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This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

Countdown to 2017 – Further Details Announced
 Briefing 
Author
Andrew Goldstone & Kassim Meghjee
Date
19 August 2016

Countdown to 2017 – Further Details Announced

Click here to read in Arabic, Cantonese, Mandarin and Russian

The government finally published the long-awaited second consultation today, and many of the expected changes have been fleshed out in this announcement. As we anticipated in our last edition of Countdown to 2017, the proposals have not been shelved or deferred as some commentators had hoped in the light of Brexit. The consultation will run for nine weeks, and comments are invited before 20 October 2016. The key headlines in this announcement are:

Inheritance Tax on UK residential property

As expected, from 6 April 2017 offshore companies holding UK residential property will no longer be 'excluded property' where the shares are owned by a non-UK domiciled individual or an offshore trust.  There will be no tax incentive offered to de-envelope existing residential property where the de-enveloping may itself trigger immediate tax charges.

Details have been provided in relation to the definition of 'residential property', and how the tax liability will apply to 'mixed use buildings'.

Debts taken out to purchase the property can be deducted from the value of the property when calculating the inheritance tax liability, provided they are not loans between connected parties.

Where UK property is owned through an offshore company, HMRC may not be aware when a liability to inheritance tax has arisen.  To assist with enforcement, it is proposed that the property cannot be sold until any outstanding inheritance tax is paid.  The obligation to report and pay the inheritance tax will be imposed on any person who has legal ownership of the property, including any directors of the company which holds the property.

Deemed UK domicile for long-term residents

The '15 out of 20 years rule' will apply from April 2017. For these purposes, individuals are to determine their residence status based on the residence rules in place in the relevant year, rather than necessarily applying the statutory residence test i.e. the old rules may still apply for earlier years. 

An individual will no longer be deemed domiciled in the UK for Income Tax and Capital Gains Tax if he or she leaves the UK for six full tax years.  Split year treatment will not apply here.

For individuals who have paid the remittance basis charge in any year before April 2017, there will be an opportunity to rebase foreign assets to April 2017 for Capital Gains Tax if they become deemed domiciled in April 2017 (but not after). There will also be a one year period to allow individuals who had been on the remittance basis to 'cleanse' their mixed funds i.e. to segregate foreign income and capital gains from clean capital.  This will not be available to individuals born in the UK with a UK domicile of origin.

The government has done a U-turn on the 'benefits charge' it proposed initially for offshore trusts. Instead it plans to adapt existing anti-avoidance legislation that applies to income and capital gains arising from non-resident trusts. This will result in the remittance basis being lost for some settlors or beneficiaries of non-resident trusts.

The government has conceded that it would be fair under the new rules for individuals to cease to remain deemed domiciled for Inheritance Tax purposes if they leave the UK for more than four years. This time period will also apply in relation to domicile elections by spouses. 

Individuals born in the UK with a UK domicile of origin 

For returning non-doms born in the UK with a UK domicile of origin, there will be a one year grace period before their worldwide assets are subject to UK Inheritance Tax.  A returner will, however, be subject to UK Income and Capital Gains Tax on an arising basis as soon as he is UK resident.  

The government acknowledges the practical difficulties for non-resident trusts caused by these reforms but unhelpfully has not provided any solutions.

Business Investment relief

The government is asking for ideas to amend and expand the relief, whilst ensuring that the scheme is not abused.  

WHAT NEXT?

We will issue further editions of Countdown to 2017 after further analysis of the consultation document (click to see the First, Second and Third editions). . What is clear is that the changes are happening and urgent action will be needed over the next few weeks and months if clients' structures are to remain as tax-efficient as possible after April 2017.

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.