Chris Moorcroft 26 September 2016 Changes to the treatment of non-domiciled individuals and residential property Chris Moorcroft 26 September 2016

Today’s agenda Introduction Deemed domicile Non-resident trusts Residential property

Introduction

Context 19 August 2016: Government released a further consultation paper on the taxation of non-UK doms. “Sets out most of the intended protections for non-resident trusts which were originally announced at Summer Budget 2015”.

Deemed domicile

The 15 out of 20 years rule RNDs who have been resident in the UK for at least 15 of the last 20 tax years treated as deemed UK domiciled for all tax purposes. Income Tax Capital Gains Tax Inheritance Tax Change will typically occur at the beginning of the 16th tax year of residence, or on 6 April 2017 if more than 15 tax years already been clocked up. Years spent during childhood and split years will count towards the threshold.

Mixed funds A one year window between April 2017 and April 2018 to be introduced for all RNDs to separate their mixed funds including to sell assets which were acquired with an element of clean capital and separate out that clean capital from any income/gain. No ‘amnesty’ for pre-17 income/gains to be remitted to the UK at a lower rate of tax. RNDs will have to operate parallel systems of keeping pre-17 income/gains outside the UK whilst paying tax on the post-17 arising income/gains.

Rebasing The government has confirmed that non-UK assets of long-term RND who will be deemed domiciled from 6 April 2017 will be ‘rebased’ at their value as of 5 April 2017. Therefore on the future sale of such assets, only post 5 April 2017 gains will be subject to CGT. This will only apply to those who become deemed domiciled on 6 April 2017 not those who become deemed domiciled in later years. Will not apply to trust assets.

Business investment relief The Government also plans to significantly extend Business Investment Relief (BIR), although exactly how remains unclear. One possibility is that they will extend it to cover investment in UK partnerships. The Government intends to use BIR to demonstrate that the UK remains open for business post- Brexit, and will be using the consultation to seek views on how it can be used more widely.

Persons with UK domicile of origin RNDs who were born in the UK with a UK domicile of origin will be subject to a much stricter regime and the Government has not changed its plans on this. Rebasing won’t apply. Treatment of mixed funds won’t apply. RND settlor subject to Income Tax, CGT and IHT on all assets in trust settled by them. Means that trust assets may be subject to tax year changes and exit charges when settlor is UK resident.

Non-resident trusts

The previous proposals No changes to IHT regime for trusts established by RNDs before deemed domicile unless they own UK residential property through non-UK holding companies. No UK IT or CGT transparency on trust income/gains for RND settlors provided no assets added after deemed domicile. RND settlors (or connected persons) would be taxed on benefits received from trust worldwide on a flat rate basis without reference to trust income/gains.

General IT / CGT treatment of trust income / gains No UK IT or CGT transparency on trust foreign income/gains for RND settlors provided no assets added after deemed domicile. Any addition of assets by deemed domiciled individual will “taint” the trust so that trust income/gains become “tax transparent” in any tax years in which the RND settlor is UK resident. Only applies to additions made on or after 6 April 2017. Does not apply to persons with UK domicile of origin

Treatment of trust gains Trust will be brought within s.86 TCGA if it is “tainted” by an addition of assets by a deemed domiciled settlor or if “any actual benefits” are received from the trust by the settlor, spouse or minor child. This results in foreign gains becoming tax transparent to the settlor. Position on UK gains not clear from the material released so far. Definition of ‘actual benefits’ not clear

Treatment of trust income IT on UK source trust income will be charged to RND settlor (deemed domicile or not) if he can benefit from trust. IT on foreign source trust income will not be charged to deemed domicile RND unless: the trust has been “tainted”, in which case all foreign source trust income will be taxed on the settlor; or RND (or spouse / child / other relevant person) receives a benefit, in which case IT charged on value of the benefit to the extent that it can be “matched” to foreign income of the trust.

IHT treatment Excluded property status to remain for deemed domiciled individuals who have settled property prior to becoming deemed domiciled. Notable exceptions for: UK residential property Trusts where property added after person becomes deemed domiciled Persons with UK domicile of origin

Conclusions Trusts settled by RNDs of 15 years plus (or almost 15 years) Likely to require restructuring Possible segregation into trusts from which settlor benefits and those from which settlor does not Perils of accidentally benefitting settlor/spouse/minor children Importance of settlor not adding funds to trust post-deemed domicile Continuing need to segregate pre-17 income/gains from pre-17 clean capital, and operate new regime on top

Conclusions Trusts settled by persons with UK domicile of origin and born in UK Make sure you know your settlors’ domiciles of origin and places of birth Consider unwinding trusts where settlor is UK resident Where settlor is not UK resident, vitally important to monitor their residence! Taxation of trust will completely change when they become UK resident, including ten year charges and exit charges

Residential property

Recap Non-domiciled individuals historically subject to UK IHT only on UK situs assets IHT avoided by holding properties through non-UK companies Number of measures brought in recently to counteract tax advantages ATED Increased SDLT Non-residents CGT

IHT and residential property RNDs who have been able to shield their UK properties from IHT by holding them through non-UK companies and trusts will no longer be able to do so. The government plans to make these structures transparent for IHT purposes. There are no plans to have a ‘de-enveloping relief’ for the unwinding of these structures, to avoid creating a tax liability under the CGT or SDLT regimes.

Issues to watch out for Gift with reservation of benefit leading to IHT on death of settlor Exclude settlor as beneficiary? Ten year charges and exit charges ATED position if companies maintained Income tax on rental income PPR in future when property sold

Issues to watch out for Issues with unwinding Loss of succession planning, confidentiality ATED-related CGT and non-residents CGT (plus filing obligations) SDLT on value of debt CGT on historic or future capital benefits to UK resident beneficiaries

Conclusions Residential property structures UK residential property holding structures need to be reviewed Consider unwinding and holding properties at trust level or in personal names But many issues to consider both in unwinding structures and going forward Timing De-enveloping relief – door left open? Licences to assign, debt to restructure

Thank you Chris Moorcroft Partner E: chris.moorcroft@harbottle.com T: +44 (0)207 667 5000