What will happen to clean capital, tainted trusts and enveloped assets under the new tax regime? John Goodchild reports.
The UK government has at last disclosed further details of the tax changes for UK resident non-domiciled individuals first announced in July 2015. The government remains determined to implement all the changes with effect from 6 April 2017 and the delay in providing further information means that taxpayers affected by the changes have little time to obtain advice and adapt to the proposed changes.
So what are the latest developments in the ‘res non-dom’ tax proposals?
It is well known that individuals will be treated as ‘deemed domiciled’ in the UK for income tax, capital gains tax and inheritance tax purposes once they have been tax resident for fifteen of the twenty previous tax years but various points of detail have now been resolved. Residence status in any given year is to be determined according to the law in force in that year.
So, for years prior to April 2013 the old, fairly opaque, law on residence will apply. Years when an individual has been able to claim ‘split-year’ status will count towards the fifteen years. In practical terms, it will therefore be possible to become ‘deemed domiciled’ in approximately thirteen years. Years spent in the UK while under the age of eighteen will also count.
Individuals (but not trustees) may elect on an asset-by-asset basis to rebase the acquisition value of foreign assets for CGT purposes to their market value on 5 April 2017. The relief will only be available for those who become deemed domiciled on 6 April 2017 and who have paid the ‘remittance basis charge’ before that date. It will only apply to assets that were located outside the UK on 8 July 2015.
Complicated rules apply where an individual has contributed foreign income and/or gains together with non-taxable cash in an account or to purchase an asset. By concession during the year from 6 April 2017 an individual will be able to segregate clean capital and foreign income and gains into separate accounts. This ‘cleansing’ relief will only apply to monies in accounts for which there are records. Other assets would need to be sold and the constituent elements separated during the time window.
The proposal to tax ‘benefits’ received regardless of their source has been dropped. Instead a form of ‘remittance basis’ will continue to apply for the purposes of capital gains and income within trust structures for settlors who become deemed domiciled under the fifteen year rule.
Protection will apply until the trust has been ‘tainted’, either by an addition to the trust (CGT and income tax) or the provision of any benefit to the settlor, their spouse or minor The proposals have been relaxed so that after 6 April 2017 deemed domiciled individuals will lose that status after four consecutive tax years of non-residence.
These individuals will receive harsh treatment compared to those who become deemed domiciled under the fifteen year rule. They will not qualify for the rebasing or cleansing reliefs or the special treatment for foreign trust income and gains outlined above. While they are UK resident any trust created by them when actually domiciled outside the UK will be subject to income tax, CGT and inheritance tax as if they had been UK domiciled at that time. They will be given a grace period for IHT purposes only, by being characterised as deemed-domiciled only if they have been resident for at least one of the two tax years prior to the year in question.
As is well known, offshore companies will cease to shield this property from inheritance tax after 6 April 2015. The new legislation will also focus on the deductibility of debts against the property and the government intends that loans made between connected parties should not be deductible.
There had been some hope that the government would introduce transitional relief, possibly in relation to CGT and Stamp Duty Land Tax, to assist families who wished to ‘de-envelope’ but the announcement makes it clear that there will not be any such relief.
There will be some disappointment with the announcements but there are some planning opportunities particularly for those individuals who are close to fifteen years of UK residence. Taxpayers who might be affected by the proposed changes now need to review their arrangements and take any necessary action before April 2017.
John Goodchild is a partner and head of private wealth at Pemberton Greenish.