The non-dom newsletter

Transcription

1 December 2016 Tax Services The non-dom newsletter Twelfth edition - Draft Finance Bill Special 8 December 2016 Introduction Welcome to the Draft Finance Bill Special edition of the non-dom newsletter. Here we review the new details released by HMRC and share our thoughts and analysis on what actions to consider now. If you would like to discuss any of the issues raised in this newsletter, please get in touch for contacts, click here. Final answer? On 5 December 2016, the Government published a response to the August consultation document, together with some detailed draft legislation. Combined, the two answer many, but by no means all, of the questions non-uk domiciled individuals and trustees have been asking. We now have, at least, an outline of all of the proposed reforms, and in most cases we do have detailed legislation. Given the ups and downs of the progress of these reforms since George Osborne first announced them in the 2015 Summer Budget, many advisors will be left with a lingering feeling of uncertainty. Are these the final proposals? How much, if at all, will things change again between now and April? And, against that backdrop, what should they and their clients being doing now? For a list of suggested actions to consider, click here. One thing is certain, time is running out to take action. Rebasing assets and restructuring trusts cannot be done overnight. We are getting to the point where decisions must be made, based on the information we have. So final answer or not, we are certainly in the final countdown.

2 The headlines The consultation response document and draft legislation published on 5 December provides us with an awful lot to digest. For consideration and analysis of much of that detail, click here. For those looking for more of a whistle stop tour the key details are provided below: Main proposals and transitional provisions The main proposals to introduce a new concept of deemed domiciled are unchanged. Individuals with a non-uk domicile of origin will be deemed domiciled in the UK for all taxes once they have been resident here for 15 out of the previous 20 years. Individuals born in the UK with a UK domicile of origin who have acquired a non-uk domicile of choice will be deemed domiciled in the UK whenever resident here. Individuals who will become deemed domiciled on 6 April 2017 will be able to rebase personallyheld foreign assets to their market value on 5 April 2017 for capital gains tax (CGT) purposes. The assets must have been foreign assets in the period from March 2016 until disposal or from the date acquired, if later. The period in which an individual may cleanse mixed funds held in overseas bank accounts by segregating them into different overseas accounts has been extended from one year to two years, starting on 6 April Trust changes Trusts set up by individuals before becoming deemed domiciled will be protected such that settlors are not taxed on foreign income or gains as they arise to the trust or underlying entities. It is no longer proposed that this protection will be lost where a benefit is paid out of the trust. However, protection will continue to be lost where property is added to the settlement (with certain exceptions). The new proposals extend the existing rules of taxing beneficiaries when benefits received are matched to trust gains. UK resident settlors of protected settlements may now be taxed on benefits arising both to them and their close family members (being spouse, cohabitee and minor children). However, the beneficiary is taxed in priority so the settlor is only taxed where the beneficiary is not actually taxed in the UK. Gains arising to all overseas trusts will no longer be matched to benefits paid to non-residents. There are exceptions for temporary non-residents and in circumstances where the trust is wound up. These changes will apply regardless of the domicile of the settlor. Foreign income arising in a trust or underlying company will be taxable only to the extent it is matched to benefits. No legislation has been published in respect of this change. Legislation is also awaited in relation to changes proposed to remove amounts taxed on settlors under the carried interest provisions from the pool of gains available to be matched to benefits, thus removing the existing double taxation issue. In addition, changes are proposed to the way in which benefits received from trusts will be valued for income tax and CGT purposes. 2

3 Inheritance tax (IHT) and UK residential property A qualifying interest in a close company or partnership will generally be subject to UK IHT to the extent that the value of the interest is directly or indirectly attributable to a UK residential property. Interests in loans provided to acquire, maintain or enhance a UK residential property, or acquire a qualifying interest in a close company or partnership which owns UK residential property will be within the scope of IHT for the creditor. Such debts are deductible for the debtor, and restrictions on the deductibility of connected party debts have been removed. Where a UK residential property has been sold, the proceeds will treated as though they were residential property for two years after the sale. However, the proposal for a two-year tail, which treated property which had ceased to be residential property for two years after the change of use, is not being taken forward. Where a Double Tax Treaty gives the other country the primary taxing rights over the property, a UK tax charge will still apply where the other country s domestic legislation does not give rise to an actual charge. The Government has confirmed that it will not be introducing any de-enveloping reliefs. Business investment relief (BIR) A number of changes are to be brought in with a view to making BIR easier to obtain and more attractive to potential investors. BIR will be available on the acquisition of existing shares as well as on the subscription for new shares in qualifying target companies. A new hybrid company category will be added to the investment company definitions. This will enable a company that is both trading and a stakeholder company to attract BIR in future. The time limit for investing in a company before it starts to trade will increase from the current two years to five years. The grace period for extracting or reinvesting funds will be increased from 45 or 90 days to two years before the investor is treated as having remitted those funds. There will be a change in the extraction of value rule, such that the rule is only breached where a benefit is received in circumstances directly or indirectly attributable to the investment. In addition, the Government has clarified that BIR is not available to companies which are corporate members of partnerships, unless the company itself is a qualifying company. Further changes to enhance BIR will be considered in the future. Useful links Response to consultation document published 5 December 2016 Draft Finance Bill published 5 December 2016 Furtherconsultation document published 9 August 2016 Joint CIOT, ICAEW, STEP and the Law Society discussion paper click here 3

