Outcomes from the non dom consultation – Howard Kennedy's view

Outcomes from the Non-Dom consultation: Howard Kennedy's view

The non-domicile consultation may have been late coming but it certainly delivers. Whilst there are a couple of small concessions, the headline changes which are listed below are holding fast for the time being.

UK Born and Bred For non-doms who were born in the UK and who have a UK domicile of origin the proposed changes are particularly harsh. If you have a UK domicile of origin and you have left the UK and acquired a domicile of choice in another country, you will no longer be able to return to the UK and continue to claim nondom status whilst you are living here. You will not be able to benefit from the rebasing or cleansing concessions outlined below. The rules relating to trusts also distinguish those with a UK domicile of origin – see below.

Goodbye to Long Term Non-Doms If you are a non-UK domiciliary who has been resident in the UK in 15 of the past 20 years (the “15/20 test”) you will be deemed to be UK domiciled for all taxes (income tax, inheritance tax and capital gains tax) from 6 April 2017. Tax years of split residence will also be taken into account in assessing the 15/20 test so it will be possible to become deemed domiciled after spending just over 13 calendar years in the UK. Under this test someone who has acquired deemed domiciled status would only lose that status for income and capital gains tax after they have become non-UK resident and spent at least six years abroad.

Good News for Rebasing and Cleansing of Mixed Funds Capital gains tax rebasing will apply to assets owned by individuals who become deemed domiciled under the 15/20 test on 6 April 2017. It is not available to those UK born and bred (as discussed above).

This rebasing will only apply to foreign assets which were personally owned at the time of the 2015 Summer Budget (8 July 2015).

If a deemed gain is realised on rebasing, it will not be subject to UK tax even if the proceeds are remitted to the UK. This is effectively a tax-free uplift for foreign assets which have been owned at all times since 8 July 2015. Provided the funds used to purchase the asset were clean capital, the entire gain can be brought to the UK with no UK tax charge. However this concession will only apply to those who have made a claim for the remittance basis in the past. For a detailed understanding of how the rebasing will operate we await further publication of draft legislation.

If you would like more information on our services, please visit www.howardkennedy.com here you will find all our latest news, publications and events. This material is for general information only and is not intended to provide legal advice. © Howard Kennedy LLP 2016

Bank accounts which contain a mixture of taxed and untaxed income/gains are known as mixed funds. Until now it has not been possible to separate the taxed and untaxed monies. However a positive concession has been announced giving non-doms a one year window, beginning on 6 April 2017, to separate their mixed funds into their constituent parts. It will then be possible to remit funds in a more favourable order and reduce the tax cost of doing so.

This cleansing of mixed funds will only be available where the tax payer has maintained sufficiently good records to determine the constituent parts of the funds held in a bank account.

Inheritance Tax and Residential Property The consultation provides a little more detail about the proposals to bring UK residential property within the scope of inheritance tax (IHT). From 6 April 2017 residential property owned via a non-UK company will no longer be protected from IHT, regardless of whether the company is owned by an individual or a trust.

Such property will be subject to IHT in the same way as other UK property – e.g. on death of a shareholder, on failing to survive seven years from making a lifetime gift and on the ten year anniversary of creating a settlement. Some draft legislation has been published in relation to these proposals but we await further clarification. Whilst enforcement of these provisions will require the UK tax authorities to know about the beneficial ownership of the company holding the property, the UK government has already published a list of 46 countries that have agreed to share such information, and that list is likely to grow.

These rules will only apply to residential property and the consultation indicates that these rules will apply only to companies that are closely held (effectively personal companies), but the details of how this will be done are not yet known. However, where the property is owned by a closely held company, the new rules will apply irrespective of whether the property is for personal use or business use (such as being let out to tenants) and, unlike the ATED, regardless of the property's value.

Debts that have been incurred exclusively in relation to the property (such as mortgages) should be deductible in calculating the payment of IHT. However, debts to related parties will be disregarded. This means that loans from a trust to a company or between trusts, for example, are likely to be ignored.

