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By Simon Gorbutt, Director & Lana Mallon, Senior Wealth Planner
Wealth Structuring Solutions
Lombard International Assurance

As the tax year draws to a close, non-doms have plenty to think about as part of their end-of-year planning, particularly in light of the current environment of uncertainty. Here are some of the things clients could be thinking about as we move further into 2019, and some of the ways to deal with that uncertainty.

 

Pre-April 2019

Of the non-dom changes introduced in 2017, cleansing and rebasing were two of the more positive developments. The opportunity - to cleanse offshore wealth by separating foreign mixed funds into their component parts permitting more tax efficient (and, in the case of clean capital, tax free) remittances to the UK - remains available until 5 April this year. For some clients, the cleansing process may have proven difficult so far, for record-keeping or other reasons.

Those with simpler fact patterns are still just in time to take action. For those not in that category, it is worth noting that while the transfer(s) between offshore accounts must happen by 5 April, the nomination of what is transferred can happen after that date. Clients with more complicated accounting history may therefore choose to make transfers on a prudent basis now and nominate later. For post-5 April 2008 income and gains, the transfer need not be of amounts held by the individual directly.

Each successive 6 April will now see further individuals becoming deemed domiciled. Taking measures early could prevent an unnecessary tax charge. A UK compliant life policy from Lombard International Assurance is well suited to clients who would otherwise face UK tax on a worldwide basis after becoming UK deemed domiciled. Tax on linked assets is deferred before and after deemed-domicile status, clients retain access to amounts invested (with no tax being due on withdrawals of up to a cumulative 5% per annum) and tax reliefs, segmentation, and the portability of the contract create a series of exit options.

Looking Ahead

While cleansing and rebasing are both limited in scope, only cleansing is limited in time. For clients who became UK resident deemed domiciled in April 2017, the opportunity will remain post-tax year end to dispose of foreign situated assets and rebase gains to 5 April 2017. It is therefore possible to pay a more limited amount of CGT and isolate clean capital, and unless rebased assets were acquired with foreign untaxed amounts, proceeds can be remitted to the UK without further tax. Rebasing is automatic unless an opt-out is filed and, while powerful on its own, can also be followed by cleansing while still available. Clean capital identified via rebasing and/or cleansing can then be put to work, including via investment in a life policy. 

For those who have not managed to cleanse mixed funds, who miss the deadline or who arrive in future tax years, a policy can ensure that accidental remittances are avoided while permitting exposure to UK-based assets. 5% withdrawals remain available and do not create a taxable remittance if received and used abroad. UK res non-doms who are not yet deemed domiciled may be able to use life insurance as an alternative to the remittance basis, eschewing the charge, and importantly there is no need to segregate accounts within a life policy.

Trust Planning

Non-doms who have or are considering establishing offshore trusts will have a number of further things to consider. The 2017 changes introduced the concept of a protected settlement – an offshore trust established by a non-dom before acquisition of deemed dom status – which would be opaque for foreign income and gains purposes and remain so even after acquisition of deemed domiciled status. At first sight, this was a significant boost for offshore trust planning. However, there is a sting in the tail: Tainting of a protected settlement, after becoming deemed domiciled, would result in all trust protections being permanently lost. Tainting can be accidental in that it catches property or income provided directly or indirectly for the purposes of the settlement, including not only direct additions but also non-arm’s length loans, for example.

In a more recent development, the tax authority has confirmed that it will not seek to correct an omission in the 2017 legislation that results in offshore income gains (those from non-reporting funds) continuing to be taxed in the hands of a UK resident settlor even under a protected settlement. HMRC has rejected a technical interpretation of the rules that concluded that offshore income gains were nevertheless protected.

In the meantime, there is talk of growing interest at the tax authority in individuals claiming to be non-domiciled under general law but whose circumstances may not support that contention. By way of a reminder, one can be non-domiciled and non-deemed domiciled for tax purposes but become domiciled as a matter of general law. The result is, again, a loss of trust protections. It also prevents the application of rebasing.

A correctly structured policy held by the trustees of a protected settlement could be a valuable tool. The policy itself can invest in non-reporting funds without allowing offshore income gains to arise to the trustees. If the settlement is subsequently tainted or a settlor inadvertently acquires UK general law domicile, a policy can ensure that no income or gains arise to the trustees at all, and that none is therefore capable of being attributed to a UK resident taxpayer. 

Next on the Agenda

The Chancellor’s Spring Statement will be given on 13 March. While the government’s focus is likely to be firmly on Brexit, it is not inconceivable that the Statement could include more far-reaching announcements (Although the Autumn Budget is intended to be the year’s only tax event, the Chancellor has reserved the right to depart from this rule.). Any predictions will be sheer guesswork at this stage, although the open consultation on the inheritance taxation of trusts could conceivably become a springboard for further trust tax changes and some may be starting to wonder whether the path taken by foreign-held UK residential property (which is now subject to both CGT and IHT) might eventually be paralleled by commercial property (for which the non-resident CGT changes take effect in April this year). 

Given the impact and frequency of recent non-dom changes, and with a view to anticipating what the new tax year might bring, taking action before 6 April could be a prudent move.

Crib Sheet: Reliefs and Conditions

Cleansing Rebasing
Transfer of money in 2017/18 or 2018/19 Asset held 5/4/2017
Between accounts A and B Disposal on or after 6/4/2017
Nominated for this purpose                             Not situated in UK between 16/3/2016 (or acquisition) and 5/4/2017
No other transfer from A to B has been nominated Claimed remittance basis in a year before 2017/18
Claimed remittance basis in a year before 2017/18 Deemed dom for 2017/18 and all years up until disposal
Not dom of origin                        Not dom of origin or general law dom