4 Policy document and draft income tax and capital gains tax legislation published 2 February click here Policy document and draft IHT legislation published 9 December click here Consultation document published 30 September click here Previous versions of this newsletter are available - click here HMRC s Technical Briefing on the main changes to non-dom regime click here HMRC s Technical Briefing on changes to IHT for UK property click here HMRC s 15 October 2015 announcement on loan collateral - click here Questions for contacts click here And finally We cannot let a Finance Bill get in the way of wishing you the compliments of the season. We hope that amidst all the change and challenge you do find some festive fun. See you in 2017 and before 6 April! 4

5 Ready, steady go? As is so often the case in tax, taxpayers find themselves needing to make decisions and advisors find themselves needing to give advice in spite of the fact that the proposals will not be final until closer to Royal Assent, expected in July Everyone has a different attitude to risk, and many will have different views on what is the right action to take now, in light of what we know. We share here some of our suggestions that clients and advisors might like to consider. The reader must always bear in mind, however, that these are merely intended as food for thought and the legislation could still change again before becoming final in July. In particular, we still await the detailed legislation on income tax and trusts and so until that is available any trust adjustments must (to this degree) be a leap of faith. Rebasing and mixed funds Review existing assets and investments in detail, in the context of future needs. Determine which assets are likely to qualify for rebasing. Are they comprised of clean capital? Analyse accounts to see if cleansing is appropriate. Are sufficient records to hand to achieve this or must records be sought out? Consider how future lifestyles are to be funded. If remittance basis charge was not previously paid, consider paying the charge for 2016/17 or amending the previous year s tax return to pay the charge. Will there be sufficient clean capital from rebasing and cleansing? Can funds be borrowed against clean capital? Will any assets give rise to income gains as opposed to capital gains? If so, consider whether to sell these ahead of 6 April, as no rebasing will be available. Consider obtaining valuations of assets. Where assets are standing at a loss, consider postponing their disposal so that any loss will be realised after 6 April where this fits with investment objectives. The non-dom newsletter 5

6 Non-resident trusts If a trust owns UK residential property, the impact of the new IHT rules must be assessed. Is there a Gift with reservation of benefit (GROB)? How should this be addressed? The exclusion of the settlor may be undesirable so life assurance may be an easier solution. Will there be liquid funds to pay 10 year charges? Trustees should also consider any loans made to enable individuals or underlying companies to purchase residential property. Given the proposed changes to the benefit rules, trustees should review their capital gains tax pool, and any benefits, and should consider whether any planned payments to non-uk resident beneficiaries should be accelerated. Similarly, trustees may wish to review all planned payments to beneficiaries and consider whether such payments should be accelerated while the remittance basis still applies. Where there are unmatched capital payments, trustees may wish to consider accelerating gains to match to those payments, provided this fits with the wider investment strategy of the trust. More fundamentally, is a trust still the most appropriate vehicle? Where restructuring is considered appropriate, what assets in the trust can be liquidated and for those that cannot, will there be a tax charge if they are paid out to beneficiaries? How are assets to be held once the deemed domicile rules bite? Are we set to see an even bigger growth in family investment companies? IHT changes If an individual is not yet deemed domiciled, consider establishing a pre-2017 trust. Review the IHT and succession strategy. Trustees will need detailed record-keeping to track their settlor s residence status and movements. Should Settlors take a holiday every 10 years? BACK 6

