From a UK tax perspective, international private clients have faced a series of challenging reforms in the past few years. However, the 2018 Budget provided some welcome respite, allowing individuals to get to grips with the historic changes rather than concentrating on new ones. In this note, we reflect on some of the most significant changes over the past few years and highlight areas where action may still be necessary or beneficial.
Deemed UK domicile
From 6 April 2017, individuals will be deemed UK domiciled for all UK taxes once they have been UK resident for at least 15 out of the past 20 tax years.
Many international private clients will therefore be subject to UK tax on their worldwide income and gains, for the first time, for the year ended 5 April 2018. Their 2017/18 UK tax returns, which need to be filed by 31 January 2019, may prove more complicated, with additional reporting; particularly, where offshore structures are concerned. More time will be needed to deal with this. Those who are not yet deemed UK domiciled may want to:
- review what their exposure to UK tax would be if their current income and gains were UK taxable on a worldwide basis to see if any restructuring can be done prior to becoming deemed UK domiciled; and
- as their worldwide estate will be exposed to UK inheritance tax once they are deemed UK domiciled, consider if any steps can be taken before that date to mitigate inheritance tax.
There are transitional provisions whereby international private clients have until 5 April 2019 to segregate offshore bank accounts into their component parts (income, capital gains and tax-free capital) by transferring amounts to other accounts by nomination. This is potentially very valuable as the usual rule is for each component part to be transferred to another account on a pro-rata basis. The transitional provision therefore enables the taxpayer to control which components are brought to and therefore taxable or not taxable in the UK.
This opportunity has been available since 6 April 2017. Many individuals have, however, not yet undertaken the exercise. This is in the hope that H M Revenue & Customs (HMRC) would publish more detailed guidance because the calculations are complex and there are areas of uncertainty.
HMRC has commented on some of the queries raised, but it now seems unlikely that HMRC will publish any further guidance. As the opportunity is only available until 5 April 2019, individuals should check now if such an exercise would be beneficial for them.
HMRC has confirmed that the transitional provisions will not apply if even £1 is incorrectly nominated. It may therefore be prudent to leave a buffer to deal with any potential discrepancies between the calculations and an eventual HMRC analysis.
The review is likely to require a cost versus benefit analysis but, as HMRC is unlikely to extend the 5 April 2019 deadline, this should be viewed as a final chance to segregate the component parts.
Individuals who became deemed UK domiciled for all UK taxes on 6 April 2017 can also benefit for CGT purposes from rebasing provisions, which can uplift the original cost of directly-held assets to their market value as at 5 April 2017. Conditions apply, so individuals should check that they qualify and ensure that records are established and maintained of 5 April 2017 values.
From 6 April 2017, the Government introduced trust tax protections to prevent UK resident but non-domiciled settlors of offshore trusts from becoming immediately subject to UK tax on the trust’s income and gains on an annual basis just because they have become deemed UK domiciled. As this is potentially very valuable, trustees should undertake an annual review to ensure that these trust protections are maintained. For example, they should ensure that any loan interest due has actually been paid.
Whilst the clear intention of the Government was for all trust income to be protected in this way, unintended statutory drafting has meant that “offshore income gains”, which are treated as income for tax purposes and arise on the disposal of offshore non-reporting funds, are not protected. As the Government has announced that it has no plans to amend the legislation, these amounts must now be reported in the settlor’s 2017/18 tax return onwards.
UK real estate (residential and commercial)
From April 2019, non-UK residents will be subject to UK CGT on the disposal of any direct or indirect interest in UK real estate. Where UK real estate is held within a structure, consideration should therefore be given to whether any restructuring is required prior to April 2019.
Since April 2017, indirect interests in UK residential property have been within the scope of UK inheritance tax. Where these interests are held within trusts, trustees should be aware of the new potential exposure to inheritance tax on every 10 year anniversary of the trust. Undeclared UK tax liabilities that involve offshore matters Individuals, trustees and non-resident landlord companies with undeclared tax liabilities relating to offshore matters who did not make a disclosure to HMRC by 30 September 2018 face a severe new penalty regime.
The 30 September deadline has passed and the new penalty regime now applies for undeclared tax liabilities that could have been assessed on 6 April 2017. There is therefore even more reason to come forward and make a voluntary disclosure of undisclosed liabilities to HMRC because penalty mitigation remains important. The penalty could, for example, be reduced from 200% to 100% of the tax due.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.