Tax Update for Non-UK Residents & Non-UK Domiciles – Oct 2016
This is our first specific update for Non-UK residents & Non-UK domiciles since our update following the summer budget in July 2015. A lot has happened since that update with the UK voting to leave the EU, a change in Prime Minister and Chancellor. This has meant that a lot of the detail on announcements made in earlier budgets,notable the 2015 budget, has been delayed with UK politics and Government Departments being fixed on the Brexit vote from end the of March, then the changes in Government roles. With everything that has happened there was doubt if a lot of measures would be introduced, then in mid-August the detail started to come forward, as matters have settled, or settled as best they can until the detail of the UKs exit from the UK is known. In August the Treasury and HMRC released a number of consultation documents, in particular regarding the changes to the non-UK domicile rules.
End of Permanent Non-Domicile Status
As announced in the 2015 summer budget, from April 2017 anyone who has been resident in the UK for 15 of the past 20 years and defines them self as non-UK domicile will be deemed to be UK-domiciled for all UK tax purposes, including inheritance tax, from the start of tax-year sixteen. The new ‘deemed domicile rule’ will result in many long-term non-doms being taxed on their worldwide income and gains going forward without the option of claiming the remittance basis.
Currently, non-UK doms may claim to be assessed on the remittance basis whereby they are only taxed on their offshore income to the extent that is remitted to the UK. Under the new proposed rules, a non-dom who first became UK resident before or during 2002/03 and who has continued to be UK resident to date or is regarded as a ‘returning UK-dom’ (see below), will wake up on 6 April 2017 with a deemed domicile status for income tax and capital gains tax purposes. Non-doms who have been UK resident since 2002/03 will also be deemed domiciled for IHT purposes, a year earlier than they may have anticipated. This will affect all non-doms resident in the UK on 6 April 2017 with no “grandfathering”.
The consultation document released in August has confirmed that there will be some relief for those non-doms who become deemed domiciled on 6 April 2017 as a result of the new 15 out of 20 year rule. These individuals will have the ability to rebase their foreign assets for capital gains tax purposes to their values on 5 April 2017. This treatment will not be available for any non-doms who become deemed domiciled in later years and is only applicable if the non-dom has paid the remittance basis charge previously.
Future remittances of sales proceeds from the disposal of assets benefiting from the capital gains tax rebasing will result in a taxable remittance to the extent that the asset’s acquisition was originally Harbour Key Limited Residence & Non UK Domiciles Update
funded by foreign income/gains subject to the remittance basis. In addition, the part of the gain accrued since 5 April 2017 would be liable to UK capital gains tax regardless of whether the proceeds of sale are remitted.
A grace period of one year will be offered to non-doms who have mixed accounts offshore. ‘Mixed accounts’ refer to bank accounts where the cash consists of a mixture of foreign income, foreign gains and capital. The consultation document has confirmed that the balances may be segregated into their underlying components to allow remittances to be made more tax efficiently. However, this will require a tracking of the accounts contents under the complex identification rules and where this is not possible (either because the information is not available or the labour intensive process is simply too expensive to carry out), any remittance to the UK by the deemed non-dom would suffer what is referred to as the mixed-fund rules.
Planning points for consideration:
1. Consideration to be given, where possible, that an individual in the current tax pays the remittance charge, to benefit from the rebasing provisions.
2. Whether to leave the UK to restart the clock, if they are not to be treated as a returning non-UK dom (see below).
3. Sorting the segregation of any mixed offshore funds.
4. HMRC has continued to promote the Business Investment Relief for non-doms wishing to bring foreign funds to the UK without triggering a taxable remittance and this relief should not be overlooked for clients wishing to invest in a UK business.
Returning Non-UK Doms
Highlighted to the Treasury, following the position of the HSBC Chief Executive, who was domiciled in Hong-Kong for tax planning purposes, but was born and resident in the UK, following the HSBC Swiss bank issues last year, the returning non-UK dom rule will take effect from 6 April 2017.