As a consequence many non-doms owning residential property via a company will be suffering an annual ATED charge without achieving any IHT shelter, making many of these structures redundant for UK tax purposes. However, taking steps to remove a property from a structure is not straightforward and a number of tax charges can arise. Despite suggestions to the contrary, the consultation says that there will be no transitional provisions allowing individuals to unwind property holding structures without a tax charge. This leaves individuals having to decide whether to unwind now and pay an upfront tax charge, or remain in a structure which causes the company to pay ATED for many years with no likely CGT or IHT benefit. Whilst there may be tax costs in doing so, the recent moves in UK residential property prices may mean that now is a good time to unwind the structure, at least in relation to minimising tax on any capital gain.

If you would like more information on our services, please visit www.howardkennedy.com here you will find all our latest news, publications and events. This material is for general information only and is not intended to provide legal advice. Š Howard Kennedy LLP 2016

Conversely, for individuals who own residential property via a company which is not suffering an ATED charge (because the property is rented out for example), there may still be advantages in retaining the existing structure. For example: • Lower tax rates apply to rental income in some circumstances • Limited liability and asset protection benefits that a corporate structure affords • Anonymity of ownership and an opportunity for succession planning through the transmission of shares rather than the transfer of the real estate itself.

What About Trusts?

The consultation sets out a new regime for the taxation of trusts. Disappointingly there will not be a move away from looking at the underlying income and gains position. Although some protections are introduced for existing trust structures, those protections are more limited in their application. The main points are: • A protected settlement status will apply to trusts created by those becoming deemed domiciled under the 15/20 test, but will not apply to settlements created by those born in the UK with a UK domicile of origin. Protected settlement status will only continue until a settlement is tainted by the addition of funds after the settlor becomes deemed domiciled • For capital gains tax, a settlement will remain protected until a benefit is paid out to the settlor or a family member. Once a benefit has been paid out, the settlor will be taxable on gains in the trust as they arise • Foreign income will not be taxed on the settlor whilst it remains in the trust. However, once the settlor (or their spouse or minor children) receives a distribution, that distribution will be taxed on the settlor (not necessarily on the person receiving it). Some draft legislation has been published dealing with these provisions, but further detail is still awaited • Long term resident non-doms should note that adding property or receiving a benefit from a trust will remove these protections. It is likely to be advantageous to segregate assets which will be needed to maintain a UK lifestyle from those assets that are retained purely for investment purposes • It is going to be crucial to review existing structures to ensure that they benefit from the protections available and to put in place plans to manage and maintain that protection in the future.

What Should I Do Now? 1. Although the current consultation does not expire until 20 October 2016, a relatively clear framework is available to enable clients to understand how these changes are likely to impact. It should be possible to start making decisions about whether to keep existing trust structures or whether to establish new trusts. It would be advisable to start a review of existing structures to understand the alternatives that are available 2. A review and confirmation of domicile status for clients and other family members would be sensible at this stage. For those resident and non-domiciled in the UK, consider establishing and funding trusts ahead of 6 April 2017 If you would like more information on our services, please visit www.howardkennedy.com here you will find all our latest news, publications and events. This material is for general information only and is not intended to provide legal advice. © Howard Kennedy LLP 2016

3. Consider the impact of the rebasing rule and how to achieve the best advantage. Trustees may wish to appoint assets to beneficiaries who will become deemed domiciled, but it would be advisable to wait for draft legislation before transferring assets 4. Consider whether existing trusts will have sufficient levels of funding bearing in mind that protections will be lost if funds are added after 6 April 2017 even if that property is located abroad 5. Trustees will need to review the benefits they provide. If a beneficiary lives in a trust property, this could taint the trust post-April 2017 6. Those with mixed funds should review their recordkeeping and understand how to take advantage of the proposed one year window to cleanse any relevant funds 7. Those owning UK residential property through a company should consider the best time to move the property into personal ownership, if appropriate.

Howard Kennedy LLP can help you to understand how these changes will affect you or trusts you are connected with. For advice please contact your usual Howard Kennedy contact or:

Liz Palmer Partner: Head of Private Client and Family T: +44 (0) 20 3755 5645 E: liz.palmer@howardkennedy.com

Leigh Sayliss Partner: Head of Business and Property Taxes T: +44 (0)20 3755 5526 E: leigh.sayliss@howardkennedy.com

If you would like more information on our services, please visit www.howardkennedy.com here you will find all our latest news, publications and events. This material is for general information only and is not intended to provide legal advice. Š Howard Kennedy LLP 2016