The new rules with effect from 6th April 2017
Non-UK doms are to become deemed domiciled for all tax purposes once they have been UK tax resident for at least 15 out of the past 20 tax years (“15 year rule”). The Treasury wants “split years” to count towards the 15 years. When a non-UK dom becomes deemed domiciled under the 15 year rule:
- the remittance basis of taxation will no longer be available, so the non-UK dom will be taxed on worldwide income and gains;
- the annual remittance basis charge will no longer be payable;
- the non-UK dom will be liable to Inheritance Tax on his directly held worldwide assets;
- pre-existing excluded property offshore trusts will not be liable to UK taxes (Income Tax and Capital Gains Tax) on non-UK income and gains;
- pre-existing excluded property offshore trusts can continue to enjoy exemption from Inheritance Tax (except in relation to UK residential property – see below);
- all future withdrawals from offshore trusts will be taxable under “new rules”, even if the withdrawals are not remitted. The Consultation Paper states as follows:-
“The government intends to base the new rules on the taxable value of benefits received by the deemed domiciled individual without reference to the income and gains arising in the offshore structure. This will be a very significant change to the way that the income and gains arising in offshore trusts and their underlying entities are taxed and it means that there will be no need for trustees to have to recreate the history of the income and gains in the trust for tax purposes once an individual becomes deemed-UK domiciled.”
- Inheritance Tax will be imposed on the value of UK residential property however the residential property is owned, and offshore structures will not provide any exemption from Inheritance Tax;
- the Annual Tax on Enveloped Dwellings will continue to be payable in respect of residential properties held within offshore trust structures;
- “re-setting the deemed domicile clock” would necessitate not less than 6 full years non-UK tax residence.
The impact of the new rules for the deemed UK dom (assuming that the new rules are enacted as currently proposed)
With effect from 6 April 2017:
- Will be deemed domiciled under the new rules for all UK tax purposes.
- Will be taxable on his worldwide income and gains (but not the foreign income and foreign gains within his excluded property offshore trusts) on an arising basis.
- Will become eligible for the annual Income Tax allowance and the annual Capital Gains Tax exemption.
- Income (other than the income generated by his trusts) in excess of his annual personal allowance (£10,600 for 2015/2016) will be taxed at progressive rates (which for 2015/2016 are 20% on income up to £31,785; 40% on income over £31,785; and 45% on income over £150,000).
- Taxed offshore income could be remitted to the UK to be spent here without further liability to UK tax.
- Own capital gains (other than the foreign gains generated by his trusts) in excess of his annual Capital Gains Tax exemption (£11,100 for 2015/2016) will be taxed at progressive rates which for 2015/2016 are 18% to the extent that his combined taxable income and gains do not exceed £31,785, and thereafter 28%.
- Will no longer pay the annual remittance basis charge (currently £90,000 pa).
- Worldwide estate (but not the assets within his excluded property trusts) will be exposed to Inheritance Tax at 40% subject to the impact of Double Taxation Treaties.
- Any UK residential property held within a trust will be exposed to Inheritance Tax and he could become taxable on the benefit of rent-free occupation of the property.
Possible pre 6 April 2017 action points to consider
Should consider whether to make any withdrawals from his trusts before 6 April 2017 in order to fund future non-UK and UK expenditure, on the basis that any withdrawals made before that date and retained offshore will not be taxable (assuming he is paying the remittance basis charge) whereas any withdrawals made or after 6 April 2016 would be taxable on an arising basis. This decision will be affected by the rate at which distributions from trusts will be taxed after 5 April 2017.
Might consider whether to become non-UK tax resident before 5 April 2017 in order to avoid UK taxation on his personal worldwide income and gains. The important point to note here is that under the present proposals the foreign income and gains within the trusts would not be taxable in his hands so long as the income and gains are retained within the trust.
It may be sensible to de-envelope residential properties held within trusts but this will depend upon a number of factors.
We think it is unlikely that the proposals (particularly those concerning UK residential properties) will be implemented as presently suggested. It will be important to continue to monitor the changes closely and to be ready to take decisions as and when the precise nature and extent of the new rules becomes clear.