After 6 April 2017 individuals who were born in the UK with a UK domicile of origin, but have since moved offshore and taken a non-domicile status will be regarded as a “returning UK dom” if they resume UK residence after 5 April 2017. This means they will be treated as UK domicile as soon as they return to the UK, the fifteen year rule will not apply. A grace period will be allowed for IHT purposes whereby the non-dom will not be deemed dom unless they are resident in the both the tax year in question as well as at least one of the previous two tax years. This grace period will not be allowed for income tax or capital gains tax, so such individual’s resident from 2017/18 will not be able to claim the remittance basis for their foreign source income/gains for any year they are UK resident.
Returning UK doms will also not be entitled to the protections offered to long-term resident non-dom settlors of offshore trusts settled while they were non-dom. In particular, they will be taxed on the trust gains if they, their spouse, children or grandchildren can benefit. Trust income will be taxed on the UK resident returning UK dom if they or their spouse can benefit, or income is paid to their minor children in the tax year of residence. The IHT gift with reservation of benefit anti-avoidance legislation must also not be overlooked. Harbour Key Limited Residence & Non UK Domiciles Update
Foreign Property Wrappers
Another part of the 2015 Summer Budget was the announcement that with effect from 6 April 2017 foreign wrappers (for example offshore company or partnership) holding UK residential properties will come into the scope of UK inheritance tax. From 6 April 2017, non-UK domiciled shareholders will be treated as owing a beneficial interest in any underlying UK residential property held by a foreign close company or foreign partnership in proportion to their shareholding or interest in the offshore entity. Trustees will also be treated as owning the underlying UK residential property thereby causing the foreign company shares to come within the relevant property regime even though the settlor was non-domiciled i.e. subject to UK inheritance tax.
Although a loan taken out by the foreign company to buy the UK residential property will generally reduce its value for IHT purposes, the consultation document states that the deduction will not be allowed for loans held with connected persons. This could cause an effective double tax charge for inheritance tax purposes – once in respect of the non-UK dom shareholder whose UK inheritance tax estate will include the value of the property without relief for the connected person’s loan and again because the debt may well be a taxable asset of the connected person as part of their personal inheritance tax estate.
In particular, non-dom settlors of trusts holding enveloped properties will come within the gift with reservation of benefit anti-avoidance legislation if they have not been excluded from benefit from the trust. This will cause the value of the underlying residential property to fall within the settlor’s personal inheritance tax estate as well as forming relevant property for the trust.
Following the original announcement back in 2015, it was thought that due to the tax charges that arise on unwinding offshore structures, there would be a concession/relief to enable the unwinding to take place. The most recent consultation document indicates there will be no concession, therefore those impacted must act as soon as possible to decide whether they wish to unwind or change their offshore structures before the changes come into effect.
The consultation document refers to certain protections for non-resident trusts set up by non-UK dom settlors who subsequently become deemed domiciled (current 17 out of 20 year rule). Currently, the deemed domicile status does not extend beyond inheritance tax and, in particular, this restriction in its application means that trust gains are taxed until such time that a beneficiary (which may include the settlor) receives capital distributions or benefits regardless of their long-term residence status in the UK. UK domiciled settlors are, however, taxed which causes them to be taxed on trust gains as they arise if either they, their spouse, children or grandchildren can benefit. After 5 April 2017, the harsher treatment will not come into effect if the trust was set up by a non-UK dom who subsequently becomes deemed domiciled by virtue of the 15 out of 20 year rule, but this protection will only apply for as long as the deemed dom settlor, their spouse and minor children do not take benefits from the trust after 5 April 2017. These individuals can be the main beneficiaries of offshore trusts, so non-domiciled settlors need to be aware of the impact of the deemed domicile provisions after 5 April 2017 if benefits to be taken by their immediate family.