7 A picture emerges The consultation response and draft legislation published on 5 December provide a much clearer picture of what the final reforms to the taxation of non-doms will look like. There may be a few smudges on the camera lens and the editors may still want to do some airbrushing around the edges, but the final picture is unlikely to change fundamentally at this stage. So what should clients and advisors be doing now to prepare for D-day on 6 April 2017? We consider some of the proposals, what we know and what we don t and what that means for clients needing to plan. The fundamentals The fundamentals of the proposals have changed little from the outset and are now unlikely to change further. The period of consultation is over. As a reminder, the main proposals are that non-uk domiciled individuals who have been resident in the UK for 15 out of the last 20 years and those born in the UK with a UK domiciled of origin and resident in the UK will be deemed domiciled in the UK for all taxes from 6 April A change announced in the consultation document reduces the inheritance tax tail for those leaving the UK, but it will still be necessary to be non-resident for four complete tax years before ceasing to be deemed domiciled under the 15 out of 20 rule. Offshore trusts It is the proposals for offshore trusts which have been most subject to change. The latest announcements are no exception, with some further changes to the proposals that were announced in August. None of the trust protections will apply to those who are deemed domiciled because they are UK resident and were born in the UK with a UK domicile of origin (returning doms). Offshore trusts settled by non-uk domiciled individuals before they became deemed domiciled will be protected settlements. However, following responses to the latest consultation, the trusts will not lose those protections simply because a benefit is paid out. Protections can still be lost when property is added to the trust, but only where added by the settlor or another trust of which he is either a settlor or beneficiary. However, this latter point is a new one and will need careful monitoring by trustees. Furthermore, if the settlor leaves the UK and loses his deemed domiciled status, any additions while he is nondomiciled will not taint the settlement. There are other exceptions too, for arms-length transactions and for settlements of existing liabilities, and to allow for the addition of funds where the settlements expenses exceed its income. Nevertheless, tainting (and its attendant difficulties for trustees) is back. In particular, trustees will need to be careful that any transactions with the settlor or with other trusts take place on an arms-length basis and that this can be demonstrated. Loans between trusts, for example, may need to be reviewed. Assuming that a trust has not been tainted, then gains will be matched to benefits, much as was proposed in August. Thus, if a benefit is provided to a settlor after 6 April 2017 and the settlor is deemed domiciled under the new rules there will be an immediate tax charge if the benefit can be matched to income or gains within the trust. However, there are a number of additional rules. Benefits paid to close family members of a settlor will be taxed on him, but only where they would not be taxed on the recipient in the year of receipt either because the recipient is non-uk resident, or because he is non-uk domiciled and does not remit the gain. Where the beneficiary would pay capital gains tax, he or she is taxed in priority. Where the settlor pays the tax in respect of a benefit paid to another beneficiary, he has a right of recovery against the beneficiary or the trustees. The position is less clear when a close family member receives a capital payment and remits it and it is later matched with a capital gain. As the legislation currently stands, it appears this may still be taxed on the settlor. There are also a number of anti-avoidance measures. Thus, new provisions aimed at circumstances where a capital payment is made to a non-resident beneficiary or a beneficiary who is not a close family member of the settlor and that individual makes a subsequent gift to the settlor or a close family member within three years. In these circumstances, the recipient of that gift would be treated as having received a benefit from the trust and would be taxed accordingly. It may be necessary to review payments made before April 2017 in the light of these rules. Perhaps the most fundamental change to the taxation of offshore trusts, however, is the proposal to prevent benefits received by non-uk resident beneficiaries being matched to trust gains. There are some exceptions to this rule for temporary non-residents and in cases where the trust is being wound up. For trusts with a mixture of UK and non-uk resident beneficiaries, this change could have profound effects on the amount of tax which must be paid by the UK resident beneficiaries. Trustees will want to urgently review their plans in the light of this and some may wish to consider accelerating the payment of benefits. This will apply to The non-dom newsletter 7

