The changes are driven by the proposed new rules which deem individuals to have a UK domicile when they have been resident in the UK for 15 out of the last 20 tax years. Post 6 April 2017, such individuals will be known as “deemed doms” and will be subject to tax on their worldwide income and gains. However, there will be favourable rules for assets owned in trust as discussed below. If you were born in the UK and return, having in the meantime acquired a domicile of choice outside the UK (termed by HMRC as a “returning dom”) your tax status and that of your trusts may be changed too and you should seek advice before your return to the UK.
Individuals who become deemed domiciled on 6 April 2017 and have claimed the remittance basis, will have their overseas assets rebased for CGT purposes (without a tax charge) to their market value on that date. The rebasing will not apply to assets held in trust or to offshore income gains.
Individuals will also have the opportunity, in a window from 6 April 2017 to 5 April 2019, to cleanse their overseas bank accounts so that they are segregated into their component parts, such as ‘’clean capital’ and income. This will assist taxpayers to ensure they remit monies into the UK in the most tax efficient way and will also apply to distributions from trusts.
Both these changes will considerably enhance the position of non-doms.
The changes to the offshore trust regime are also very positive and in many cases a trust will offer considerable tax advantages.
If an individual has created an offshore trust before he or she becomes deemed domiciled in the UK, the trust will be afforded ‘protected status’. This means that there will be no tax charge (other than on UK source income) unless or until a beneficiary receives a distribution from the trust. In contrast, if the deemed dom individual owned the assets personally, he/she would be taxed on the income and gains generated by the assets on an arising basis. Moreover, HMRC have now confirmed that a trust’s tax deferral advantages will remain even if the beneficiary receives a benefit from the trust –although the deemed dom would pay tax on the value of that benefit whether it was received in the UK or overseas. The protected trust, if created before the settlor was deemed domiciled, will also bring ongoing inheritance tax advantages. The advantages of ‘protected’ trusts will be lost if property is added to a trust by the settlor or another trust if the settlor has become deemed domiciled in the UK. Individuals who are not deemed dom can continue to receive benefits from trusts with the benefit of the remittance basis.
Those who are set to become deemed domiciled on 6 April this year should consider the possibility of creating a trust and those with existing trusts may wish to consider settling further property, although in each case the inheritance tax position and the impact of the new rebasing rules should be considered.
One of the biggest changes is the replacement of the annual return with the confirmation statement. The purpose of the confirmation statement remains the same in that it is designed to provide a snapshot of the position of the Company on a given date, however the process varies from the traditional annual return.
The newly published Finance Bill contains a number of anti –avoidance provisions which should be carefully considered by those with existing
offshore trusts. In some cases, the changes may have an impact on actions already taken or contemplated so a review is important. Where Intertrust administer a trust, we can assist in this review. The changes will from April 2017 prevent the ‘washing out’ of gains which have accumulated within a trust by a payment to a beneficiary who is not UK resident. Similarly, if there is a distribution to a non-resident, who then makes an onward transfer to an UK resident beneficiary, it is proposed that the tax treatment will be as if the payment had been to the final recipient unless there is a three year delay before the onward transfer. There will thus be an increased onus on trustees to take tax into account when making trust distributions. Again, Intertrust will be pleased to discuss the position in relation to distributions with settlors, beneficiaries and their advisers.
There will also be changes to the way in which benefits received from a trust will be valued. In particular, where a loan is made there will be an annual taxable benefit (without the benefit of the remittance basis) unless a market rate of interest is actually paid.
Those with an existing trust will want to review the position of the trust, with their advisers, as soon as possible to see if any adjustment is required before April. Not all the draft legislation is yet available (we still await in particular that relating to offshore trusts and income tax) but unless plans are made (as opposed to executed) now, then time may prove tight. Issues to consider will include the possibility of distributions before an individual becomes deemed domiciled, possibly adding more assets to the trust before April to rebase or avoid the new ‘tainting rules’, reviewing earlier distributions to ensure they remain tax efficient and analysing the wider position of the trust to ensure its favoured status will remain intact.
We can work with you and your advisers to review options and ensure tax efficiency. For more information please contact.
tel +44 (0)1 481 211 321
Philip Le Cornu
tel +44 (0)1 534 504 225
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