We have been monitoring closely the government's proposals to:
- Treat non-UK domiciled individuals as UK domiciled for all tax purposes once they have been resident in the UK for 15 of the previous 20 tax years;
- Bring all UK residential property, including certain loans to fund UK residential property purchases and any assets used as security for those loans, within the scope of UK inheritance tax; and
- Change the way offshore trusts are taxed.
The road to this point has not been smooth as the snap election caused the Finance Bill provisions introducing these changes to be withdrawn. However, the final draft legislation has now been published and there is additional clarity for clients and their advisers.
- From 6 April 2017, a non-domiciled individual will be deemed domiciled for all tax purposes, including inheritance tax, if they have been resident for 15 out of the previous 20 tax years.
- From 6 April 2017, all UK residential property, whether held directly or via an offshore trust or company, including certain loans to fund the purchase of the property and assets used as security for such loans, will be subject to UK inheritance tax, either on the death of the beneficial owner or, if held via a trust, on the 10 year anniversary of the trust or on a distribution of capital.
- From 6 April 2017, a new tax regime for trusts applies to offshore trusts. The "protected settlements" regime is a significant change to the way trusts are taxed and affords some key planning opportunities as well as traps and pitfalls. Broadly:
- Beneficiaries will continue to be taxed on benefits they receive to the extent that the benefits can be matched against trust income or gains (with income taking priority). A non-domiciled beneficiary can still enjoy the remittance basis provided the benefits from the trust are received outside the UK and are matched with non-UK income or gains. In contrast, a deemed domiciled beneficiary (under the new 15 out of 20 year rule) will be taxed on the arising basis on all benefits received, to the extent that they can be matched with trust income or gains.
- A beneficiary generally will not be taxed on a benefit received from a trust if he is non-UK resident or a non-dom and claiming the remittance basis as long as they do not remit the benefit received. However, if he is a close family member of the settlor, the settlor will be taxed instead on matched trust income, either on the arising or remittance basis depending on the settlor's domicile status. A close family member will include spouse, cohabitee and minor children. The draft provisions applying the same treatment to trust gains are likely to be included in the draft legislation due to be published on 13 September to have effect from 6 April 2018.
- Trust distributions to non-residents will continue to reduce the pool of gains in a trust available for matching. This means it is still possible for the trustees to "wash out" gains by paying them to a non-resident beneficiary (who could include the settlor) with a view to then making a further tax-free distribution to a UK resident beneficiary on the basis that there are no more gains left to match. The draft provisions preventing this reduction of the trust gains pool are likely to be included in the draft legislation due to be published on 13 September to have effect from 6 April 2018.
As the Chancellor announced in his last Spring Budget, this year there will be an Autumn Budget (date yet to be confirmed). The draft legislation to form the Finance Bill for 2018 will be published on 13 September. It is anticipated that anti-avoidance provisions relating to gifts to UK individuals out of trust distributions paid initially to non-UK resident or non-UK domiciled beneficiaries will be announced to take effect from 6 April 2018. There will be an open consultation ending on 25 October and we will provide our views.
We will continue to monitor the government's announcements and consult with our clients and their advisors to ensure that they are in the best possible situation given the seismic changes to the tax regime. We will provide further information as it becomes available.
If you would like us to analyse your particular circumstances and advise on a tailored strategy, please contact Andrew Goldstone or your usual Mishcon de Reya LLP tax contact.