As has come to be expected with HMRC announcements, the draft Finance Bill 2017 released on 5 December 2016 brought with it reprieve for some, confusion for others and disappointment for many affected by the trust and domicile reforms. Whilst the draft legislation is not under consultation there may still be lobbying by various professional bodies over the way some clauses apply, so this may not be the final version.
Returning UK doms
Firstly, the bad news for ‘returning UK doms’ (i.e. those with a UK domicile of origin who were born in the UK and subsequently acquired a domicile of choice elsewhere) is that the Government has failed to be persuaded by the consultation responses asking for some kind of transitional relief or time delay. The final consultation response confirms that the rules for ‘returning UK doms’ will come in as originally drafted with no changes. As a reminder a ‘returning UK dom’ is deemed domiciled from the first year of UK residence for capital gains (CGT) and income tax and the second year of residence for inheritance tax (IHT). There will be no trust protection, no asset rebasing and no mixed fund cleansing. Given the Government’s refusal throughout the process to reconsider their stance on this aspect, we would not expect these rules to be amended. For the rest of the note when we refer to deemed domiciles we mean individuals who have been in the UK for more than 15 out of the last 20 years and not returning UK doms.
Deemed doms
Individuals once deemed domiciled will, whilst UK resident, be taxable on their worldwide income and capital gains on an arising basis with no option to use the remittance basis. They will also be subject to inheritance tax on their worldwide estate.
The reliefs available for those deemed doms in the form of mixed fund cleansing and asset rebasing have been confirmed. As with returning UK doms, HMRC has refused to consider the responses requesting an extension of the mixed fund cleansing to trust structures.
The mixed fund cleansing will apply to anyone who has been taxed on the remittance basis at any point between 2008/09 and 2016/17 and has been extended to apply for two tax years up to April 2019. It will allow previously mixed funds to be separated and therefore enable previously trapped clean capital to be brought into the UK tax-free. Whilst overall we welcome this measure we are concerned over the practicality of the rules on the mechanics of the cleansing process, which appear to have been drafted in haste.
The asset rebasing will apply to those who are deemed domiciled at 5 April 2017 only and who have previously paid the remittance basis charge in any tax year since 2008/09 up to 5 April 2017. Any foreign capital assets held personally which were not situated in the UK at any time between 16 March 2016 and 5 April 2017 will be automatically rebased to their value as at 5 April 2017. An irrevocable election must be made where an individual does not want rebasing to apply to a disposal. HMRC have confirmed that rebasing will not be extended to non doms who will become deemed domiciled post 5 April 2017 and will also not apply to investments where the gains are subject to income tax such as non-reporting mutual funds.
Trust Structures
One respite for deemed doms with offshore trust structures is that the trust protection for income and gains in the trust is more robust than original drafted.
Previously, it was suggested that protection would be lost if any benefits were received from the trust and thereafter trust income and gains would be taxable on the settlor on the arising basis. This has been softened so that trust protection is only lost in cases where there are additions to the trust. Benefits received from the trust will be taxable as they arise but any income and gains left within the trust will not be taxed. There are also some ‘exceptions’ as to what an addition is so that inadvertently tainting the trust will be harder (but not impossible).
This is good news as it means the majority of people will be able to keep the trust protected. Whilst HMRC has given with one hand they have taken away with the other in that other rules are also being introduced which were not part of the previous consultations. From April 2017:
- Capital payments made to non-resident beneficiaries will in most circumstances be disregarded in terms of matching to stockpiled gains. This means it will no longer be possible to wash out such gains by using non-resident beneficiaries.
- Where a capital payment is made to a ‘close family member’ and that individual does not pay any tax on the payment (either because they are non-UK resident or they claim the remittance basis), the settlor, if UK resident, will now be liable to tax on that payment as if it had been made to him directly. A close family member in this context is a spouse/civil partner/ cohabitee or minor child.
- Where a capital payment is made to a beneficiary who does not pay tax on the payment but then within three years gifts that amount to a UK resident recipient, new rules will tax the end recipient on the amount received as if it has been received from the trust directly.
- A tightening of the rules on benefits received which in the past have not been taxed, such as loans where the interest is rolled-up rather than paid. Such loans will now give rise to a taxable benefit matched to the capital/income from the trust for the beneficiary or settlor.
If you would like to discuss anything in this article or would like to find out how we can assist you in minimising the impacts of the new legislation please speak to your usual Frank Hirth contact.