Major Changes to the Taxation of Non-Domiciled Individuals

From 6 April 2017 the changes applying to non-domiciled individuals will become law.  These are summarised as follows:

• From 6 April 2017 anyone who has been resident in the UK for more than 15 years out of the last 20 will become deemed domiciled in the UK for all tax purposes. This means that their entire worldwide assets will be subject UK Inheritance Tax and their non-UK source income and capital gains will become liable for tax on an arising basis.
• Individuals born in the UK and with a UK domicile of origin who have been living outside of the UK, perhaps for many years, will immediately acquire a UK domicile on becoming UK resident. There will be a limited grace period of one year before such individuals fall within the scope of Inheritance Tax on worldwide assets, but their worldwide income and gains will become immediately chargeable to UK tax.
• There will be a rebasing election available but only for individuals who become deemed domiciled on 6 April 2017. This will apply to foreign assets which were held between 16 March 2016 and 5 April 2017.  Rebasing is only available to those individuals who have paid the remittance basis charge at least once from 6 April 2008.
• The UK government has confirmed that they will provide a two year period in which all non-domiciled individuals will be able to “cleanse” their offshore bank accounts so as to segregate capital from income and capital gains to allow more tax efficient remittances to the UK.
• Remember that income and gains previously covered by a remittance basis claim will still be taxable in the UK if brought to the UK after someone has become UK domiciled.
• The UK has substantial anti-avoidance provisions designed to counter the use of offshore structures to avoid charges to Income Tax and Capital Gains Tax. The government has announced that these anti-avoidance rules will not apply to Trusts set up by non-domiciled individuals when they are not domiciled in the United Kingdom but this relaxation will apply only where no benefits are received by the individual or members of his family, and where no assets are contributed to the Trust after he or she becomes deemed domiciled under these new rule changes.

ACTION TO TAKE BEFORE 6 APRIL 2017

There will be some planning that can be done to alleviate the impact of these changes and the following ideas may be in point for some or all non-domiciled individuals:

1. REBASING

A detailed review will be needed to check whether it would be beneficial to elect to dis-apply rebasing on an asset by asset basis.   This may be worth considering where assets are standing at a loss.

A review should also be made of the pros and cons of disposing of non-qualifying assets before 5 April 2017.

Where rebased assets were originally acquired with unremitted overseas income or gains there would still be tax on a remittance of proceeds in excess of the rebased non-taxable gain.  However, it may be possible to separate the proceeds once received into an offshore bank account into their constituent parts using the cleansing facility discussed at 2, below, so allowing access to the rebased gain element.

2. TIDY UP OFFSHORE ACCOUNTS

As noted above, non-domiciled individuals will have a two-year window in which to cleanse ‘mixed funds’, to allow more tax-efficient remittances to be made in future.

It should be noted that this facility:

• Only applies to mixed funds consisting of amounts deposited in bank and similar accounts;
• Will not apply to individuals born in the UK with a UK domicile of origin;
• Can be claimed by any non-domiciled individual who was subject to the remittance basis after 5 April 2008 (even if they are not UK resident at April 2017). Once the funds have been separated, the owner will be able to bring ‘clean’ capital into the UK without suffering a tax charge.

3. UTILISE CAPITAL LOSSES

From 6 April 2017, capital losses will be available to offset against capital gains for deemed domiciled individuals, regardless of whether they previously made the offshore capital loss election.

4. TRUST REVIEWS

Trust settlors and their families will need to review their current arrangements with the trustees and their advisers as soon as possible.  Points for advisers and clients to consider include:

• Individuals not yet deemed domiciled may wish to settle trusts now to avoid paying the remittance basis charge going forwards.
• Review loan agreements – interest free loans to trusts may be considered as additions to the trust post 5 April 2017 due to the interest foregone.
• Consider distributing assets/cash pre 6 April 2017 for use offshore and claim the remittance basis. Under proposed rules for separating mixed funds it may be possible to create new clean capital.
• Consider making capital payments to non UK resident beneficiaries to wash out unmatched capital gains.
• Conversely, consider crystallising capital gains in order to match these gains against previous unmatched capital payments to non-resident beneficiaries.

5. REVIEW IHT ARRANGEMENTS – DEBT

Connected party loans used to acquire such property also need to be reviewed urgently since the rules as drafted will bring the lender within the scope of IHT for the first time.

Where an offshore structure owns a mixture of assets, any debt is to be allocated across the various assets in proportion to their market value, even if the debt is secured only on UK residential property.

These proposed changes suggest that assets not subject to UK IHT should be removed from structures containing UK residential property.

If you have any questions or need advice, please contact us.