Non-Domiciles tax planning opportunity

24/11/2016
Non-Domiciles tax planning opportunity

The publishing of the draft Finance Bill 2017 gives some new information relevant to long term residents who are domiciled overseas. We will see a major change from April 2017 but there are planning opportunities in the short term.

Who needs to act quickly?

Anyone currently domiciled outside the UK – and about to sell a capital asset with a large gain. Check whether it is beneficial to postpone the sale until after 5th April 2017 to get the rebasing – or realise before and try to arrange your finances so that no gain needs to be remitted in the future.

Anyone becoming deemed domiciled on 6th April 2017 under the new rules

1  there is an opportunity to create a new clean capital account from which future remittances can be made to avoid future income and capital gains tax on money brought to the UK. It appears that this is a one-off opportunity so careful planning will be required.

2   consider setting up a Trust before 5th April to save future inheritance tax plus the possibility of savings in IT and CGT.

Background to the Changes to UK taxation of non domicile individuals

Non domicile individuals had for a very long time been able to able claim the remittance basis of taxation in respect of their offshore income and gains arising in a tax year. This means that they will only be taxed in the UK when they remit the funds to the UK.  Since April 2008, the non domicile individuals, depending on their circumstances had to pay the remittance basis charge to take advantage of this privilege.  In the Summer Budget 2015 the then Chancellor announced sweeping changes to the way non domicile individuals are taxed on their offshore income and gains.

It was announced that from 6 April 2017, non domicile individuals who had been resident in the UK for 15 out of the last 20 years will be deemed to be domicile in the UK and they will not have the option to elect for the remittance basis of taxation.  In addition individuals who were born in the UK and had a UK domicile at birth but later changed their domicile by choice will also be deemed to be UK domicile from 5 April 2017, irrespective of how long they been resident in the UK since losing their UK domicile.  The Chancellor in his Autumn Statement confirmed that the proposed changes will go ahead as announced from 6 April 2017.  These individuals will need to review the tax position between now and 5 April 2017 to determine how these changes will impact on their UK tax position.

If you are affected by these changes, the issues you need to consider will depend on your specific circumstances. For example for non domicile individuals who will become deemed domicile from 6 April 2017 and was not born in the UK with UK domicile, the Government has proposed that the tax base cost their offshore assets held as at 8 July 2015 can be re-based to the market value as at 6 April 2017 for capital gains tax purposes.  Hence if you are looking to sell an offshore asset now, you should, if possible, consider deferring the sale to after 5 April 2017.  If you an individual who is currently not deemed domicile for inheritance tax purposes, you should consider whether you should set set up an excluded property trust before 5 April 2017 for inheritance tax purposes. At present an individual who has been resident in the UK for 16 of the past 20 years will be deemed to be UK domicile for inheritance tax purposes from the start of the 17th tax year.  The Government had also announced that there will be short window of opportunity (i.e. from 6 April 2017 to 5 April 2018) to desegregate certain mixed funds.  A mixed fund is a fund which contains more than category of income, gains and capital.  When an individual bring funds from a mixed fund to the UK, there is a precise method of determining which component is remitted first. This do not always give the desired results.  Hence if you are looking to bring funds to the UK, you should again, if possible, consider deferring this to post 5 April 2017.   

UK residential properties

At present non domiciled individuals and excluded property trust are not subject to UK inheritance tax on UK residential properties held indirectly via a offshore entity.  However from 6 April 2017, UK residential property held via these offshore entities will be caught and be subject to UK inheritance tax.  If are in this position, you need to review how this would impact on you and whether it would be advantageous to de-envelope the structure before 6 April 2017.

Business Investment Relief

The Chancellor announced in the Autumn Statement that the rules for the Business Investment Relief scheme will change from April 2017 to make it easier for non-domiciled individuals who are taxed on the remittance basis to bring offshore funds to the UK for the purposes of investing in UK businesses without giving rise to a taxable remittance. At present the conditions that needs to be met are narrowly drawn and can be restrictive.

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