September 2015 Tax Services The non-dom newsletter Introduction Welcome to the first edition of our Non-Dom Newsletter. This newsletter has a single focus: to keep you abreast and advised of the changing non-dom landscape. Alongside news, ideas and opinions, it will ensure that you are fully briefed on the key issues. If you would like to discuss any of the issues raised here, please get in touch for contacts, click here. What we know so far (and what we don t) With effect from 6 April 2017, a number of significant changes will be made to the non-dom regime: Non-UK domiciled individuals who have been UK resident for 15 out of the last 20 years will be deemed domiciled in the UK, lose access to the remittance basis on their personal assets and be deemed domiciled for inheritance tax purposes. Those born in the UK who replaced a UK domicile of origin with a domicile of choice in another jurisdiction will be deemed UK domiciled on their return to the UK ( returnee doms ). Offshore trusts will retain beneficial treatment to some extent which will reduce the impact of worldwide taxation for those becoming deemed domiciled. This will not shelter UK source income but is likely to mean no tax on offshore income and gains within the trust structure until the taxpayer receives a benefit; Trusts created by returnee doms, however, will not benefit from these provisions and also will lose their excluded property status for inheritance tax purposes. UK residential properties held via an offshore company will be within the charge to inheritance tax. HMRC will issue detailed (and it can be expected) lengthy consultation documents. The changes will be enacted in the 2016 and 2017 Finance Acts. There are no present plans for a rebasing relief.
A lot of detail is awaited --for example, how the new trust rules will interact with the existing anti-avoidance codes and how split residence years will be dealt with. However, in assessing the position taxpayers can be guided at present by the clear policy messages from the Government - the Government is committed to balancing fairness with ensuring the UK has a competitive tax regime that attracts and retains investment. It is clear too that the Government does not wish to see residential property held via a corporate structure. Indeed, it is possible that there may be some relief to help taxpayers extract the property from existing structures. It is important to keep hold of these messages when contemplating action and use them as a guide in the decision process. For further detail on these issues, click here. Expected timetable of main provisions Finance Bill Consultation closes End February 2016 Bill makes its way through Parliament/ Committee stages April/July 2016 Budget/Finance Bill published March 2016 Bill receives Royal Assent July 2016 New rules come into force 6 April 2017 Consultation responses and further draft legislation published for consultation Autumn Statement, late November/early December 2015 Consultation closes (we know it will be a shortened consultation) End of October/early November 2015 UK Consultation document to be published (possibly to include some draft legislation) Early Autumn 2015 Informal consultation meetings with interested parties July and August 2015 Policy announced 8 July 2015 Date confirmed Date unconfirmed The non-dom newsletter 2
Loan collateral After the announcement in August 2014 that HMRC had revised its position with regard to the use of foreign income and gains as loan collateral, there has been little further movement. HMRC did share some draft frequently asked questions regarding their technical position on an informal basis, but there has been no move to officially publish either the original document or an updated version (following feedback from professionals). Recent conversations with HMRC do not give reason for optimism that any further information will be published in the near future. A link to the original HMRC announcement is here In the meantime, affected individuals must make a decision by 31 December 2015. In order to benefit from the transitional provisions. HMRC have stated that individuals must notify them by 31 December 2015 of their intention to either repay any affected loans, or replace the collateral for those loans. However, the position is not clear-cut and it is informally understood that HMRC accept that where action before 6 April 2016, a notification may not be necessary. Action needed Although the precise details of the changes are not yet known, non-uk domiciled individuals should begin reviewing their position now, with a view to possibly taking action ahead of the changes. Click here for a suggested action list Across the globe? As the UK considers far-reaching changes to the tax regime for non-doms, we will consider comparable regimes in other jurisdictions. This issue looks at the tax rules for such individuals taking up residence in Malta. The island of Malta has retained the remittance basis of taxation. The Maltese tax system is still heavily based on the old British Model Tax Ordinance and Malta has retained the version of remittance basis existing in the UK before 1948. The Maltese Income Tax Act provides that residents of Malta who are not domiciled in Malta (do not intend to live in Malta permanently) are not taxed on foreign source capital gains and foreign source income which is not received in Malta. A Remittance Base Charge is not imposed. For fuller details contact: Robert Attard, Malta +356 2347 1452 Robert.Attard@mt.ey.com Useful links 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 Questions for contacts, click here The non-dom newsletter 3
