On 8 September 2017, the second Finance Bill of 2017 was published. This confirmed that the previously announced policies, including amendments to the taxation of non-doms due to start on 6 April 2017, would be effective from that date.
In addition, further draft legislation, which will form part of a third Finance Bill, was published on 13 September 2017. This introduces new rules in relation to recycling benefits from offshore trusts via non-resident beneficiaries and also the tax treatment of distributions to close family members of the settlor. These provisions will be effective from 6 April 2018.
Provisions Taking Effect From 6 April 2017
From 6 April 2017, individuals who have been resident in the UK in 15 of the previous 20 years are deemed to be UK domiciled (deemed-dom) for income tax, capital gains tax and inheritance tax purposes.
- Capital Gains Tax Rebasing
Individuals who became deemed-dom at 6 April 2017, under these changes, and who have paid the remittance basis charge at least once, will be entitled to ‘rebase’ their assets. This treatment is not available to ‘returning non-doms’ (see below).
In order to apply, the asset being rebased must have been owned by the individual on 5 April 2017 and must not have been situated in the UK during the period from 16 March 2016 to 5 April 2017. There appears to be no requirement for the individual to have owned the qualifying asset throughout the whole of this period.
The rebasing will apply automatically to qualifying assets sold by a qualifying individual on or after 6 April 2017. It is possible for an election to be made to disapply the rebasing.
- Segregating Mixed Funds
There is a two-year window from 6 April 2017 for non-doms to segregate their mixed funds.
Only funds held in bank accounts by individuals can be segregated; other assets will need to be converted to cash before segregation. This opportunity will be available to all non-doms who have claimed the remittance basis before 6 April 2017 (other than ‘returning non-doms’).
Whilst this could prove complicated, it could well be a very interesting planning opportunity.
- Foreign Capital Losses
It was announced that foreign capital losses realised after an individual becomes deemed-dom will be allowable against all their capital gains, even if a capital loss election had not previously been made.
- Temporary Non-residence
Foreign chargeable gains arising to an individual who became non-UK resident prior to 8 July 2015 (i.e. when the non-dom changes were announced), and then returned to the UK within five years, will not be subject to the temporary non-residence rules if the individual is deemed-dom in the year of return.
A change was announced for Individuals who were born in the UK with a UK domicile of origin but who later acquire a domicile of choice (known as ‘returning non-doms’). They will now be treated as being domiciled in the UK again, as soon as they return to being resident in the UK. Trusts created whilst a ‘returning non-dom’ was non-domiciled will be treated as if created by a UK domiciled individual.
Those who may be affected by these rules should take advice immediately as their tax position may have changed significantly and they will not benefit from some of the reliefs available for those who are deemed dom under the long-term non-dom rules.
Protections for Foreign Settlor-interested Trusts
Protections will apply to all foreign settlor-interested trusts established by non-doms whether deemed-dom under the new rules or not (excepting ‘returning non-doms’).
These protections may make non-resident trusts attractive for non-doms, including those who are currently paying the remittance basis charge, as income and gains may be rolled up in such trusts without the need to claim the remittance basis and pay the remittance basis charge.
- Capital Gains Tax Protection for Foreign Settlor-interested Trusts
There will be a capital gains tax protection for foreign trusts established before the settlor became deemed-dom. Capital gains will only be taxable to the extent that they can be matched to benefits received from the trust. Without this protection, deemed-dom settlors would be subject to capital gains tax on trust capital gains as they arise.
- Income Tax Protection for Foreign Settlor-interested Trusts
There will be similar income tax protection for foreign trusts established before the settlor became deemed domiciled. Existing provisions, which deem trust income to belong to the settlor, will no longer apply in respect of foreign income at both the trust level and in any underlying corporate entities. The settlor will, therefore, only be subject to income tax by reference to benefits received by him/her which are matched to income. In addition, a settlor may be taxed in respect of income matched to benefits received by ‘close family members’.
The ‘transfer of assets abroad provisions’ will still apply to income arising to non-UK companies not held by a protected trust.
