In a move that has surprised clients and practitioners, new rules on the taxation of UK resident non-domiciled individuals (“RNDs”), which were to be effective from 6 April 2017 have been dropped from Finance Bill 2017.
What has happened?
With the announcement of a snap general election to take place on 8 June 2017, Parliament is set to be dissolved on 3 May. This has left very little time for debating Finance Bill 2017, which includes the substantial RND tax changes on which we have reported since 2015. As a result, only those provisions of the Bill that are considered essential have been retained. The outcome, following Tuesday’s Commons debate, is a Bill of 148 pages as opposed the original 762 and, notably, the omitted clauses include those that:
- bring about deemed domicile after 15 of 20 years of UK tax residence;
- amend the taxation of offshore trusts;
- permit rebasing and cleansing of offshore sums; and
- alter the inheritance tax treatment of indirectly held UK residential property.
Have the new rules been scrapped?
No. The omission of the new rules from the Finance Bill is a response to the limited time available for scrutiny of the changes. As such, the new rules remain government policy and their implementation has been postponed rather than abandoned. We would expect them to be reintroduced following the general election and, bar a surprise election outcome, we currently do not anticipate wholesale amendments.
While it is probable that a second Finance Act will implement the new rules with effect from 6 April 2017, this has not been confirmed and clients should ensure that they proceed with attention to how any planned transactions, or transactions in progress, would be treated under existing legislation.
What does this mean in practice?
Clients who would not have become deemed domiciled on 6 April will be less concerned, as large parts of their planning should remain unaffected and the remittance basis, if required, will remain available for them in tax year 2017/18. If the new rules will not take effect this tax year, they may need to revisit any offshore trusts in which they retain an interest, given that foreign income of such a trust could be taxable. However, there are still likely to be efficient ways to plan in this and in future tax years. A life policy, for example, is a non-income producing asset and can be a viable alternative to opting into the remittance basis at all.
Clients who were due to be deemed domiciled from 6 April will have more to consider. For example, it will not be clear whether sums that have been, or are being, rebased and cleansed are clean capital. For those leaving the UK, or with no need for access to funds in the UK, this may not be a concern. For others, it may simply be prudent to retain sums abroad, including where invested in a life policy, until the position has been clarified.
Clients returning to the UK with a UK domicile of origin might be tempted to rely on the continued inheritance tax and capital gains tax efficiency of offshore trusts in which they retain an interest. Again, a plan that considers the less advantageous set of rules may be prudent.
How does this affect planning with life policies?
RND taxation has been further complicated by the latest developments and some clients will now require advice that takes into account both the existing and anticipated RND regimes.
Although the rules may ultimately come into force largely in the form, and with the effects, that were originally planned, this is not certain and, were there a change of government, the regime could become less attractive still. Either way, the direction of travel for RNDs remains clear.
However, none of the likely outcomes are set to affect life policy taxation under the chargeable events regime. A policy can offer deferral of taxation both in the current environment and under the proposed new rules and, with the correct planning, tax-efficient access to invested sums. It may also offer a direct alternative to opting for remittance basis taxation while remaining portable and efficient following any eventual change of residence.
For further information, please contact your usual Lombard International Assurance representative.
By Simon Gorbutt