We now have further details of the proposed changes in April 2017 to the UK’s remittance basis of taxation for non-doms, courtesy of the Treasury’s September 2015 consultation paper.
The changes to how non-UK (i.e. offshore) trusts will be treated is particularly dramatic. How bad the changes are for you will depend on whether you are UK domiciled or not.
UK resident non-doms
The consultation proposes that a long term resident of the UK will be deemed UK domiciled for all UK tax purposes (not just IHT) after ‘15 years out of 20’ residency in the UK (which could happen as early as 13 years and two days after actual residency, if the arrival into the UK is timed badly).
Becoming deemed domiciled marks the dividing line. Before becoming deemed-UK domiciled, an individual can set up an offshore trust and, with careful management, enjoy the income and gains from that trust free of UK taxation, while the trust assets themselves grow in a tax free environment. For all intents and purposes, it is business as usual.
Once the individual becomes deemed-UK domiciled, however, the Government’s intention is that benefits provided to the settlor, or his/her spouse and children, by the trust (or any underlying entity) will be ascribed a taxable value and will be taxed on the settlor accordingly. Benefits can include rent free occupation of trust property and interest free loans, as well as distributions. The country in which the benefit is received or enjoyed will be irrelevant. There will be no need to work out the trust’s historic income and capital gains record though, as these will not be matched against benefits as under the current system – a boon for offshore trusts with less than perfect records.
A trust set up ‘pre-deemed domicile’ will not lose its ‘excluded property’ status for Inheritance Tax either, once the settlor becomes deemed-UK domiciled. So it will remain good planning for those non-doms who intend to live in the UK long term to place non-UK situated assets into offshore trusts to protect those assets from Inheritance Tax.
It seems that the Government has not quite decided its approach to non-doms and offshore trusts though. The consultation paper states that the Government is still considering whether aspects of the new regime should apply to all UK resident non-doms, not just those who become deemed-UK domiciled!
Returnees with a UK domicile of origin
Pity the poor UK dom, who has had the temerity to replace their UK domicile of origin with a non-UK domicile of choice whilst living elsewhere and then set up and fund an offshore trust. The Government does not like you, it seems. If the returning UK dom becomes resident in the UK, the trust will lose its Inheritance Tax excluded property status immediately and the income and gains of the trust will be imputed to the returning UK dom under the usual anti-avoidance rules in the UK tax code.
Returning UK doms will have to become very conversant with the UK’s statutory residence test to ensure that they do not become UK resident inadvertently.
Although the changes are not due to come into effect until April 2017 and we are still at the consultation paper stage, now is the time to start considering how these changes may affect any offshore trust where either the settlor or the beneficiaries are, or could become, UK resident.