On 5th December 2016 the Government published the draft clauses of Finance Bill 2017 and various related documents.
With only four months to go until April 2017 when the new non-dom taxation regime takes effect, the draft legislation offers some welcome clarification of the new rules.
Below is a high level summary of some of the key areas that have either been confirmed or changed however, we note that the draft clauses of Finance Bill 2017 remain subject to consultation:
1) Deemed domicile
As expected, the draft clauses of Finance Bill 2017 confirm that the Government will proceed with the deeming provisions first announced in the 2015 Summer Budget. From April 2017 non-doms who have been resident in the UK for more than 15 out of the past 20 tax years will become deemed domiciled for all UK tax purposes. As a result:
- they will be subject to UK tax on their worldwide income and gains as they arise and will no longer be able to claim the remittance basis in respect of non-UK income and gains; and
- both foreign and UK assets will be subject to inheritance tax (IHT).
The Government has confirmed that to ‘reset the clock’ for income tax and capital gains tax purposes, these individuals will need to leave the UK and remain non-UK resident for 6 consecutive UK tax years. However, confirming announcements made by HMRC over the summer, an individual will only need to leave the UK and remain non-UK resident for 4 consecutive UK tax years to lose their deemed UK domicile for IHT purposes.
In addition, individuals born in the UK with a UK domicile of origin will be deemed domiciled in the UK for tax purposes when they return to the UK (returners). However this will not apply for IHT until they have been UK resident for at least one of the two previous tax years.
2) Transitional measures
As part of the new rules reforming the UK tax treatment of non-doms, the Government have confirmed that two new transitional reliefs will be introduced.
– Rebasing of foreign assets
First announced in the 2015 Summer Budget, individuals becoming deemed domiciled in April 2017 under the 15/ 20 rule who have previously paid the remittance basis charge will be able to rebase their foreign assets to their market value on 5 April 2017. However, rebasing will not be available to those who become deemed domiciled after April 2017.
In a departure from the August 2016 consultation document, rebasing will apply to assets held on 5 April 2017 that have not been UK sited at any time from 16 March 2016 or their date of acquisition if later. The scope of rebasing is limited to directly held assets and will not be extended to include assets that are held indirectly. This may therefore provide an opportunity for assets that are not currently held personally to be rebased.
Rebasing is only available for assets within the charge to capital gains tax and does not include offshore income gains.
Cleansing of mixed funds
The Government have confirmed that all non-doms, apart from returners, who have been taxed on the remittance basis at some stage prior to 6 April 2017 will be able to take advantage of so called cleansing of mixed funds. The Government has extended, from one to two years, the window of opportunity enabling non-doms to rearrange their mixed funds held in non-UK bank accounts to their constituent parts, distinguishing between the income, capital gains, and “clean” capital elements. Prior to this change many non-doms could not access “clean” capital because it was in a mixed fund, but now they will be able to do so.
3) Provisions for offshore trusts
As a result of the consultation process, the Government have revisited their original proposals for the creation of a “protected” trust regime for non-UK trusts settled by individuals before they become deemed domiciled in the UK. The result is an alternative approach where liability to income tax or capital gains tax is dependent upon the extent to which benefits or capital payments are received from the non-UK trust. As part of this, new provisions have been announced which, in certain circumstances, will treat the settlor as the recipient of any benefits and capital payments received from the trust by a “close family member”.
Protected status will be available for non-UK trusts settled by individuals before they become deemed domiciled in the UK, and will continue provided the settlor makes no direct or indirect additions to the trust after they have become deemed domiciled in the UK. The Government have confirmed that protected trust status will not apply to settlors who become deemed domiciled under the returners rule.
4) Business Investment Relief (BIR)
Recognising that BIR has had limited appeal for non-doms since it was first introduced in 2012, from 6 April 2017 investments in so-called “hybrid companies” may meet the conditions for relief. A “hybrid company” is broadly a company which is not exclusively trading or investing in trading companies (which qualify under the established BIR rules), but a hybrid of the two. In addition, relief may be available where the individual acquires existing shares.
To further incentivise non-doms to use BIR, the complex rules which result in the withdrawal of BIR will be revised.
However, BIR will continue to be denied for investments made in partnerships. Furthermore, the legislation has been expanded to explicitly exclude investments in corporate partners of partnerships.
5) UK residential property
From 6 April 2017 the scope of IHT is extended to include UK residential property owned indirectly. Non-UK close companies and partnerships holding such property will be transparent for IHT purposes. In addition, those who have lent money or provided security for a loan to acquire, maintain or repair UK residential property will be subject to IHT.
Non-doms will no longer be able to shelter the value of UK residential property from IHT through the use of these offshore structures, with wide anti-avoidance provisions introduced to ensure the enforcement of the new regime.
The Government had previously announced plans to disallow a deduction for debts from connected parties when valuing property for IHT, but this approach has been rejected following the consultation. Instead, loans taken out to acquire or maintain a UK residential property will be deductible when determining the value charged to IHT, but the loans will be subject to IHT in the estate of the lender, regardless of lender’s residence and domicile position. This will apply to all loans, regardless of whether the loan is between connected parties or not.