HMRC Consultation: Reforms to the Taxation of Non-domiciles – Offshore Trusts

10 October 2016

10 October 2016 by Glen Thomas Tax

Sweeping changes were announced to the tax regime for those who are foreign domiciled.  We have been aware for sometime that the new rules will apply from 6th April 2017, but advisors have been short on significant detail since the announcement.  What we have known from the announcements in the 2015 budget is that:

  • There will be a deemed domicile status for all taxes (not just inheritance tax) for non-doms who have been resident here for 15 out of the previous 20 tax years.
  • UK born non domiciled individuals will be deemed domiciled for all taxes whilst they are UK resident therefore the remittance basis of taxation will no longer be available to them.
  • UK residential property will be subject to UK inheritance tax even if it is held through an offshore wrapper.
  • There will be changes to the taxation of UK resident settlors or beneficiaries of offshore trusts.  However, certain protections will apply to trusts established before settlors became deemed domiciled.

A little further help has been provided with an update to the consultation issued on 19 August 2016, which has given us more insight as to the government’s thinking on what is a complex area of taxation.  This article is not designed to be exhaustive, but concentrates on the offshore trust aspects of the proposals.

Excluded Property Trusts – Inheritance Tax

It has been confirmed that non-doms who have set up an offshore trust before they become deemed-domiciled will not be taxed on trust income and gains that are retained in the trust or its underlying entities, and such excluded property trusts will have the same inheritance tax (IHT) treatment as at present. The excluded property trust protection, however, will be denied to settlors who were born in the UK with a UK domicile of origin, who create a trust whilst non domiciled and who subsequently become UK resident and therefore deemed domiciled. 

The above is subject to the new rules, which bring UK residential property into the charge to IHT even if it is held through foreign wrappers.

Capital Gains Tax

Currently a UK-dom settlor of foreign trust who is resident in the UK is taxed on chargeable gains arising in the trust (or chargeable gains attributable to the trustees where they have an interest in a foreign close company). This is the case regardless of whether they receive any benefit from the trust.

These rules are to be extended to all those that become deemed domiciled in the UK.  It should be noted that a settlor will be protected from this charge in respect of a trust that was established before he became deemed domiciled and no additions of property have been made since that date.  However, if the settlor, their spouse, or their minor children and/or stepchildren receive any actual benefits from the trust then the protection will be lost.

Also, any UK resident individual is taxed on capital payments they receive from a non-resident trust to the extent that there are chargeable gains arising in that trust.  If an individual is non-dom then tax on foreign gains in the trust can be delayed indefinitely by using the remittance basis of taxation.   Following the introduction of the new deemed-domicile rule, UK resident individuals who receive capital payments or benefits from a non-resident trust or underlying entity, and who are deemed-domiciled, will be subject to CGT regardless of the source of the gains and where the benefits are received.

A trust was able to calculate capital gains by reference to a rebased 2008 value when matching those gains to a distribution or benefit received by a non-dom beneficiary.  This relief will continue to apply to where the beneficiary is deemed-domiciled, but not where he is an individual born in the UK with a UK domicile of origin. 

Income Tax 

Where a settlor interested trust exists, the income of the trust is currently treated as arising on the settlor.  Settlors who are deemed domiciled will no longer be able to claim the remittance basis, so the current settlements legislation would apply to tax all foreign-source income.

Under the protection the settlor will not be taxed on the foreign income in a non-resident trust that they established before becoming deemed domiciled, if the income is retained within the trust. UK source income arising to a non-resident trust will continue to be taxed on a deemed domiciled settlor as it is currently. 

The deemed domiciled settlor will instead be taxed on benefits received by them regardless of whether the benefits are received in the UK or overseas.

Transfer of Assets Abroad 

The transfer of assets abroad legislation is designed to prevent UK-resident individuals from avoiding tax by transferring the ownership of income generating assets to persons abroad, while still being able to enjoy the benefit of the income that those assets generate. 

This legislation is wide reaching and it is generally thought of in the context of trusts, however it can apply to the transfer to any other offshore entity or person.  Currently, where HMRC consider that the transfer is undertaken for tax avoidance motives and the transferor has control of the income, any income arising in an offshore trust structure is treated as being transferor’s.  

These rules will be partially disapplied in respect of a deemed domiciled settlor who set up a non-resident trust before he become deemed domiciled.  Therefore he will not be taxed on foreign income of the trust as it arises.  This protection will also apply for income arising in a trust owned company if it pays that income out as a dividend to the trust.  

The intention of the new rules is that the foreign sourced income will not assessable on an arising basis, but instead the transferor is liable to income tax on any worldwide benefits received to the extent that they can be matched with the income of the trust. 

Where property has been added to a protected settlement after the date on which the settlor became deemed domiciled, the settlement will become tainted and lose its protection.

Conclusion

The transitional rules described above will be complex.  However those who are due to become deemed domiciled who have either settled or are a beneficiary of a foreign trust will be relieved to hear that the protections promised in the 2015 budget will be legislated.  

Contact us

If you are in any doubt as your tax position you should contact your local office, send an enquiry or speak to your usual MHA MacIntyre Hudson advisor as we are interested in discussing this with you.

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