Attached are some important update notes summarising some upcoming changes to tax legislation.
A list of the areas covered below are:
- Important Update to Non UK Domiciled individuals (Non Doms) – due to come into effect 6 April 2017
- An outline of the Making Tax Digital Rules – due to come into effect 6 April 2018
- Budget Update following budget on 8 March 2017
1. Non UK Domiciled Individuals – Important update
Further to our correspondence after the Summer Budget on 8 July 2015 and an extended period of consultation, there are now more details available and draft legislation has now been published with a view to the new rules taking effect in April 2017.
The new rules (as they are currently drafted) are summarised below. Please take the time to read them and make contact if you need further clarification or feel further planning work is needed for you.
UK domiciles of Origin
It has been confirmed that individuals born in the UK with a UK domicile of origin will no longer be able to claim non-UK domicile (‘non-dom’) status for tax purposes while they are living in the UK, even if they had previously left the UK and acquired a domicile of choice in another country.
No more long-term non-doms
Further, it has now been confirmed that non UK doms will be deemed to be UK domiciled, for all tax purposes, once they have been resident in the UK for at least 15 of the past 20 tax years (the ’15/20 test’).
Individuals who become deemed domiciled will, whilst UK resident, be taxable on their worldwide income and capital gains on an arising basis with no option to use the remittance basis. They will also be subject to inheritance tax on their worldwide estate.
An individual who has acquired deemed domiciled status would only lose that status if he or she becomes non-UK resident and remains so for at least six years.
While the latest announcements significantly restrict the ability of non-doms to benefit from a preferential system/tax treatment, they also offer opportunities for effective planning. We set out the key points below.
Transitional arrangements and planning: Rebasing
Individuals becoming deemed UK domiciled on 6 April 2017 under the 15 out of 20 year rule will be able to benefit from rebasing of their foreign situated capital assets, to their market value on 5 April 2017, for CGT purposes. This is effectively a tax free uplift for foreign assets and where the original funds used to purchase the asset were clean capital, the entire gains can be remitted to the UK, tax free.
Rebasing will apply to a disposal automatically unless the taxpayer makes an election for the rebasing not to apply.
Rebasing will only apply to individuals who have paid the remittance basis charge in relation to any year before 5 April 2017 and who become deemed domiciled under the 15 out of 20 year rule on 6 April 2017.
Rebasing will not be available for individuals who become deemed domiciled after 6 April 2017.
Individuals born in the UK with a UK domicile of origin are specifically excluded from benefiting.
Will rebasing apply to all foreign assets?
The foreign asset must not have been situated in the UK at any time in the period 16 March 2016 and 5 April 2017.
Rebasing will only apply to unrealised gains in assets held directly. Assets held within overseas structures such as trusts or companies will not benefit from the uplift.
Many non doms reverted to using the Arising Basis when the Remittance Basis Charge was introduced. These people will be prohibited from Rebasing unless they elect to use the Remittance Basis in either 2016/17 or an amendment is made to an earlier year to make a remittance basis claim. If you are going to be deemed UK domiciled on 6 April 2017, consideration should be given to whether it is worth paying a remittance basis charge in order to benefit from the tax free uplift on your foreign situs assets.
Transitional arrangements and planning: Cleansing of mixed funds
Many non-doms may have existing mixed funds where it would be beneficial to segregate out the various components of that fund. A common scenario is having a single, non UK bank account containing a mixture of capital, income and gains arising from different sources and spanning several tax years. Where these funds are held in a single account rather than segregating each source/year individually, this would constitute a mixed fund.
The new rules will allow qualifying individuals to rearrange and separate their mixed funds held in non-UK bank accounts into their constituent parts e.g. the income, capital gains, and ‘clean’ capital elements. This would potentially be of benefit to any individual where the remittance basis has been claimed.
The Government have called this ‘unmixing’ of mixed funds “cleansing”.
Any non-dom who has claimed the remittance basis at any point between 2008/09 and 2016/17 inclusive.
There is a two year period, beginning on 6 April 2017, during which the ‘cleansing’ must be done.
Individuals born in the UK with a UK domicile of origin are specifically excluded from benefiting.
What does cleansing apply to?
- Money held outside the UK.
- Deposits held in overseas bank accounts.
- Similar non-UK accounts capable of being split into different accounts.
- Money from the disposal of non-UK situs assets (e.g. investment fund).
What is the impact of the cleansing of mixed funds?
The current remittance basis rules governing mixed funds (i.e. most commonly non UK sited bank accounts consisting of a mixture of so called ‘clean’ capital, income and capital gains) dictate that taxable income and capital gains of a given tax year are treated as remitted (and therefore become taxable in the UK ) before non-taxable ‘clean’ capital. The current rules also prevent the separation of these elements into different offshore accounts. Therefore, unless separate accounts have been used for each source of income, Non-doms will find they are unable to make remittances of money to the UK without incurring a UK tax charge as their offshore ‘clean’ capital is ‘trapped underneath’ their foreign income and gains.
