To
date, UK resident non-doms may not have been greatly impacted by the UK tax
system’s plethora of measures to try to get the foreign income and gains
received by offshore trusts (i.e. trusts that are not UK tax resident) taxed in
the UK. This is because one of the key anti-avoidance provisions, the
‘S.86 Settlor Charge’ which can make a trust’s settlor liable for the offshore trust’s
gains, only applies to settlors who are both resident and domiciled in the
UK.Its
sister charge, the ‘S.87 Beneficiary Charge’, can apply to match trust gains
with distributions and benefits (‘capital payments’) to the trust’s
beneficiaries. This will not trouble a
UK resident non-dom beneficiary either, provided the capital payments are made
or enjoyed outside the UK, and kept there, and the resident non-dom claims the
remittance basis of taxation.
Any non-dom UK resident settlors about to become
deemed domiciled should get their offshore trusts screened now, to identify
potential sources of additions. Apart from a few exceptions, any
addition, of however much and even if inadvertent, from 6 April 2017, will mean
that the protected status is lost for good and the offshore trust’s income and
gains are then assessed on the UK resident deemed dom settlor as they arise.
The stakes could be high.
Similarly,
the Settlement regime and the Transfer of Assets Abroad provisions in the current
Income Tax legislation can also tax foreign trust income on settlors. These are
manageable if the settlor is claiming the remittance basis of taxation and
capital payments are not remitted to the UK.
However,
long term UK resident non-doms could find that, unless they move quickly, the
taxation of their offshore trusts, as they currently know it, changes for them
from 6 April 2017. Based on the current draft Finance Bill 2017, those
non-doms resident in the UK for 15 or more out of the 20 income tax years,
ending with the tax year prior to the one in question (so for tax year
2017/2018, starting 6 April 2017, the 20 years is up to and including tax year
2016/2017), will be deemed to be UK domiciled for Income Tax and Capital Gains
Tax purposes. In other words, access to the remittance basis of taxation
is to have a time limit placed upon it – a maximum of 15 years for those
individuals here for a continuous period of 15 tax years.
Stripped of the
remittance basis of taxation, UK resident deemed dom settlors could feel the
full force of S.86 and be taxed on trust gains as they arise. Under new
rules contained in the Finance Bill, capital payments to close family members
will also be taxed on a UK resident settlor (this will apply to all UK resident
settlors, be they non-dom or deemed dom, from 6 April 2017) if they are not liable
for UK tax on the close family member (because the family member is a
remittance basis user, for example).
The
picture is not so gloomy for trust income. Draft legislation just
published confirms that foreign trust income will only be taxed on UK resident
settlors if they or close family members actually receive a benefit from the
trust (as for gains). UK resident settlors will no longer automatically
be taxed on foreign trust income simply because they are also a potential
beneficiary of the offshore trust.
So
does this mean that soon to be deemed doms should abandon their offshore
trusts? Far from it. Offshore trusts continue to offer a shelter
from UK Inheritance Tax for assets placed into them before the settlor becomes UK
domiciled, deemed or actual. And, going forward, settlors and their close
family members who can leave capital and income in the trust without taking a
benefit will still find that foreign income and gains can be rolled up in an
offshore trust free of UK Income Tax and Capital Gains Tax, provided that the
offshore trust meets the criteria for the new status of ‘protected trust’
offered in the Finance Bill 2017. This requires there to be no
capital or income additions to the trust by the settlor or another trust of
which the settlor is a beneficiary or the settlor of that trust.
