1. Payne Hicks Beach 10 New Square Lincoln's Inn London WC2A 3QG t: +44 (0)20 7465 4300 f: +44 (0)20 7465 4400 www.phb.co.uk contact: Robert Brodrick d +44 (0)20 7465 4347 e rbrodrick@phb.co.uk The UK: where are we now? How will Trustees and UHNW clients be affected by Brexit and the changes to the taxation of non-doms and UK residential property? STEP Bahamas – 4 th October 2016 1

2. Introduction Significant tax changes introduced Reforms were confirmed in Treasury Announcement on 19 August 2016. From 6 April 2017 all UK residential property will be subject to Inheritance Tax whether owned directly or indirectly All changes to the taxation of non-UK domiciliaries will take effect from 6 April 2017 Non-domiciled individuals will be deemed UK domiciled for all tax purposes after being resident in the UK in 15 of the previous 20 tax years The remittance basis will cease to be available once an individual is deemed domiciled Special rules for UK born non-doms who establish a non-UK domicile of choice and then return to the UK. From 6 April 2017 such individuals who returned to the UK prior to 6 April 2017 will cease to be non-domiciled, and others who return after April 2017 will cease to be non-domiciled when they return. Trust structures established by them when they were non-domiciled will cease to benefit from preferential status. An absence of 6 years will be required to re-aquire non-domiciled status once a person has become deemed domiciled under the new rules. The 4 year rule will remain for IHT purposes.

3. Introduction Significant tax changes introduced Rebasing opportunity for those who become deemed domiciled on 6 April 2017 and who have previously claimed the remittance basis Mixed fund relief for any non-doms who have previously claimed the remittance basis Trusts will offer some protection, but protection will be lost as follows: Capital gains – gains will become assessable on the settlor on an arising basis under S86 if additions made or benefits received by the Settlor, spouse, civil partner or minor children. These proposals are likely to be modified Income Tax – protected unless additions made or benefit received by settlor or family (e.g. spouse, civil partner, minor child or minor grandchild) in which case settlor taxed on income of the trust up to the value of the benefit Benefit of multiple trusts to avoid risk of tainting

4. Introduction The Brexit Effect “Post EU referendum, the aspiration for a tax system that balances fairness and international competitiveness remains the same, and the government believes it is still appropriate to proceed with these reforms.” The combination of SDLT changes and the EU Referendum has had a marked effect on the London property market Valuation advice is going to be critical

5. UK Residential Property Scenario 1 Non-UK resident with offshore company/trust structure holding £10 million residential property for personal use De-envelope to avoid double IHT/ATED charge Divide ownership between parents/children and rely on co-ownership/section 102B FA 1986 exemption from reservation of benefit rules to reduce IHT exposure No de-enveloping relief but effect of EU Referendum and SDLT changes means that many high value properties have gone down in value significantly in the past 12 months Consider de-enveloping but leaving property in non-settlor interested trust. Beware GROB issues Beware S87 Gains and possible tax on benefit of rent-free occupation if any beneficiary becomes UK resident in the future

6. UK Residential Property Scenario 2 UK resident/non-dom occupying property held through company/trust structure subject to ATED. Will need to de-envelope to avoid ATED/IHT exposure Likely to be a one-off tax charge Need to consider the S87/back-matching of gains against historic benefit of rent-free occupation Is it possible to introduce further funds into the trust so as to wash out gains offshore in the same year as winding up the structure? Provided trustees have made a rebasing election, only post April 2008 gains will be chargeable.

7. UK Residential Property Scenario 3 Non-UK resident/Non-dom with offshore companies holding let property portfolio From 6 April 2017, the value of the properties will become subject to UK Inheritance Tax on the death of the owner of the shares as if the company were transparent. Consider transferring shares into a non-settlor interested discretionary trust (e.g. for benefit of children/grandchildren). Consider gift of shares or sale with promissory note. Where the properties generate an income, the IHT regime applicable to trusts may be more suitable, as the trust income can be retained (offshore) and used to fund ten year charges. Provided that the TYA charge remains 6% it would take 66 years before paying the equivalent of a full IHT death charge. De-enveloping may not be necessary but need to manage IHT exposure

8. UK Residential Property Scenario 4 Non-UK resident buying new property for personal use No single solution as will depend on age of individual, whether they own other UK property, whether they have children etc. Personal ownership v Trust ownership Shared ownership (e.g. between parents and children) and rely on S102B exemption from GROB Non-settlor interested trust ownership Maximise availability of principal private residence relief Wills and other non-tax issues Borrowing to reduce IHT exposure

9. UK Residential Property Scenario 5 Non-UK resident buying property for rental investment Company ownership likely to be best provided no family members occupy letting relief from ATED 20% income tax plus deductions lower rate of NR CGT Consider holding shares in a non-settlor interested trust Personal ownership Succession/non-tax issues Direct trust ownership UK resident Non-UK resident

10. UK Residential Property Debts SDLT issues and deductibility for IHT purposes Where there is third party debt in place there is likely to be SDLT to pay on de-enveloping unless debt can be repaid in full before de-enveloping begins Any debts which are not related to the property will not be taken into account when determining the value chargeable to IHT Where an entity holds debts which relate to the UK residential property alongside other assets, it will be necessary to take a pro-rata approach Loans made between connected parties will be disregarded when determining the value of the property which will be chargeable to IHT Existing rules on deductibility of debts will also apply: broadly speaking only loans taken out to finance the acquisition of a residential property will be deductible.