Action needed Individuals should review their residence position for recent years and consider when they are likely to meet the 15 out of 20 rule and thus be deemed domiciled in the UK. Some individuals may need to revisit their domicile statement especially in circumstances where there has been doubt over an individual s domicile of origin and of dependency (e.g., because their parents left the UK while they were small children). Clients likely to become deemed domiciled in April 2017 may wish to begin reviewing mixed bank accounts and other investment structures to ensure they will be in a position to report any income and gains following the changes. Some non-uk domiciled individuals may wish to set up trusts ahead of becoming deemed domiciled (this will be particularly appropriate for those who are no yet deemed domiciled for IHT under the 17 out of 20 rule and who will be deemed domiciled from 6 April 2017 under the new rule). Some individuals with residential property held in companies or trusts may wish to consider unwinding those structures ahead of the planned changes to the rules (especially where an ATED charge applies to an existing structure). If (appears the case) there is to be no rebasing, some individuals may wish to sell and (after 30 days ) reacquire securities before 6th April 2017 (thereby taking a profit under the existing remittance basis). Although 2017 may seem a distance away, investment advice will be needed to ensure the profit is taken when the market says, rather than when the taxman suggests; It is possible (depending on the final form of the legislation) that some individuals may see their existing capital losses abolished. Individuals in this position will want to use these losses to shelter gains before they disappear; Individuals who are at present relying on the remittance basis may wish to explore alternate wrappers, such as insurance bonds and UK companies. These discussions cannot be deferred until 2017 given the likely tax charges on switching from one regime to another; Non-doms will not normally want investments which unwind shortly after April 2017 and so the form and timing of investments will be a critical part of current decisions and discussions with investment advisors; Offshore trustees will need to consider action ahead of the fuller detail. Trustees will need to review their portfolios to identify the clients most likely to be impacted and, in particular, to review the funding issues on ten year charges etc. BACK The non-dom newsletter 4
What we know so far (and what we don t know) The changes will principally affect: Long-term resident non-uk domiciled individuals Individuals with a UK domicile of origin who acquire or have acquired a domicile of choice elsewhere Long-term resident UK-domiciled individuals who are leaving the UK Non-UK domiciled individuals who hold UK residential property in an offshore structure Long-term resident non-uk domiciled individuals With effect from 6 April 2017, individuals who are non-uk domiciled will be deemed to have a UK domicile for tax purposes if they have been resident in the UK for more than 15 out of the past 20 tax years. Once an individual has become deemed domiciled in the UK, he or she will remain so for five years after leaving the UK. It is not currently clear whether residence during a split year will be count for this purpose as this will be subject to consultation. In addition there is some confusion around whether the new deemed domicile provisions will apply from the sixteenth or from the seventeenth year of residence. Conversations with HMRC at this stage suggest that split years are likely to be counted as full years, and that individuals will be deemed domiciled in their sixteenth year of residence this means that some individuals could become deemed domiciled in the UK after being present in the UK for as little as 14 years. Tax effect of being deemed domiciled Once a long-term resident is deemed domiciled in the UK, he or she will no longer be able to claim the remittance basis and will be subject to UK tax on their worldwide income and gains. UK inheritance tax (IHT) will be payable on worldwide assets. A small number of special tax treatments will remain. Non doms who have set up an offshore trust before they become deemed domiciled here under the fifteen year rule will not be taxed on foreign income and gains that are retained in the trust, but instead on any benefits, capital or income received from any trusts on a worldwide basis. It appears from current discussions that foreign income may not be subject to tax for deemed domiciled individuals even where it is remitted to the UK, provided it is not paid out of the trust. It is not currently clear how the existing complex rules for matching trust gains to capital payments will operate in these circumstances and discussions suggest that HMRC still have a lot of