29 November 2018
Significant changes to the taxation of non-UK domiciled individuals and non-UK trusts came into effect from 6 April 2017 and 6 April 2018. Details of these are noted below.
1. Key points
- Non-UK domiciled individuals are treated as UK domiciled for all tax purposes once they havebeen UK tax resident for 15 out of the past 20 tax years. They are no longer able to claim theremittance basis of taxation while they remain deemed UK domiciled. Those who have beenUK resident for fewer than 15 years can continue to access the remittance basis, subject insome cases to the remittance basis charge.
- Individuals who were born in the UK with a UK domicile of origin (formerly domiciledresidents (FDRs)), are treated as UK domiciled whenever they are UK tax resident, subject toa one-year grace period for inheritance tax (IHT), when an FDR becomes UK resident.
- Directly-held or indirectly-held UK residential property, loans provided to acquire, maintainor enhance UK residential property and collateral, security or guarantees provided for suchloans are within the scope of IHT.
2. Deemed UK domiciled individuals
For income tax and capital gains tax (CGT), once non-UK domiciled individuals have been UK tax resident for 15 out of the past 20 tax years they are thereafter subject to UK tax on their worldwide income and gains unless and until they leave the UK and remain non-UK resident for six complete tax years. For IHT, such individuals lose their deemed UK domiciled status at the start of their fourth consecutive tax year of non-UK residence.
3. Transitional reliefs
Directly-held offshore assets are automatically rebased to their value as at 5 April 2017 if the holder became deemed UK domiciled on 6 April 2017, previously paid the remittance basis charge and retains legal non-UK domiciled status at the time of any disposal. This applies to all directly-held non-UK assets, provided the asset was not situated in the UK at any time between 16 March 2016, or the date of acquisition, if later, and 5 April 2017. There is the option to elect for this not to apply to specific assets. The rebasing provisions are not available to FDRs or individuals who do not become deemed UK domiciled until after 6 April 2017. Trustees are not able to rebase trust assets under this relief.
Non-UK domiciled individuals who are not FDRs and have used the remittance basis at some point since 2008 are able, in a transitional period from 6 April 2017 to 5 April 2019, to ‘unmix’ or ‘cleanse’ offshore bank accounts containing capital, gains and income into separate accounts, subject to a number of restrictions. This is done by an election, which must be retained by the taxpayer.
4. Non-UK resident trusts
For non-UK trusts settled by non-UK domiciled individuals (except FDRs) before they become deemed UK domiciled, non-UK assets continue to be excluded from IHT, and beneficiaries are only subject to UK income tax or CGT on non-UK income or gains when they receive a distribution or benefit.
This applies even where the settlor retains an interest in the trust, although in the case of income and gains, the settlor must remain legally non-UK domiciled to receive ‘protection’.
Trust protection ceases to apply if any addition is made to the trust, either directly or indirectly, once the settlor is deemed UK domiciled. Care should be taken, particularly where loans have been made to the trustees by the settlor, to ensure no inadvertent addition occurs.
UK source income continues to be taxed on a settlor who is also a beneficiary.
The following anti-avoidance provisions have also applied from 6 April 2018:
- indirect UK resident recipients of distributions may be treated as receiving the distribution themselves, where the direct recipient is not taxed in the UK on it;
- distributions to non-UK residents no longer reduce a trust’s ‘pool’ of gains; and
- distributions to ‘close family members’ of a UK resident settlor (that is their spouse/civil partner or minor child) are taxable on the settlor, where the recipient is not subject to UK tax (for some income tax purposes this applies from 6 April 2017).
5. UK residential property held in offshore companies/partnerships
Interests in non-UK companies and partnerships that derive value from UK residential property are no longer outside the scope of IHT. There may therefore be no reason to retain existing structures, although there is likely be a tax cost for unwinding them.
The rules for loans made in connection with UK residential property are particularly wide and apply to other assets that are collateral or security for such a loan, up to the value of the loan.
6. Business Investment Relief (BIR)
Changes have been made to BIR to simplify it and enhance its appeal. Your usual Smith & Williamson contact will be able to provide further details or advice on BIR generally.
7. Next steps
Although the reforms are now in force, planning opportunities remain, especially for those not yet deemed UK domiciled, while offshore structures need to be kept under constant review. There is also scope to make use of the transitional provisions. Those relating to mixed funds, in particular, are only available until 5 April 2019, so it is important to consider them now. Please speak to your usual Smith & Williamson contact to discuss any matters raised by this note.