In light of the proposed changes coming into effect on 6 April 2017, there is a short window in which trustees of excluded property trusts owing foreign company wrappers of UK residential property and non-domiciled individuals have to consider the implications and whether they need to take action. The draft legislation and consultation document issues may not be finalised as currently proposed, but the issues are complex and time is short so non-UK doms and trustees need consider their options and be ready to implement changes by the end of the tax year. Harbour Key Limited Residence & Non UK Domiciles Update
It’s not down and out for Non UK Domiciles
As per our update last summer, the budget announcements and recent consultation documents do not abolish the remittance basis altogether.
Non-doms can continue to use the remittance basis for the first 15 tax years (and for the first 7 of those without paying any charge).
The deemed domicile test can be reset by 5 years of non-residence following the Statutory Residence Test.
The proposal that the remittance basis charge should be paid for 3 consecutive years has been dropped.
Although there will generally be no “grandfathering”, those who have left before 6 April 2017 will still be subject to the old rules.
While excluded property trusts will no longer work for UK residential property or for returning-doms, such trusts will continue to keep their excluded status for other UK assets (e.g. UK commercial property) and non-UK investment assets, even after the settlor has gone past the 15 year limit.
Beware Annual Tax on Enveloped Dwellings (“ATED”)
Although not just an issue for non-UK residents or non-UK domiciles who have UK property, the ATED legislation now applies where residential property worth over £500,000 is owned by a non-natural person (for example a limited company). Relief from ATED applies where the property is let out at a commercial rent to a party unconnected to the landlord. However, the legislation is complex thereby sometimes resulting in those subject to the regime inadvertently jeopardising their ATED relief or failing to file their ATED returns on time causing financial penalties.
In the case of occupation of the dwelling by a non-qualifying individual, this almost always triggers an ATED charge even if full market rent is paid. Broadly, a non-qualifying individual includes a settlor of a trust, controlling shareholders (including associates) and linear ancestors/descendants of either.
Accidentally triggering an ATED charge is easily done and with the mortgage interest relief restrictions being phased in from April 2017 (summer budget landlords update), landlords are now increasingly looking to incorporate their rental businesses. The ATED implications of incorporation must not be overlooked and new companies may well have to file ATED returns within 30 days of receiving the first of the residential properties, if the property is let to a non-qualifying individual.
Non-resident Capital Gains Tax (“NRCGT”)
We have highlighted in previous newsletters the NRCGT regime which was introduced on 6 April 2015 for non-UK residents disposing of UK residential property, which is now a chargeable event for UK capital gains tax purposes.
Disposals by non-UK residents must be reported to HMRC within 30 days to avoid a penalty. Penalties for late filing are in line with those for late filing of a self-assessment tax return and can reach up to £1,000 for an individual if the return is over six months late. Where the non-UK resident is already filing UK self-assessment tax returns, it is possible to settle any CGT due as part of their normal end Harbour Key Limited Residence & Non UK Domiciles Update of year tax payment. However, where this is not possible, the payment due date is harmonised with the NRCGT filing deadline i.e. the report and the tax has to be paid 30 days after the disposal.
The interaction of NRCGT with the principal private residence legislation is particularly complex and non-UK resident individuals selling former UK homes more than 18 months after 5 April 2015 or from the start of their non-residence period, whichever is later, need to consider whether a chargeable period is applicable.
The default position of rebasing a property’s value as at 5 April 2015 may not be the most favourable treatment and it is important to consider the options of electing for straight-line apportionment or using the actual capital gains tax base cost, all of which needs to be considered within the 30 day period.
Comment
The tax treatment of Non-Domiciled individuals is already extremely complex and the proposed changes add another layer of complexity. There is limited time before 6 April 2017 and the August released consultation documents have pretty much confirmed the direction of travel and what is to be implemented. Non-UK domiciles should take the time to consider their position and what their options are.
Harbour Key Limited
October 2016
