In the second part of our blog on HMRC proposals to changes in the taxation of non domiciles we look at the final two recommendations from the recent consultation paper.
Trusts
The proposal for a trusts benefits charge has been scrapped in favour of amending the existing rules. The adapted legislation will provide certain, limited protections in relation to CGT and Income Tax for trusts established before the settlor becomes deemed domiciled.
1. CGT
There will be an extension of the current rules that tax a settlor, who is resident and domiciled in the UK and who has settled assets in a non-resident trust, on trust gains as they arise where they (or a family member) retain an interest in the trust, to settlors who also become deemed domiciled. Settlors will be protected from a charge on capital gains as they arise where the trust was set up before they became deemed domiciled and no additions of property have been made since that date. If the settlor, their spouse or minor children receive any actual benefits from the trust the protection will be lost.
2. Income Tax
Deemed domiciled settlors of settlor-interested trusts will be subject to tax on the income of the trust as it arises going forward. Protection will be available in respect of foreign income arising to a non-resident trust set up before the settlor became deemed domiciled, provided the income is retained within the trust. If the settlor, their spouse or minor children or another relevant person receives a distribution of relevant foreign income arising in a year when the settlor was non-domiciled and the trust was protected, this distribution will be taxed on the settlor
UK residential property and inheritance tax
Under current rules, non-UK property, including shares in a non-UK company and an interest in a non-UK partnership, is exempt from inheritance tax if owned by a non-UK domiciled individual who is not yet deemed domiciled or by a trust settled by them. HMRC plan to remove this exemption to the extent the non-UK property derives its value from UK residential property.
For example, shares in a non-UK company which owns only UK residential property will cease to be exempt from 6 April 2017. Thus where a UK residential property is held through an offshore structure, it will be subject to IHT in the same way as if it were held directly.
Furthermore, UK residential property will no longer be considered ‘excluded property’ for UK IHT purposes where the shares are owned by a non-UK domiciled individual or an offshore trust.
Debt on UK residential property will be deductible if, and only if, it relates directly to the UK property. Thus it is assumed that the debt would need to have been used to buy or do works to the property and in most cases should be secured on the property, provided the loans in question are not between connected parties.
Conclusion
As mentioned above, these changes are complex, especially those involving trusts, and will require further research and consultation before HMRC pass them as legislation. Due to this, there may well be a postponement, however, at the time of writing, the changes are still due to come in on 6 April 2017 so it is necessary to be prepared for them.
If you believe that any of these changes are likely to affect you or you would like to discuss any of the matters further, please feel free to contact our tax team on 0845 177 5500 or using our on-line contact form.