To date, UK resident non-doms may not have been greatly impacted by the UK tax system’s plethora of measures to try to get the foreign income and gains received by offshore trusts (i.e. trusts that are not UK tax resident) taxed in the UK. This is because one of the key anti-avoidance provisions, the ‘S.86 Settlor Charge’ which can make a trust’s settlor liable for the offshore trust’s gains, only applies to settlors who are both resident and domiciled in the UK.
Its sister charge, the ‘S.87 Beneficiary Charge’, can apply to match trust gains with distributions and benefits (‘capital payments’) to the trust’s beneficiaries. This will not trouble a UK resident non-dom beneficiary either, provided the capital payments are made or enjoyed outside the UK, and kept there, and the resident non-dom claims the remittance basis of taxation.
Similarly, the Settlement regime and the Transfer of Assets Abroad provisions in the current Income Tax legislation can also tax foreign trust income on settlors. These are manageable if the settlor is claiming the remittance basis of taxation and capital payments are not remitted to the UK.
However, long term UK resident non-doms could find that, unless they move quickly, the taxation of their offshore trusts, as they currently know it, changes for them from 6 April 2017. Based on the current draft Finance Bill 2017, those non-doms resident in the UK for 15 or more out of the 20 income tax years, ending with the tax year prior to the one in question (so for tax year 2017/2018, starting 6 April 2017, the 20 years is up to and including tax year 2016/2017), will be deemed to be UK domiciled for Income Tax and Capital Gains Tax purposes. In other words, access to the remittance basis of taxation is to have a time limit placed upon it – a maximum of 15 years for those individuals here for a continuous period of 15 tax years. Stripped of the remittance basis of taxation, UK resident deemed dom settlors could feel the full force of S.86 and be taxed on trust gains as they arise. Under new rules contained in the Finance Bill, capital payments to close family members will also be taxed on a UK resident settlor (this will apply to all UK resident settlors, be they non-dom or deemed dom, from 6 April 2017) if they are not liable for UK tax on the close family member (because the family member is a remittance basis user, for example).
The picture is not so gloomy for trust income. Draft legislation just published confirms that foreign trust income will only be taxed on UK resident settlors if they or close family members actually receive a benefit from the trust (as for gains). UK resident settlors will no longer automatically be taxed on foreign trust income simply because they are also a potential beneficiary of the offshore trust.
So does this mean that soon to be deemed doms should abandon their offshore trusts? Far from it. Offshore trusts continue to offer a shelter from UK Inheritance Tax for assets placed into them before the settlor becomes UK domiciled, deemed or actual. And, going forward, settlors and their close family members who can leave capital and income in the trust without taking a benefit will still find that foreign income and gains can be rolled up in an offshore trust free of UK Income Tax and Capital Gains Tax, provided that the offshore trust meets the criteria for the new status of ‘protected trust’ offered in the Finance Bill 2017. This requires there to be no capital or income additions to the trust by the settlor or another trust of which the settlor is a beneficiary or the settlor of that trust.
Any non-dom UK resident settlors about to become deemed domiciled should get their offshore trusts screened now, to identify potential sources of additions. Apart from a few exceptions, any addition, of however much and even if inadvertent, from 6 April 2017, will mean that the protected status is lost for good and the offshore trust’s income and gains are then assessed on the UK resident deemed dom settlor as they arise. The stakes could be high.