thinking to do here. Trusts established before the individual became deemed domiciled will remain excluded property for IHT, as at present. Where trusts are set up before 6 April 2017, HMRC have confirmed that it is the 17 out of 20 rule which will be of relevance. However, see below for changes to the taxation of UK residential property held in these structures. It is not clear how the transfer of assets abroad rules will operate for those who become deemed domiciled, and this will also be subject to consultation. Long-term resident UK domiciled individuals When a UK-domiciled individual leaves the UK with the intention of establishing him or herself permanently or indefinitely in another jurisdiction, he or she may acquire a domicile of choice in that new jurisdiction. At present, such an individual would remain deemed domiciled in the UK for IHT for a further three years, after acquiring this domicile of choice. With effect from 6 April 2017, where such individual has been resident here for at least 15 years, he or she will remain deemed domiciled in the UK for a further five years. HMRC seem to be open to discussion about the detailed application of these rules. The rules currently proposed are complicated and may result in some individuals remaining deemed domiciled in the UK for a lengthy period after leaving. The five years seems likely to remain a constant, but the interaction with existing rules may alter as the consultation progresses. In our view, the five years should act as a minimum period, so that an individual leaving to live abroad and acquiring a non-uk domicile would lose his UK deemed domicile The non-dom newsletter 5
on the later of five years or acquiring a domicile of choice outside the UK. Individuals with a UK domicile of origin Where an individual with a UK domicile of origin has acquired a non-uk domicile of choice, it is currently possible for him to maintain that non-uk domicile of choice should he return to the UK for a limited period. With effect from 6 April 2017, such individuals will be deemed domiciled in the UK from the date they return. Where such individuals have returned to the UK before 6 April 2017, they will be deemed domiciled from that date. This will only affect individuals who are born in the UK. In our discussions with HMRC we have emphasised the need for an exception to be made for those who acquire a domicile of dependency outside the UK while children, who may genuinely not consider the UK to be their home. However, it is proposed that this rule will affect all those born in the UK with a UK domicile of origin. Individuals with a UK domicile of origin who are treated as deemed domiciled under these rules will be taxed on their worldwide income and gains. Unlike those deemed domiciled individuals with a non-uk domicile of origin, they will not benefit from any special offshore trust rules. Instead, any income and gains in overseas trusts which were established while the individual was non-uk domiciled will be taxable and assets within the trust will not be excluded property for IHT. The precise detail of the changes will be subject to consultation. With effect from 6 April 2017, all UK residential property will be subject to UK IHT whether it is held directly or indirectly by foreign domiciled persons. Therefore such property will be subject to IHT on a relevant event, for example, the death of the individual. Although these changes will be effective from the same date as the other proposed changes to the taxation of non-doms, the current intention is that they will included in Finance Bill 2017 and so the consultation is on a slightly slower timetable than for the rest of the changes, which will be included in Finance Bill 2016. It is understood that HMRC are giving consideration to the introduction of some transitional provisions which may allow the unwind of existing structures with a reduced tax cost. No details are known of these proposals at present. BACK UK residential property held via an offshore structure Separately, the Chancellor announced new inheritance tax rules in respect of UK residential property held indirectly by non-uk domiciled individuals (e.g., via a non-uk company or excluded property trust). Presently, where UK property is held via a non-uk company or certain other non-uk structures it can be excluded property for IHT. The non-dom newsletter 6
EY Assurance Tax Transactions Advisory Contact details For further information, please contact one of the following or your usual EY contact: London David Kilshaw 020 7783 0763 dkilshaw@uk.ey.com John Mackay 020 7951 2779 jmackay@uk.ey.com Carolyn Steppler 020 7951 4968 csteppler@uk.ey.com Alex Foster 020 7980 9540 afoster@uk.ey.com Midlands Elaine Shiels 0121 535 2110 eshiels@uk.ey.com North Martin Portnoy 0161 333 3275 mportnoy@uk.ey.com Andrew Shepherd Rebecca Hunt 0161 333 2726 0161 234 0537 ashepherd@uk.ey.com rhunt1@uk.ey.com Trevor Sherlock 0191 247 2527 tsherlock@uk.ey.com About EY 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 The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. 2015 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 Scotland Keith Carrol 0141 226 9281 kcarrol@uk.ey.com South Jennine Way 0117 981 2076 jway@uk.ey.com BACK The non-dom newsletter 7