11. Changes to the taxation of non-domiciliaries Scenario 1 UK Resident Non-Dom Remittance Basis User with offshore trust Loss of remittance basis after 15 years Assets that remain within trust should retain their current status but tainting rules will apply so that if the Settlor or his family enjoys any benefit the protected status will cease is it possible to decant into multiple trust? All distributions will now be taxable once the remittance basis is lost. Consider distributions to fund non-UK expenditure and gifts to adult children Taxation of benefits received abroad: consider payment of rent to avoid benefit (and fund running costs)

12. Changes to the taxation of non-domiciliaries Scenario 2 UK Resident, non-dom US citizens Loss of remittance basis will highlight the mismatch between US/UK Taxation LLC taxation – Although HMRC lost the Anson case it is still not clear that LLCs can be treated as transparent – revenue thought to be addressing this: watch this space Consider converting LLCs into LPs to put matter beyond doubt Taxation of Grantor Trusts – UK tax issue in relation to payment of US tax out of trust. Risk of UK tax charge on amount of US tax and loss of protected status

13. Changes to the taxation of non-domiciliaries Scenario 3 Going non-resident may still become deemed domiciled even once non-UK resident but deemed domicile for IHT purposes will still cease after 4 years’ non-residence importance of setting up excluded property trust whilst still non-domiciled to protect non- UK situated assets Ideally need to satisfy the “automatic overseas” test in the Statutory Residence rules to guarantee non-UK resident status

14. Changes to the taxation of non-domiciliaries Scenario 4 UK resident non-dom remittance basis user: loss of remittance basis Will be subject to worldwide taxation from 6 April 2017 Essential to look at transferring offshore personally owned assets into non-UK resident trust prior to acquisition of deemed domicile Assets in existing offshore trusts should continue to be protected from tax on an arising basis, provided that they remain in trust and no benefits are received. Practical implications Difficulty of reporting income/gains from shared family assets Need to understand ownership structures Income may be taxable even if not “received” Consider rebasing and mixed fund relief

15. Changes to the taxation of non-domiciliaries Scenario 5 Returning non-dom who was born in the UK and has a UK domicile of origin A UK domiciliary who has acquired non-domicile status will lose their non-dom status on 6 April 2017 if they have already returned to the UK, or on their subsequent return Essential for returning non-doms to review their structures now and make any necessary changes Consider becoming non-UK resident before 6 April 2017 Impact on existing offshore structure

16. Changes to the taxation of non-domiciliaries Rebasing The Government accepts that it would be punitive to require long-term resident non-doms to pay CGT on gains that have accrued on foreign assets held while the individual was a non- dom For those individuals who become deemed domiciled in April 2017 there will be a one-off opportunity to rebase directly held foreign assets held outside the UK on 8 July 2015 to their market value on 5 April 2017. As a result any gain which accrued before April 2017 will not be charged to CGT in the UK Rebasing will apply on an asset by asset basis. Where an asset was purchased with unremitted foreign income/gains these will still be subject to tax on the remittance basis when the proceeds are brought to the UK. Where the asset was purchased with clean capital the entire proceeds of sale can be brought to the UK without triggering a remittance Rebasing will be limited to those who have paid the remittance basis charge in any year before April 2017 Rebasing will not apply to those who become deemed domiciled in years after April 2017 and it will not apply to those who become deemed domiciled because they were born in the UK with a UK domicile of origin

17. Changes to the taxation of non-domiciliaries Mixed Funds To avoid what the Government describes as a punitive outcome, there will be a temporary window in which non-doms can rearrange their mixed funds overseas to enable them to separate those funds into offshore income, gains and clean capital This window of opportunity will last for one tax year from April 2017 and will provide certainty on how amounts remitted to the UK will be taxed Non-doms with mixed funds will be able to move their clean capital, foreign income and foreign gains into separate accounts. There will be no requirement for a non-dom to make a remittance from their newly segregated accounts in any particular order or within any particular time limit This will only apply to mixed funds deposited in bank and similar accounts Where the mixed fund takes the form of an asset (e.g. a painting) it will not qualify for the special treatment although it will be possible to sell an overseas asset in the transitional window and separate the sale proceeds in the same way as any other money Individuals will need to be able to determine the component parts of their mixed fund: it will not be possible to separate mixed funds if you are unable to identify the source of those funds

