Offshore trusts: anti avoidance consultative clause and Schedule (published 13 September 2017) Response by the Chartered Institute of Taxation 1. Introduction 1.1. The consultative clause and Schedule follow the reforms to the taxation regime for individuals who are not domiciled in the UK under general law. The reforms were first announced at the summer 2015 Budget. Individuals who are not domiciled in the UK under general law will be deemed to be UK domiciled for tax purposes if they are either resident in the UK for fifteen of the past twenty tax years, or if they are born in the UK with a UK domicile of origin. 1.2. An integral part of the reforms is the protected status of a qualifying offshore trust established by a non-uk domiciled settlor before becoming deemed domiciled under the fifteen out of twenty year rule. The protections mean that the non-uk domiciled settlor will not pay income tax or capital gains tax (CGT) on foreign income or gains that are retained in that protected trust or its underlying entities, as long as neither they nor their spouse or children receive any benefit from the trust. 1 1.3. In the response to the consultation on the reforms in December 2016, the government confirmed that it would take steps to tighten and add to the existing anti-avoidance 1 In the consultation document published on 30 September 2015 it is stated at paragraph 3.2 that the government does not intend that non-domiciliaries who become deemed-uk domiciled should have to pay UK tax on income and gains in offshore structures which were set up before they became deemed-domiciled simply because the individual was the settlor of the trust or was considered a transferor under the Transfer of Assets Abroad legislation. As a part of these reforms, the government will ensure that any individual who becomes deemed-uk domiciled will continue to be protected from UK tax on offshore trusts that they have settled while neither they nor their spouse or children receive any benefit from the trust.
rules that relate to the taxation of income arising and gains accruing to offshore trusts. The measures in this clause and Schedule will take effect on or after 6 April 2018. 1.4. As an educational charity, our primary purpose is to promote education in taxation. One of the key aims of the CIOT is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. Our comments and recommendations on tax issues are made solely in order to achieve this aim; we are a non-party-political organisation. 2. Key concerns 2.1. We recognise that the timetable for enacting the draft consultative clause and Schedule is very tight due to the constrained legislative timetable following the general election earlier this year. However this clause and Schedule, together with the substantive enactments in Finance Bill 2017-19, fundamentally change the highly complex taxation regime for offshore trusts. We are concerned that insufficient time has been allowed for proper scrutiny of these provisions to ensure that they operate coherently and without unintended consequences. The consultation meeting held on 16 October 2017 was helpful but served to underline the number of significant concerns with the draft legislation that cannot be addressed adequately through guidance. Our submissions of 19 January 2017 and 23 February 2017 set out a number of such drafting concerns that are not generally repeated here unless they relate to the points of fundamental importance listed below. 2.2. Our fundamental concerns at this stage are: (a) Ensuring that the definition of close member of the settlor s family test is aligned in its operation for income tax and CGT,(ii) that the legislation is clearly drafted to show (in line with the policy intent discussed at the 16 October 2017 meeting) that following the death of the settlor the provision has limited / no application, and (iii) that the uncertainties inherent in the current definition are resolved by legislative amendment (see further paragraph three below) (b) Ensuring the alignment of the attribution of gains / income to onward gifts rule (the anti-conduit rule ) in its operation for income tax and CGT and (ii) making clear that the relevant intention (in terms of passing on the original payment) is solely that of the original beneficiary. The difficulties of operating this rule with any certainty are manifold. We suggest at paragraph four below ways in which this uncertainty could be mitigated. (c) The need for amendments (with effect from 6 April 2017) in two respects to ensure that the reforms operate in accordance with what is understood to be the policy intent (paragraph five below). 3. Close member of the settlor s family provisions 3.1. The provisions relating to a charge on the settlor where a close member of the settlor s family receives a benefit / capital payment need to be aligned so that they operate in a consistent fashion and in similar circumstances. P/tech/subsfinal/CGT/2017 2