- Transitional Rules
Undistributed foreign income and unmatched foreign gains arising before 6 April 2017 will be available to match to benefits received after 5 April 2017 by all beneficiaries, including settlors.
Unmatched capital benefits received by the settlor before 6 April 2017 will be carried forward to match to capital gains arising after 5 April 2017. Such unmatched capital benefits will not be matched to income.
Unmatched capital benefits received by beneficiaries other than the settlor before 6 April 2017 will be matched to income or capital gains arising after 5 April 2017. Income retained by a trust or underlying company which has been taxed on the settlor (e.g. because it was remitted to the UK by the trust or company) will not be matched to future benefits and will not therefore be taxed a second time.
- Tainting ‘Protected Settlements’
The capital gains tax and income tax protections for trusts will not be available if the trust is tainted.
Tainting will occur if property is added (directly or indirectly) to a trust by the settlor after he becomes deemed domiciled. In addition, the protections will be lost if property is added to a trust by the trustees of a second trust and the settlor of the first trust is the settlor or a beneficiary of the second trust.
- Excluded Property for Inheritance Tax
Non-UK situs assets held by trusts set up before an individual is deemed-dom for inheritance tax will remain outside the scope of UK inheritance tax. An exception may arise due to the new rules regarding UK residential property held through overseas companies.
Provisions Taking Effect From 6 April 2018
The changes which will take effect from 6 April 2018 relate to how income and gains in offshore trusts are taxed when beneficiaries receive capital payments.
- Capital Payments Received by Non-resident Beneficiaries
Capital gains will no longer be matched to capital payments received by non-resident beneficiaries. It will therefore not be possible to ‘wash out’ capital gains from a trust by making distributions to non-resident beneficiaries. In addition, capital payments will be disregarded if they are made to a beneficiary who is UK resident when he receives the payment but who becomes non-resident before the payment is matched to a capital gain.
- Capital Payments Received by Close Family Members of the Settlor
Where the settlor of a trust is resident in the UK during a tax year and a capital payment is made in that tax year to a beneficiary who is a close family member of the settlor, the capital payment is treated as being made to the settlor. These provisions apply to both income and capital gains and will have the effect that the settlor is taxed on any income or capital gains matched to the capital payment. These rules apply to income from 6 April 2017 but will be extended to capital gains from 6 April 2018.
A close family member is defined to include the settlor’s spouse, civil partner, cohabitee or minor child (of the settlor or his/her spouse/civil partner/cohabitee). Minor grandchildren are not defined as close family members.
- Onward Gifts
If a beneficiary receives a capital payment from a trust which is not taxable and makes an onward gift, the subsequent recipient will be treated as having received the capital payment. These provisions apply to both income and capital gains and may result in the subsequent recipient being taxed on income and/or capital gains matched to the capital payment.
If this situation is likely to arise, advice must be sought, as the criteria are lengthy.
- Non-doms who are not already deemed-domiciled under the new rules should consider the creation or further use of foreign trusts to hold investments.
- Non-doms who are not already deemed-domiciled may wish to consider receiving trust distributions whilst they are still able to use the remittance basis.
- Non-doms who became deemed-domiciled from 6 April 2017 should consider whether they can take advantage of the automatic rebasing of non-UK assets for capital gains tax purposes. In particular, individuals who have not previously paid the remittance basis charge may wish to consider if it is worth doing so for 2016-17, or for another year for which there remains time to make an election.
- Non-doms with mixed funds should analyse these funds to determine if there is clean capital available that may be remitted to the UK without a tax charge.
- Trustees of offshore trusts, with both UK resident and non-resident beneficiaries, may wish to consider making distributions to non-residents prior to 5 April 2018 in order to ‘wash out’ stockpiled capital gains.
- Trustees of offshore trusts, where the settlor is UK resident, may wish to consider making distributions to close family members of the settlor prior to 5 April 2018.
- Returning non-doms should take immediate professional advice.
If you require additional information on this topic, please contact your usual Dixcart adviser or speak to Paul Webb or Peter Robertson in the UK office: firstname.lastname@example.org.