|No taxation of offshore trusts in perpetuity under UK's Finance Bill 2017|
The UK's draft Finance Bill 2017 published this week resolves most of the uncertainties regarding the coming reforms to the non-dom tax rules.
The UK's Treasury has dropped its original plan to make offshore trusts taxable on the arising basis as soon as any benefits were received by the settlor or a close family member.
In its place, the Finance Bill sets out a regime under which deemed-domicile beneficiaries of offshore trusts will be taxed on all benefits they receive to the extent that the benefits can be matched against trust income or gains. If a close family member of the settlor receives a benefit, the settlor will be taxed instead on matched trust income and gains.
Nicole Booth, Senior Tax Manager at verFides states: ‘It may be advantageous to set up an offshore trust before the rules come into effect, and this will be of particular relevance for individuals with assets or cash that are not required to fund day to day living expenses and can be set aside for future generations. If structured correctly, any income or gains arising on such assets can be generated tax free and the assets can pass down to beneficiaries free of UK inheritance tax.’
Deemed domicile rule
The new deemed-domicile rule – under which a non-dom will perforce become domiciled after long-term residence in the UK – is included in the Bill unchanged from its original form. There are no concessions on the rules for non-doms of UK origin: those born in the UK with a UK domicile of origin, but who later lost their UK domicile, will immediately be treated as UK domiciled for most tax purposes as soon as they return to the UK and become UK-resident. This, says law firm Mishcon de Reya 'will be a major deterrent to non-doms thinking of returning to the UK for a few years'.
However, non-doms will still be able to shelter their non-UK assets from inheritance tax provided they transfer the assets into trust before they become deemed domiciled. They will not pay capital gains tax on historic gains that accrued on non-UK assets acquired before they became deemed-domiciled; the value of those assets will rebased for CGT purposes to their April 2017 value.
Cleansing mixed funds
'Cleansing' of mixed funds into clean capital, income and gains, which was originally being offered for just one year from 6 April 2017, has now been extended to two years. However, it will still only apply to bank accounts and not other assets or investments, says Mishcon de Reya.
Tax on Enveloped dwellings
However, there will be no 'de-enveloping' relief for the thousands of non-doms who currently hold residential property through an offshore company. Holding the property through an 'envelope' in this way is likely to attract extra tax charges (for example the Annual Tax on Enveloped Dwellings – ATED) so many of these will wish to transfer it into their own names when it becomes liable to UK inheritance tax. Robin Vos TEP of Macfarlanes law firm advises that those affected to take advice as to what tax liabilities might arise and then weigh up the benefits of terminating the structure (no longer having to pay the ATED charge) against the upfront tax cost.
Business Investment Relief
The rules on Business Investment Relief for non-doms are being eased. These allow non-doms to remit non-UK income and gains to the UK without incurring a tax charge when they invest in a UK business, but were complicated by certain restrictions, especially the 'extraction of benefit rule' which treated the investment as a taxable remittance if the non-dom received any benefit from the target company. The Finance Bill amends the legislation so that this rule will be breached only if the benefit received was attributable to the investment. Furthermore, the time limit for investing in a company before it starts to trade will increase from the current two years to five years.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Thursday, 8 December, 2016