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Countdown to 2017 – Brexit and the non-dom tax changes

Posted on 27 July 2016

Countdown to 2017 – Brexit and the non-dom tax changes

The EU Referendum has been and gone, we have a new Prime Minister and Chancellor, and Parliament has gone into summer recess, returning in September. All change, but what of the non-dom and UK residential property tax changes due to take effect in April 2017? Where are the further details promised by the Government? Might the changes be delayed, or even abolished?

The rumour mill keeps spinning

Rumours abound but it seems nobody knows. Some people argue that the Government and Civil Service are so busy dealing with Brexit that they simply no longer have the resources to deal with the proposed tax changes, and that a delay is inevitable. This belies the fact that much of the hard work was already done by HMRC and the Treasury before the Referendum. It seems unlikely that a shortage of resources alone would be a reason for delay.

Might the Referendum result lead to a change in thinking? With the anticipated economic slowdown, will the Government now reconsider its decision to create a less generous tax regime for long term UK resident non-doms? Many of those who will be affected are big investors and big spenders in the UK. Whilst it's never been easy to measure their positive economic impact, by most accounts it's significant. It's been argued that this is exactly the wrong time to bring in a new tax regime that risks driving them away. At the very least, it's argued that the tax changes should be postponed, or even abandoned altogether, until we know the full economic effects of Brexit. Whether the Government is swayed by those arguments is another thing.

So if a postponement or abandonment of the new regime seems unlikely, whether on political or economic grounds, and we still have no further details of the changes, what are increasingly nervous non-doms to do before April 2017? Much depends on their particular concerns and circumstances.

Long term resident non-doms

For those long-term UK resident non-doms who are most concerned about becoming deemed domiciled after April 2017, there may be merit in creating an offshore trust to hold their offshore assets. Pre-April 2017 trusts should continue to enjoy favourable inheritance tax treatment although the income tax and capital gains tax treatment of such trusts may change. That is one of the major issues on which further details are eagerly awaited.

For those who already have a trust which owns assets that have generated significant historic income and gains, it may be tax-efficient to receive trust distributions before April 2017. Similarly, where there are large unrealised gains in the trust, it may be worth realising those gains before April 2017 if that is practical.

Offshore structures for UK residential property

For those more concerned about the post-April 2017 exposure to inheritance tax of UK residential property held in an offshore company, it may now be time to start the process of dismantling the structure as it is unlikely to serve any useful purpose after 2017.

UK residents or those with a mortgaged property

Dismantling the structure can itself trigger a significant capital gains tax liability on historic gains where the shareholder or beneficiary is UK resident. Similarly, SDLT can be payable where there is an existing loan secured on the property. Although the Government originally suggested tax reliefs would be available on dismantling these structures, no details have been published. It may even be that the Government's earlier generosity comes to nothing. In such cases, a wait and see attitude makes more sense.

Non-UK residents without a mortgaged property

For those who are non-UK resident, and where there is no mortgage, there are no obvious advantages to delaying further. At least the initial steps towards a dismantling should be taken now, even if no final decision is made until the autumn or winter. Waiting any longer may result in not being able to find a suitable liquidator, or paying considerably higher professional fees, as we expect a rush next spring.

what action should you take next?

Although there is still no further clarity at this stage, non-doms should not assume the non-dom tax changes will be delayed or shelved. It makes sense to assume the changes will happen, use the available time now to take professional tax advice, and devise a plan of action. Where appropriate, non-doms should liaise with relevant offshore directors and trustees, who can provisionally instruct liquidators. The final button can be pressed when more details of the changes are available, hopefully no later than the autumn.

We will publish further editions of Countdown to 2017 over the coming months. In the meantime, if you would like us to analyse your particular circumstances and advise on a tailored mitigation strategy, please contact Andrew Goldstone or your usual Mishcon de Reya tax contact.

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