiciled).
Offshore trusts settled by individuals before becoming deemed UK domiciled will be granted protected status. This protected status will continue provided the settlor does not make any further additions to the trust after they become UK domiciled.
Other key points to note include:
- Foreign income arising in an offshore trust (or company underlying the trust) will only be taxable on the deemed domiciled settlor to the extent that it is matched to benefits received. The legislation on how these provisions will operate has not been published; however, HMRC have set out how these rules will work in a consultation response document. The draft legislation is expected to be published in early 2017.
- A further positive point to note is that it is no longer proposed that an offshore trust will permanently cease to act as a potential shelter from UK capital gains tax once a benefit is received by a deemed UK domiciled settlor. This proposal was dropped following the consultation process. Instead, settlors will only be taxed on trust gains to the extent they are matched with benefits. This shelter from UK capital gains tax will only be lost where additions are made to the trust once the settlor becomes deemed UK domiciled.
- We are awaiting legislation in relation to proposed changes on how to value benefits from offshore trusts.
UK residential property held in offshore companies
From 6 April 2017, shares in non-UK close companies will no longer be “excluded property” (effectively, outside the scope of UK inheritance tax) to the extent that the shares derive value from UK residential property. This change applies regardless of whether the shares are owned by an individual or trustee. The result of this change is that the value of UK residential property will be included in the estate of a non-dom individual for inheritance tax purposes. Trustees of offshore trusts holding residential property via a non-UK company will also potentially be subject to UK inheritance tax at the ten year anniversary date.
It was previously announced that loans between connected parties would be disallowed when valuing UK residential property for inheritance tax purposes. This proposal has been dropped. Instead, loans which are drawn-down to acquire or maintain a property will be deductible in calculating the value of the property (even where the loan is from a connected party).
After a long period of uncertainty, it is helpful to finally have draft legislation, even if certain aspects of the legislation remains outstanding (in particular, the income tax provisions in relation to trusts). Individuals, and potentially trustees, who are impacted by these rules should, if they have not already, begin considering the new rules in relation to their affairs and be liaising with a tax advisor where appropriate.
Written by Kevin Loundes, Associate Director at Abacus Trust Company