8 all trusts with mixed resident beneficiaries, regardless of the domicile of the settlor. Going forward, when considering trusts for international families, it may be appropriate in some cases to establish separate trusts for resident and non-resident beneficiaries to prevent a situation where UK resident beneficiaries pay tax on all the investment gains of the trust, while only receiving a portion of the benefit. Trustees also need to be aware that any unmatched capital payments which are matched to gains after 6 April 2017 will be taxed under the rules of the new regime meaning that the settlor may be taxed on benefits he has received before April 2017 and kept outside the UK. If he has become deemed domiciled when the capital payment is matched he will be taxed on the arising basis. Trusts may wish to review their position with regard to unmatched benefits and in some cases may wish to accelerate disposals where gains are anticipated, where this fits with the investment strategy of the trust. Less detail is available on the income matching proposals, since draft legislation has not yet been published. However, the proposal is for foreign income to be taxed only as it is matched to benefits. This treatment is to be extended to income in any underlying company of the trust. There will now be no need for this income to be distributed to the trustees from the offshore company. This treatment will apply from April 2017 for non-uk domiciled individuals and deemed domiciled individuals. As with the capital gains provisions, settlors will be taxable in respect of income matched to benefits received by close family members where those benefits are not subject to tax in the hands of the recipient and if they are deemed domiciled, without the benefit of the remittance basis. The new rules for matching income may throw up interesting results for some trusts, where income in an underlying company would previously have been taxable on the settlor on the remittance basis. This income will now enter the pool of income to be matched to benefits and trustees will need to be mindful of the ordering rules for income and capital matching when making capital payments. There are to be new valuation rules to determine how one calculates the tax charge on a benefit or capital payment. For example, if interest is rolled up (and not paid) in an interest-free loan, then there will be a capital payment in respect of the loan at the official interest rate (currently 3%). Trustees will wish to review benefits provided at present. Where offshore trusts were settled before an individual became deemed domiciled under either the old or the new rules, the property in the trust will remain excluded property and outside the scope of inheritance tax (IHT) when the individual becomes deemed domiciled. For non-uk domiciled individuals becoming deemed domiciled under the 15 out of 20 rule, the proposed protections mean there is still considerable benefit to an offshore trust. Those who will become deemed domiciled in April 2017 may therefore want to consider whether establishing a non-uk trust before that date fits with their wider wealth planning objectives. Individuals Foreign losses Once an individual becomes deemed UK domiciled, foreign capital losses from 2017/18 will be allowable even if he has not previously made the capital loss election. f an individual subsequently loses his deemed UK domiciled status, he can make the capital loss election in respect of the first tax year in which he claims the remittance basis again in the future. Rebasing Rebasing is not extended to trusts, but for individuals the relief is generous. Individuals becoming deemed domiciled on 6 April 2017 will qualify for rebasing for capital gains tax in respect of assets held personally as at 5 April The individual must be deemed domiciled under the 15 out of 20 rule for 2017/18. If the asset is sold later, the individual must also be deemed domiciled under this rule for the year of disposal and all intervening tax years. The rebasing is not available to returning doms. HMRC has also reaffirmed that there will be no rebasing for those becoming deemed domiciled after 2017/18. The assets must have been foreign assets in the period from March 2016 until disposal or from the date acquired, if later. This is in contrast to previous proposals that assets must have been foreign from July 2015, and possibly even held from that date. Furthermore, the individual must have paid the remittance basis charge in at least one tax year preceding 2017/18. Individuals who will become deemed domiciled on 6 April 2017 who have not previously paid the remittance basis charge, may therefore wish to consider paying it for 2015/16 or 2016/17 or amending their tax return to pay it for 2014/15. Where rebasing applies, the asset will be treated as having been acquired on 6 April 2017 for its market value at that date. Rebasing will apply automatically, but an individual can make an election to disapply it, on an The non-dom newsletter 8

