With Finance (No.2) Act 2017 having received Royal Assent last November 16th, clients and their advisers will now be coming to terms with the sweeping changes to the taxation of resident non-domiciliaries (RNDs) that were given effect from 6 April 2017. Alongside provisions that brought permanent non-domiciled status to an end and introduced substantial changes to the taxation of offshore trusts and indirectly held UK residential property, the Act brought with it two welcome reliefs: rebasing and cleansing.
Rebasing allows long-term UK residents who were deemed domiciled under the new rules in tax year 2017/18 to rebase non-UK assets to their value as at 5 April 2017 so that only future gains are taxable.
Cleansing allows all RNDs (not only those who were deemed domiciled 2017/18) to rearrange their overseas mixed funds so that they can be separated into their constituent parts (e.g. income, capital gains, income gains, clean capital) and, for example, remit the clean capital sum to the UK tax free.
Time is of the essence
Cleansing is available for two tax years and, while 5 April 2019 may seem like a long way off, we are already nearly ten months in and RNDs would do well to think carefully about how to cleanse their offshore mixed wealth. Unlike rebasing, which applies automatically to disposals of personally held non-UK assets, cleansing is not automatic. Instead, a thorough assessment of clients’ offshore accounts is required and transfers of capital, income and gains must be planned with care.
While rebasing is not limited in time, the rules require that the individual seeking to benefit from the relief be deemed domiciled but not domiciled under general law in the period starting with tax year 2017/18 and ending with the disposal. For the avoidance of doubt, domicile under general law refers to those who are domiciled in the UK as a result of their father’s UK domicile at their birth or by choice, through showing an intention to remain there permanently. For clients who may be on the cusp of acquiring UK domicile under general law or for whom their domicile status is becoming less clear-cut, it may be prudent to consider rebasing earlier rather than at a time when that status could be open to challenge and rebasing may no longer be available to them.
What next?
The reliefs are potentially very powerful in that they allow for the erasure of past gains, the unwinding of mixed funds, and the unlocking of pockets of clean capital which can then be remitted or invested.
One such investment, which is capable of deferring tax on income and gains even after the acquisition of deemed domicile and beyond any acquisition of domicile under general law is a UK-compliant life policy issued by Lombard International Assurance. Clean capital contributed to such a life policy retains its clean capital status and, importantly for clients who are not yet deemed domiciled, is not tainted by the accrual of further income and gains from investments within the policy. Additionally, the policy is not subject to the tainting rules which, under the Act, can result in the loss of tax deferral for offshore trusts. Deferral is also not affected by any eventual acquisition of domicile under general law, which would again bring to an end offshore trust protections.