Contact: Boodle Hatfield (London, England)
As reported in our last edition, some fundamental changes to the taxation of 'non-doms' (UK residents who are domiciled abroad) are due to take effect from April 2017. A Consultation was issued at the end of September on the details of two of the three proposals. We await HMRC's response and detailed draft legislation. Meanwhile, however, some limited draft legislation has been published on the IHT changes.
From 6 April 2017, an individual born in the UK with a UK domicile of origin who has acquired a domicile of choice elsewhere will become deemed-domiciled for IHT purposes if at any time he is resident in the UK and has been so resident for at least 1 out of the 2 previous tax years. Therefore if a so-called "formerly domiciled resident" has previously settled foreign assets into trust, those assets will no longer constitute excluded property in relation to events on or after 6 April 2017. Trustees will need not only to ensure that their compliance procedures capture the Settlor's domicile history (rather than just his domicile at the date of commencement) but also to track his/her residence status in order to apply the correct tax treatment. In contrast, there will be no change to the IHT treatment of trusts settled by non-dom settlors with a non-UK domicile of origin who become deemed-domiciled in the UK after having been resident here for 15 out of the last 20 years (under another new rule being introduced from 6 April 2017).
Apart from IHT, many details remain outstanding. First, we await confirmation of (and draft legislation about) precisely how the new rules are going to work in relation to income and capital gains: the Consultation Document touched only briefly upon the tax treatment of income and gains realised by offshore trusts created by a settlor once he has become deemed domiciled. Secondly, the Consultation suggested a possible fundamental reform of the basis on which beneficiaries of offshore trusts are taxed, so that tax would bite on benefits received without reference to the income and gains in the trust. This approach proved universally unpopular amongst professionals, with many issues that would need to be resolved, so we hope to have an indication of the direction that the Government intends to take shortly (although legislation is not expected until the Finance Bill 2017).
Lastly, we await another Consultation on the proposal to bring UK residential property held indirectly (e.g. through an offshore company) within the UK IHT net. Again legislation is not expected until the 2017 Finance Bill but it is hoped that further details will start to emerge later this year. Until we know more, planning for April 2017 remains uncertain, although if you are likely to be affected by these changes you should seek advice now so that you can act quickly should the need arise.
On a separate note, another Consultation announced in the Autumn Statement relates to possible incentives to encourage more claims for business investment relief, which allows non-doms to invest foreign income and gains in certain UK businesses without triggering a taxable remittance. Again, we await further details.