3.2. The current definition of close family member continues to operate in relation to children of the settlor following the settlor s death without any time limitation. Given that the thrust of these provisions is anti-avoidance, it would be appropriate to limit their operation following the death of the settlor. In the interests of simplicity, we suggest that the provisions cease to operate with effect from the year next following that in which the death occurs (so, for example, if the settlor dies on 17 March 2018, a child of the settlor is a close family member for 2017/18 but not with effect from 2018/19). 3.3. We reiterate our key concern that the definition of close family member is imprecise in a number of respects: (a) It includes a child of the settlor if the child has not reached the age of 18. In the tax year that the child has their 18th birthday, it is not clear how the definition will operate, whether by reference to their status at the beginning of the year (ie under 18) or by reference to their age at the date of receipt? (b) Similarly when is the application judged for people getting married (or becoming civil partners) or on divorce. We suggest the inclusion of a legislative provision that excludes spouses in the tax year of separation: such provisions are seen elsewhere in the tax code 2. 4. Attribution of gains to onward gifts (the anti-conduit rule ) 4.1. Our strong reservations about the efficacy of the anti-conduit rule remain both in terms of achieving the policy intent and its operation in practice in terms of the reporting requirement. We have set out our position in our earlier submissions (19 January and 23 February 2017). 4.2. Further thought needs to be given to ensuring that the capital gains tax and income tax provisions operate in a consistent manner and in similar circumstances. 4.3. If the rule is to remain in its current form, we suggest the following practical steps to ensure that the rule has greater certainty in its operation: (a) Restricting the intention (in terms of passing-on the original payment) to that of the original beneficiary alone: it cannot be reasonable to expect trustees making a payment to the original beneficiary to be aware of the original beneficiary s intentions; (b) A rebuttable presumption in the legislation to apply where the onward payment occurs within the stipulated time period. This presumption may be rebutted with the production of sufficient evidence to the contrary; (c) A white list in the legislation to provide for circumstances that fall outside the intended scope of the rule to include the recipient of a distribution who dies leaving assets under their will (or via intestacy or forced heirship) to a UK resident person. 2 TCGA 1992 section 288(3) P/tech/subsfinal/CGT/2017 3
5. Operation of the benefits charge 5.1. While we recognise the constraints of the legislative timetable, we remain of the view that the concerns surrounding ITA 2017 section 735A (set out in our submission to the Public Bill Committee) 3 need to be addressed. In short, although the draft legislation allows trustees or their underlying entities to invest income in the UK without it being treated as a taxable remittance, as drafted, a non- UK domiciled beneficiary could pay tax if he/she receives benefits from the trust irrespective of whether the benefit is wholly enjoyed abroad and not remitted to the UK. It applies to the settlor as well as beneficiaries. It arises as a consequence of the amendments to ITA section 735A by Finance Bill 2017-19. The practical effect is to deter trustees with foreign domiciled beneficiaries from investing in the UK. 5.2. Another necessary change to the draft legislation concerns the situation where a non- UK domiciled settlor comes to the UK and receives benefits from the trusts. Such an individual will be taxed on benefits received by reference to pre- arrival income. Moreover if after a couple of years he/she leaves and receives benefits from the trust after departure the way the legislation is framed means he/she can be subject to UK tax by reference to income arising pre- departure. The effect is to potentially deter a non-domiciled settlor from taking up residence in the UK at all. 6. Acknowledgement of submission 6.1. We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the Chartered Institute of Taxation is included in the List of Respondents when any outcome of the consultation is published. 7. The Chartered Institute of Taxation 7.1. The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. 3 https://www.tax.org.uk/sites/default/files/fb%202017-19%20ciot%20c29-33%20deemed%20domicile%20etc%20final.pdf P/tech/subsfinal/CGT/2017 4
The CIOT s 18,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 14 November 2017 P/tech/subsfinal/CGT/2017 5