Operational mechanics for new non-dom laws

In August 2016, the UK government issued further consultation on the rules affecting the taxation of non-UK domiciled individuals and inheritance tax on UK residential property. In the lead up to the final legislation which will follow the consultation, a tax expert delves into the impact on Global Indians. Draft legislation includes details of wide-ranging changes to the tax landscape for so-called “non-doms” and UK residential property, due to take effect from 6 April 2017. Domicile Deemed domicile In any given year, individuals who are UK resident for at least 15 of previous 20 tax years before the year in question will be deemed to be UK domiciled for income tax, capital gains tax (CGT), and inheritance tax (IHT). This does mean that the £90,000 remittance basis charge will be no longer payable. For IHT, if individuals are non-UK resident in a tax year, and also non-UK resident for the previous four consecutive tax years, then for IHT only, they are not deemed-UK domiciled. This also applies to spouses who have previously elected to be UK domiciled for IHT purposes. An individual returning to the UK, though, must have been non-UK resident for six complete tax years in order to break the deemed UK domiciled position for income tax and CGT. UK domicile of origin Where an individual was born in the UK, has a UK 'domicile of origin', and has acquired an overseas domicile, when UK resident in a tax year from 6 April 2017 they will be UK deemed domiciled for income tax and CGT purposes. For IHT purposes, such an individual is deemed to be UK domiciled if UK resident in a given tax year and one of the previous two tax years. Many second generation UK Indians may not have had a UK domicile of origin at birth, despite being born in the UK, and it is possible that they may be outside the scope of this particular set of provisions. It has not yet been established exactly how these rules interact with the existing double tax treaty between the UK and India, which exempts UK residents with an Indian domicile from an IHT charge on death for non-UK situs assets. Rebasing For those becoming deemed-UK domiciled from 6 April 2017 (but not on a subsequent date), provided the Remittance Basis Charge has been paid at least once since April 2008, it will be possible to rebase foreign situs assets that were held at 8 July 2015. We are awaiting further details on the mechanics of making this election, but it will be on an asset-by-asset basis. Mixed funds There will be a one-off window between 6 April 2017 and 5 April 2018 for individuals who are becoming UK deemed domiciled and who have claimed the remittance basis in the past, to separate their clean capital, capital gains and income held offshore. Once separated, these funds can be remitted to the UK as necessary. In practice, this will require a careful analysis to ensure unintended tax charges do not arise. Offshore Trusts Under the proposed new rules, where individuals become deemed-UK domiciled from 6 April 2017 are settlors of offshore trusts, it is possible for the settlor to be taxable on all income and capital gains within the trust as they arise, if the trust is not 'protected'. Trusts would lose protection if there are additions made after the settlor has become deemed-UK domiciled, or if benefits are conferred on the settlor, their spouse or minor children in excess of any income entitlement they might have under the terms of the trust. Further clarity is still awaited on any new rules where individuals who are treated as deemed-UK domiciled are beneficiaries of offshore trusts. In the majority of cases, assets held in trusts established before an individual becomes deemed-UK domiciled will continue to be “excluded property”, and outside the scope of IHT. The exception is where UK residential property is held in an offshore structure. It is important that individuals and their fiduciary service providers seek advice to ensure that the administration of offshore structures does not inadvertently prejudice their UK tax position post 6 April 2017. UK residential property The Government has signalled a clear intention to ensure that all UK residential property is within the scope of UK IHT, regardless of whether it is owned by an individual, trust or via an offshore corporate entity.

Where there has been residential and non-residential use, the rules state that a property is within the IHT charge if it has been a dwelling at any point in the two years preceding an IHT event. Mixed use commercial and residential properties will be charged to IHT based on the proportionate value ascribed to the residential element. It will not be possible to sell a property where there is an IHT charge outstanding. Any person who has legal ownership of the property, including a company and its directors, will be personally liable for any IHT liability. Where an offshore company owns the property, it is the value of the shares themselves that will be subject to the charge. Debt that relates to the property itself will be allowable as a deduction against the value of the property for IHT purposes. Loans between 'connected parties' will be disregarded, though we do not have a full definition of what a 'connected party' is. It appears that the Government will not bring in any transitional reliefs to incentivise 'de-enveloping' properties by unwinding holding structures. This is disappointing as there is likely to be an SDLT liability incurred in de-enveloping properties. Business Investment Relief Business Investment Relief (BIR) was introduced in 2012 to encourage non-doms who are taxed on the remittance basis to invest their offshore funds in the UK without giving rise to a taxable remittance. It has not proved as popular as was hoped and the Government are consulting in order to make this scheme more attractive to potential investors. Conclusion Given the direction of travel that the draft legislation demonstrates, non-doms should consider an immediate review of all offshore structures, especially those that hold UK residential property. This should be looked at in line with the changes to SDLT rates and income tax restrictions for property finance that were announced earlier in the year. First and second generation UK-resident Indians may wish to consider undertaking a review of their domicile position to ensure certainty going forward. The draft legislation might also prejudice existing succession planning, and it may also be prudent to review such planning alongside non-tax factors before the new rules come into force on 6 April 2017. Harish Dass is part of Smith & Williamson′s tax team in London and has substantial experience of tax planning for UK resident and Non-Domiciled individuals. He also heads up Smith & Williamson′s Asian Business Group.