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

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

3. Introduction

4. 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”.

5. Deemed domicile

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. Non-resident trusts

12. 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.

13. 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

14. 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

15. 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.

16. 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

17. 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

18. 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

19. Residential property

20. 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

21. 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.

22. 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

23. 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

24. 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

25. Thank you
Chris Moorcroft Partner E: T: +44 (0)