With the publication of the draft Finance Bill on 5th December 2016 and the Government’s responses to the August 2016 consultation, clients holding UK residential property through offshore structures and who have set up offshore trusts should be made aware that:
Inheritance tax (IHT) on UK residential property holdings
- From April 2017, all interests in UK residential property held by a non-dom, whether directly or indirectly, including UK residential property interests held by offshore companies, offshore trust and company structures and non-UK partnerships will be subject to IHT. The changes will affect all UK residential property of any value whether it is owner occupied or let.
- In addition, loans made to fund the acquisition, maintenance or enhancement of UK residential property will be subject to UK IHT. Therefore if a non-dom lends money to the trustees of a trust who lend that money to a non-UK company to purchase a UK residential property, both the equity value of the UK residential property and the loan will be subject to UK IHT.
In addition:
- if a non-dom sells shares in a non-UK company that holds UK residential property the proceeds of the sale (and any property acquired with those proceeds of sale) will remain within the charge to UK IHT for two years from the date of the disposal. This anti-avoidance rule will only apply where the sale occurs after 5 April 2017;
- where a non-dom has lent money to another person and the loan is used to buy, maintain or enhance UK residential property any repayments of that loan will remain within the charge to UK IHT for two years. Again, this anti-avoidance rule will only apply to loan repayments made after 5 April 2017.
Taxation of offshore trusts set up by non-doms before becoming UK deemed domiciled
A non-dom who is UK resident, who set up an offshore trust before becoming UK deemed domiciled, and who then becomes UK deemed domiciled on 6 April 2017 (as a result of being UK tax resident for 15 out of the last 20 tax years):
- will be taxed on the offshore trust’s UK income as it arises (at trust or underlying company level)
- will not be taxed on foreign income arising to the offshore trust (or an underlying company) after 5 April 2017 as it arises, or while it remains in the trust (as long as no benefits are provided to close family members of the settlor) even if that foreign income is brought to the UK by the trustees (or an underlying company)
- will be subject to income tax if a ‘close family’ member receives a distribution or benefit from the trust (if there is relevant foreign income in the trust structure) unless the close family member is themselves subject to income tax on the distribution/benefit (wherever the benefit/distribution is received)
- will not be subject to capital gains tax (CGT) on UK or non-UK gains realised in the offshore trust (or by an underlying company) as they arise
- will be subject to CGT if a close family member receives a distribution or benefit from the trust (if there are gains in the trust) unless the close family member is themselves subject to CGT on that distribution/benefit (wherever the benefit/distribution is received)
- the non-UK assets of the trust (subject to the new rules in relation to UK residential property and the ‘tainting’ rules – see below) will not be subject to UK IHT.
The settlor’s ‘close family’ include his spouse/civil partner/cohabitee, his minor children and the minor children of his spouse/civil partner/cohabitee, but not adult children or any grandchildren.
Therefore the UK resident UK deemed domiciled settlor will, broadly, be subject to tax on distributions/benefits received by close family members who are either:
- non-UK resident; or
- UK resident non-dom remittance basis users who do not remit the distribution/benefit to the UK.
Note distributions/benefits to adult children (or grandchildren) who are non-UK resident will not be subject to tax on the settlor or the recipient. However, if an offshore trust set up by the non-dom before he became UK deemed domiciled is ‘tainted’ (see below):
- he will be subject to tax on all the UK and non-UK income of the trust (and underlying entities) and all the gains of the trust on an arising basis in that tax year and all subsequent tax years in which he is UK resident (even if he ceases to be UK deemed domiciled and then later returns to the UK)
- the added funds (and anything which derives from them) will not be protected from IHT.
A trust will be ‘tainted’ if, at any time after 5 April 2017 when the settlor is UK deemed domiciled, funds are added to the trust by the settlor, or by the trustees of any trust of which the settlor is either a beneficiary or the settlor.
Changes which impact on all offshore trusts set up by a non-dom (whether or not UK deemed domiciled)
- A UK resident non-dom settlor of an offshore trust will not be taxed on foreign income arising to the offshore trust after 5 April 2017 as it arises, or while it remains in the trust (as long as no benefits are provided to close family members of the settlor) even if that foreign income is brought to the UK by the trustees (or an underlying company).
- From 6 April 2017, where a non-UK resident beneficiary receives a distribution or benefit from an offshore trust set up by a non-dom that distribution/benefit will not reduce the pool of trust gains unless the settlor is UK resident and UK deemed domiciled and is subject to tax on the distribution/benefit. This means that the trust gains will remain available to match against distributions/benefits to UK resident beneficiaries and be taxed on them.
If you are at all concerned that these changes will affect you please contact your Account Manager or email us at query@tax.uk.com
