As anticipated following the Autumn Statement, on which we reported, draft legislation has now been published on the upcoming changes to the taxation of non-domiciled individuals (“RNDs”). The draft clauses, consultation responses and technical notes confirm that the changes will go ahead as planned in April 2017. Time is therefore running out for many RNDs who need to act quickly to review their existing wealth structures in light of the raft of new rules and to consider whether alternative arrangements need to be put in place in advance of the new tax year.
UK-compliant life policies, such as those issued by Lombard International Assurance, remain on a firm footing in light of the new regime and can deliver valuable advantages, alone or in conjunction with trusts, for those who require protection from ongoing taxation, investment flexibility and access to their investment both now and beyond April 2017.
The materials published on 5 December provide clarity on a number of key areas of relevance to those advising in this field.
Reforms will come into effect from 6 April 2017, as originally announced
Permanent non-domiciled status ends
Those resident for 15 of 20 years treated as domiciled for all taxes
Returning doms taxed as UK resident domiciliaries while in the UK
Opportunity to cleanse mixed funds extended to two tax years
Automatic rebasing will be available to those becoming deemed domiciled on 6 April
Inheritance tax to apply to non-doms holding UK residential property indirectly
5% tax-deferred allowance continues, together with an option to have disproportionate gains adjusted
Modest amendment to personal portfolio bond legislation plus power to amend further by regulation
Trust protections will go ahead, subject to tax on distributions, tainting and anti-avoidance
For more detail, read on below. Lombard International Assurance will provide further commentary on the changes as the new tax year approaches.
From 6 April 2017, RNDs who have been resident in the UK for 15 of 20 tax years will be deemed domiciled for income tax, capital gains tax and inheritance tax purposes, as announced in the summer of 2015. Returning doms (those with UK domicile of origin who have acquired foreign domicile of choice and returned to the UK) will be taxed as any other resident domiciliary while in the UK. Permanent non-domiciled status will therefore no longer exist. A minor amendment to the rules on the UK inheritance tax tail will ensure that it does not survive the start of the fourth tax year of non-UK residence, and the inheritance tax grace period for returning doms is confirmed at one tax year.
Rebasing & Cleansing
Rebasing - one of two transitional rules first announced in August 2016 – will be available to individuals becoming deemed domiciled from 6 April 2017. According to the draft legislation the conditions are that:
the asset was held by the individual on 5 April 2017;
the disposal is made on or after 6 April 2017;
the asset was not situated in the United Kingdom at any time between 16 March 2016 and 5 April 2017; and
the individual is not a returning dom and has been a remittance basis user in a tax year before 2017/18.
Rebasing uses, as the acquisition value of the asset, its market value as at 5 April 2017. It will apply automatically unless taxpayers opt out.
RNDs and those who become deemed domiciled will be able to cleanse assets in order to separate out mixed funds. Although initially set to be available for a single tax year, the relief will now be available for two tax years from 6 April 2017. Cleansing must involve a transfer between accounts and the transfer must be nominated by the individual who, in turn, must not be a returning dom and must have used the remittance basis prior to 2017/18. Cleansing will not be available to assets other than money on an account, or to sums held in trust.
While draft legislation on the income taxation of offshore trusts established by non-deemed domiciled individuals has still not been published (it is expected at or before publication of Finance Bill 2017), the capital gains tax clauses can be found in draft Finance Bill 2017.
In summary, trusts established prior to acquisition of deemed domicile will offer a degree of protection from UK tax on foreign income and gains arising to the trustees unless and until sums are distributed. However, payments made to the settlor or to close family members will be matched with trust income or gains and taxed accordingly and, importantly, trust protections will be lost if additions are made to the trust by the settlor while deemed domiciled, resulting in ongoing taxation. Additionally, capital payments made to non-resident beneficiaries will not wash out trust gains unless payments are made to close family members while the settlor is UK resident, and an anti-avoidance rule will prevent payments being recycled offshore as a means of circumventing the new rules.
Inheritance Tax on Residential Property
The package of documents published on 5 December also confirms that UK inheritance tax will apply to chargeable events occurring after 5 April 2017 in relation to UK residential property held via foreign close companies, partnerships and trusts. It has been clarified that the definition of a UK dwelling for the purposes of the new rules will follow that used for non-resident capital gains tax purposes. A targeted rule designed to prevent avoidance of the new provisions will be introduced as announced. However, the government confirms that there is no longer an intention to make company directors accountable for payment of the tax.
Personal Portfolio Bonds
A consultation response has also been published in connection with proposed amendments to the personal portfolio bond rules. Draft legislation in this area adds real estate investment trusts, overseas investment trust companies and authorised contractual schemes to the list of permitted categories of asset that can be selected by a UK resident policyholder without their policy becoming a personal portfolio bond (PPB). The draft will also reserve a power to add or erase asset categories in future via regulation, in recognition that changes in the investment landscape may warrant further amendment. The government will consult informally on other modifications to PPB taxation that could provide greater flexibility to policyholders.
Part Surrenders and Assignments
Closure of the recent consultation on changes to the taxation of part surrenders and part assignments underlines that the 5% tax-deferred withdrawal allowance remains an established part of life policy taxation in the UK, despite that the alternative methods of taxation will not be pursued at this stage. Policyholders who may have unwittingly generated a disproportionate gain by operation of the current rules will be able to write to HMRC to have the gain reassessed on a just and reasonable basis, provided the submission is made within 2 years of the end of the relevant insurance year, or such longer period as the HMRC officer may permit.
While, the publication of the consultation responses and draft legislation removes a great deal of uncertainty for RND clients, it comes with the pressure to digest the new rules and ensure that wealth plans are fit for the future of non-dom taxation. A properly structured life policy could be part of the solution.
By Simon Gorbutt, Senior Wealth Planner - Regional Head
If you have any questions or require further information, please don't hesitate to contact Chris Edward or your usual Lombard International Assurance representative.