Another Finance Bill, another series of UK RND changes

Another Finance Bill, another series of UK RND changes

Draft legislation was published on Wednesday 13 September for inclusion in the winter Finance Bill, which is also referred to as Finance Bill 2017-2018. This will be the third Finance Bill published this year and is not to be confused with Finance Bill 2017-2019 on which we commented here.

Among other items, the draft sweeps up a series of changes to resident non-domicile (RND) taxation, which were under discussion prior to the General Election but which did not ultimately appear in the Finance Act. As currently written, the changes would curtail the mitigation or avoidance of tax on payments from offshore trusts. The rules are subject to consultation until 25 October this year and are currently due to take effect on 6 April 2018.
In summary, the legislation is designed to achieve the following: 


It is currently possible for an offshore trust to make capital payments to non-resident beneficiaries as a means of reducing (or ‘washing-out’) the pool of trust gains available for matching to capital payments made to a UK beneficiary. The draft rules provide that such payments to non-UK beneficiaries are to be ignored so that they do not reduce the gains pool. This includes payments to UK residents who leave the UK before a payment can be matched. By way of exception to the general position, temporary non-residents would be treated as receiving the payment on return to the UK, and the rule is also partially disapplied in respect of certain payments in the year in which a trust comes to an end. 

Close family

Finance Bill 2017-2019 includes clauses that, in certain circumstances, charge the settlor of an offshore trust to income tax on benefits received by close family members. The draft legislation completes these provisions by including equivalent rules which, for example, would bring such benefits into charge even where there was no motive to avoid tax. Also included are similar provisions to charge the settlor for capital gains tax purposes in respect of capital payments made to close family members. Where the settlor is charged, he or she may recover the amount from the real payee or recipient.  A close family member is defined to include the settlor’s minor child, and also the settlor’s spouse, civil partner or cohabitant, or a minor child of any of these. 

Onward gifts

According to the draft, payments or benefits from offshore trusts to individuals who are not taxable can be exposed to capital gains or income tax if there is an arrangement or intention that they be passed on to a subsequent UK resident recipient. It would not matter how far in the future the onward gift was made. Tax would be payable by the final recipient and again the settlor can in certain circumstances be made to bear the tax charge in the first instance such as where the recipient is a close family member. 

What now?

After more than two years of discussion and drafts, a clear picture of the extent and detail of the changes to RND taxation is emerging. Clients can now begin to make arrangements that take into account the full spectrum of reforms. Given the content of the latest draft clauses, short-term arrangements may include payments from offshore trusts to non-resident beneficiaries or close family members prior to the rules’ taking effect. Clients planning for the longer term may look to UK-compliant insurance solutions, which can continue to reduce the impact of the changes, mitigate the impact of tax and offer access to capital in the place of, or as a complement to, offshore trust arrangements. 

By Simon Gorbutt and Lana Corrienne Mallon, Senior Wealth Planner, UK