This opportunity to cleanse mixed funds will only be available during the period 6 April 2017 and 5 April 2019 and will apply to nominated transfers of money only from a mixed account to another account.
Cleansing will not be available where an individual is unable to determine the component parts of their mixed fund. The mixed fund rules have always required a remittance basis user to track and monitor their offshore funds in order to benefit from the remittance basis, and this will remain the case even under transitional arrangements.
UK Property and Trust Structures
From 6 April 2017, all UK residential property, including properties owned through a UK Trust and/or Company structure will now fall within the UK’s Inheritance Tax (IHT) net. This means, as a UK situs asset, the value of the UK property (less associated debt) will automatically be an asset in an individual’s death estate, or a Chargeable Lifetime on settlement of a new Trust.
For individuals who own UK property through such a structure, it is recommended they seek advice to determine any benefit in continuing the structure, and the tax effects of winding the structure up.
Trusts settled by non UK domiciled individuals
Various pieces of anti-avoidance legislation exist in the UK, to bring into UK taxation, income and/or gains received by a non resident trust, by UK resident settlors and beneficiaries. It was previously possible, due to the wording of some of the legislation, for UK resident settlors of non UK Trusts, to avoid taxation in the UK on Trust income because of their non UK domiciled status.
Whilst the new deemed domiciled rules will change this, new legislation is being inserted to introduce the concept of a “protected trust”. Broadly, this is a Trust settled by a non-domiciled individual which is not settled further, directly or indirectly, after 5 April 2017.
The trust legislation which attributes gains of the trust, to beneficiaries receiving a capital payment or benefit from the trust, is being adjusted so that it will no longer be possible to avoid this by arranging to make capital payments to non UK resident beneficiaries before UK resident beneficiaries. Furthermore, the definition of the word ‘family’ will be widened to avoid distributions being made to distant relatives in order to reduce the tax burden.
2. Making Tax Digital
Another far reaching change on the horizon is the HMRC initiative “Making Tax Digital” (MTD).
Unfortunately although this is scheduled to be phased in over a period from 6 April 2018, we know very little about the detail at this stage. However, since you need take no action currently, we are making you aware of the upcoming changes.
The basic idea is that HMRC are receiving information electronically from more and more sources (for instance bank interest and earnings subject to PAYE) and plan to use this data to populate a Personal Tax Account (PTA) for each individual. This will provide details of the taxpayer’s estimated tax liability for the year and other details about their tax situation generally.
By 2020, the plan is that all taxpayers will be affected but the first group to be within the new rules will be landlords (we don’t know whether or not this will include landlords of non UK properties but at the moment we are assuming so) and self employed individuals. There is an exception if income from these sources is less than £10,000 per tax year and the budget on 8 March 2017 suggested that participation of those with a turnover below the VAT threshold, would be delayed until 6 April 2019.
We believe that individuals will need to set up and activate their PTAs through the Government Gateway – and authorise us as agents to have access to these PTAs. However, as details are still being discussed we would not advise trying to do this just yet.
Taxpayers (or us as your agent!) will then have to file quarterly statements of income and expenses during the tax year in question in respect of these sources.
We do not yet know exactly what will be involved and the software will not be available until much later this year. However, we understand that penalties will not be charged if these “interim statements” are incorrect or estimated but may be charged if they are late or not filed at all.
Then at the earlier of 10 months after the last quarterly interim statement or 31 January following the tax year end, a final filing/reconciliation will be required by which the taxpayer will verify the data HMRC is showing for him/her and also correct any estimates or errors in the previously filed four interim statements. It is intended that, eventually, this process of filing four statements and one ‘reconciliation’ will replace the need for a Tax Return (as we now know them), but, at least initially, it is possible both Tax Returns and reconciliations may be required.
For the moment HMRC have confirmed that tax payments will not be required on the quarterly filings and existing payment deadlines will be retained.
The MTD plans will also require businesses and landlords to keep digital records (rather than paper records). We will be working with software providers to find a solution that makes this easy for both you and us so that the impact of a quarterly filing is not considered to be overly onerous.
We will of course keep you up to date with developments and information, as we receive it.
PLEASE NOTE THAT THIS IS FOR GENERAL REFERENCE ONLY AND SHOULD NOT BE ACTED UPON WITHOUT ADVICE, IT IS NOT AN ADVICE NOTE AND THEREFORE YOU SHOULD TAKE ADVICE SPECIFIC TO YOUR OWN TAX SITUATION.