18. Changes to the taxation of non-domiciliaries Mixed Funds cont/d This relief will not be restricted to those who have been resident for 15 of the past 20 years or who will become deemed domiciled under the new rules It will only be available to those who have been UK resident at some point in time and who have used the remittance basis of taxation Opportunity to combine rebasing relief and mixed funds relief

19. Key Facts ATED ATED introduced w.e.f. 1 April 2013 Original valuation date 1 April 2012; Next valuation date 1 April 2017 – risk of moving up an ATED band; ATED Rates Property value Annual chargeable amount 2015 to 2016 More than £500,000 but not more than £1 million (but only from 1 April 2016) £3,500 More than £1 million but not more than £2 million£7,000 More than £2 million but not more than £5 million£23,350 More than £5 million but not more than £10 million£54,450 More than £10 million but not more than £20 million£109,050 More than £20 million£218,200

20. Key Facts ATED Related Gains Applies to gains from 6 April 2013 where no ATED relief applies Rate of tax 28% Non-resident CGT introduced w.e.f. 6 April 2015 in relation to gains from 6 April 2015 28% for individuals (in relation to residential property) 20% for companies (but may be subject to ATED related gains at 28%) IHT to be introduced w.e.f. 6 April 2017 Rate of tax 40% £325,000 nil rate band

21. Key Facts SDLT rates – Residential Property (excluding mixed use) Property or lease premium or transfer valueSDLT rate Up to £125,000Zero The next £125,000 (the portion from £125,001 to £250,000)2% The next £675,000 (the portion from £250,001 to £925,000)5% The next £575,000 (the portion from £925,001 to £1.5 million)10% The remaining amount (the portion above £1.5 million)12% Purchase of residential property over £500,000 by non-natural person15% Additional rate for purchases of second homes Additional 3% (maximum 15%)

22. Robert Brodrick Robert is a partner in the Private Client department. He advises on tax, trust and estate planning for ultra high net worth families, their advisers and trustees. He acts for a wide range of clients but his main geographic focus is the Middle East. However he also acts for a number of traditional English Landed Estate owning families for whom he is also a Trustee. Robert is used to advising international families with assets in multiple jurisdictions, including those with US citizenship. Robert also advises on family governance and trust disputes. He has recently been involved in a long-running trust dispute in Jersey and England acting for a prominent Middle Eastern family. He is known for his sensitive handling of complicated family situations. Robert trained at Withers, and was a partner at Trowers & Hamlins before joining Payne Hicks Beach in 2012. “Absolutely charming, very thorough and responsive …provides excellent holistic advice to clients and is a well- respected practitioner… one of the foremost private client lawyers of his generation” Citywealth Leaders List 2013 Biographies “Strong people in a great departmental structure” Chambers & Partners

23. Payne Hicks Beach is a leading private client law firm. We provide specialist legal services to ultra-high net worth individuals, families, family offices and trustees. We also act for commercial clients and family businesses. We are a medium sized firm with 29 partners. We have a progressive outlook which is underpinned by a very conservative ethos. We regularly advise very high profile families and we always aim to deliver a personal service. We are prepared to invest a lot of time in getting to know our clients. Our office is located at 10 New Square, Lincoln's Inn, London, in a building which the firm has occupied since the mid-1700s. The private client department consists of 29 fee earners (a mixture of solicitors, trust managers, probate managers and trust accountants). The department is ranked in Chambers & Partners and Legal 500, and its achievements have been recognised by its being a finalist in the STEP Awards “London Legal Team of the Year – Mid Size” in 2015. About Payne Hicks Beach

24. Payne Hicks Beach is a partnership authorised and regulated by the Solicitors' Regulation Authority (number 59098). Its main office is at 10 New Square, Lincoln's Inn, London WC2A 3QG and a list of the partners may be inspected there. The purpose of this document is to set out general advice and comments, and therefore specific legal advice must be taken before reliance is placed upon it in any particular circumstances. Where hyperlinks are provided to third party websites, Payne Hicks Beach is not responsible for the content of such sites. To the extent information and opinions contained in this presentation have been obtained from public sources, these are believed to be reliable, but no representation, warranty or undertaking, expressed or implied, is made or given whether such information is accurate, reasonable, authentic, valid or complete and it should not be relied upon as such. Payne Hicks Beach accepts no liability or responsibility for any direct or consequential loss arising from any use of the material contained in this presentation. It may not be passed on to any third party and no representation on behalf of Payne Hicks Beach may be made in relation to such onward transmission. Nothing in this documentation may be contained in any presentation or other documentation produced by any other party without the prior written consent of Payne Hicks Beach. Disclaimer