9 asset by asset basis. The rebasing will only apply to assets subject to capital gains, and will not extend to assets which would give rise to offshore income gains. Individuals may wish to consider whether such assets should be rebased by other means ahead of April It is not clear how the rebasing provisions will apply to partnership assets, although since the law treats partnership assets as owned by the individual partners, it appears on the face of it that such assets should qualify for rebasing. There is little or no anti-avoidance legislation (never forgetting the General Anti-Abuse Rule (GAAR)) around the rebasing. So where these assets were purchased with clean capital, there may be opportunities to sell and release funds which can be brought to the UK without a tax charge. It appears it may even be possible to sell to connected parties. What is clear is that assets which are owned by trusts and companies will not qualify for rebasing, so consideration will need to be given to whether other rebasing would be appropriate. It should be noted, however, that any gains realised by trustees ahead of April 2017 will enter the pool of gains available to be matched to benefits and where this matching has not occurred before that date, the gain will be taxable under the new regime. Mixed fund rules The opportunity to cleanse mixed fund bank accounts is to be expanded from a period of one year to two, beginning on 6 April The draft legislation published on 5 December allows nominated transfers to be made out of mixed accounts without those transfers being treated as offshore transfers. As the legislation currently stands, it is not clear what the funds in the new bank account will represent, but the intention is to allow individuals to split accounts into their different components, e.g., income, capital gain, clean capital, etc. Appeals for the cleansing to be extended to non-cash assets have been rejected as proving too complex. This does not, however, prevent the sale of assets and subsequent cleansing of the proceeds. The opportunity is available to all non-uk domiciled individuals, not just those becoming deemed domiciled under the 15 out of 20 rule. However, it is not available to returning doms. UK residential property As previously announced, UK residential properties held through an offshore structure will be brought within the scope of UK IHT. This is achieved by removing the excluded property status of the interest in the asset which holds the property - e.g. the shares in the company or the interest in the partnership - to the extent that its value is directly or indirectly attributable to a UK residential property. The legislation now makes clear that the provisions are limited to interests in close companies and partnerships, but have also been expanded to include an interest in certain loans. A loan would fall within these provisions where it has been provided to acquire, maintain or enhance a UK residential property, or acquire a qualifying interest in a close company or partnership which owns UK residential property. The explicit inclusion of loan interests means the provisions may include many more interests in property than might have previously been envisaged. So, for example, where a non-resident individual or trust has made a loan to an individual to purchase a UK residential property that non-resident individual or trust may now have a chargeable asset and be within the scope of UK IHT for the first time. It is not clear how HMRC intends to ensure that such individuals are aware of this new liability nor how they will police any non-compliance, accidental or otherwise. The value of the company shares, partnership interest or loan is only within IHT to the extent that its value is derived from residential property. In determining the value of that residential property, debts which relate to the property can be deducted from the value of the property. Previously, there was a restriction on deducting connected party loans, but this restriction has now been removed. Although the removal is not as welcome as it may initially appear given the new loan provisions. The definition of residential property will follow the definition used in the non-resident capital gains tax provisions. Essentially, this means any property used or suitable for use as a dwelling or is in the process of being constructed or adapted for use as a dwelling. However, there are a number of exclusions for various institutional properties, for example, schools, nursing homes, etc. and a specific exclusion for student accommodation. The proposal for a two year tail, which treated property as continuing to be residential property for two years after it had ceased to be so, is not being taken forward. However, a new provision will prevent any proceeds received on the sale of a residential from being excluded property for two years after a disposal. Where a Double Tax Treaty gives the other country the primary taxing rights over the property, a UK tax charge The non-dom newsletter 9

10 will still apply where the other country s domestic legislation does not give rise to an actual charge. This means that those who had hoped to rely on a treaty (for example, that with India) to prevent a charge, may now have to rethink their position. BACK Finally, the Government has confirmed that there will not be any de-enveloping reliefs. This leaves many with properties held in offshore structures with a choice some tax now or more tax later? The choice will be a personal one for each taxpayer and is likely to be governed by a number of factors, for example, the size of any tax charge on unwind, the age of the individual and the individual s attitude to risk. For many, life insurance to cover the cost of any potential inheritance tax charge may be a pragmatic solution. For those with properties held in trust company structures, they will need to consider any forthcoming ten year anniversary charges, but, where the individual occupies the property, the property may also be in the individual s estate under the gift with reservation of benefits provisions. Individuals and their trustees may wish to consider whether it is possible to remove them from benefitting, but where the property is occupied this may prove more difficult. Again, life insurance may be the pragmatic answer to the gift with reservation problem. De-enveloping can be expected to be one of the trends of If you need help with liquidating a now unloved company, EY will be pleased to assist. Our off-shore teams cover the Crown Dependencies and the Caribbean and are led by Licensed Insolvency Practitioners based in those jurisdictions. Our multi-disciplinary teams are able to advise on and complete the relevant ATED, ATED CGT and NRCGT returns required post the appointment of liquidators and our UK RICS registered valuers are able to provide the valuations for those returns. For further information, on how we can help, please contact Stuart Gardner in our Jersey office on +44 (0) Next steps With the changes proposed coming into force in April 2017, there is little time for those affected to plan. We are unlikely to receive any significant further information before March when the Finance Bill is published. Now is, therefore, the time to put all the previous preparations to good use, to decide what steps need to be taken before April 2017 and, with appropriate advice, cautiously to begin taking them. The non-dom newsletter 10

11 EY Assurance Tax Transactions Advisory About EY Contact details For further information, please contact one of the following or your usual EY contact: Trevor Sherlock Martin Portnoy Elaine Shiels David Richardson Natalie Parry Sarah Traill Claire Morton Karl Russen EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young LLP All Rights Reserved. The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF Ernst & Young LLP. Published in the UK. All Rights Reserved. ED None In line with EY s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com/uk The non-dom newsletter 11