The non-dom changes are still coming into effect from 6 April 2017, but other than that no further details or clarifications were provided. Non-doms who will be affected by these changes should, in most cases, not implement any changes based on the current proposals (particularly those in relation to offshore trusts) until further clarity is provided – this may be on 5 December 2016 when the draft Finance Bill 2017 is due to be published, and we expect the government’s response to the August consultation.
However, on a positive note:
- there appears to be confirmation that a non-dom who becomes UK deemed domiciled will not be subject to tax on an arising basis on gains realised within an offshore trust set up by him before he became deemed domiciled (provided no funds are added to the trust after he has become UK deemed domiciled). This was the proposed position at the time of the original consultation paper in October 2015 but the consultation paper published in August 2016 proposed that if he, his spouse/civil partner or minor child received any benefit (whether capital or income) from the trust after he had become UK deemed domiciled he would be subject to tax on an arising basis on all the trust’s gains;
- despite rumours to the contrary, there was no announcement that it would no longer be possible to ‘wash-out’ trust gains to non-UK resident beneficiaries, and in particular no anti-forestalling measures were announced (that is, distributions to non-UK resident beneficiaries can still be a useful part of long term planning).
Further details on the non-dom changes can also be found in our BLP Private Wealth guide: Reforms to taxation of non-doms: impact for UK resident with foreign domicile of origin – position from 6 April 2017
Other Autumn Statement announcements
Requirement to Correct
Taxpayers will be subject to a ‘Requirement to Correct’ (RTC) past UK tax irregularities related to offshore income or assets. The RTC will cover all outstanding UK tax liabilities on or before 6 April 2017, and the correction must be made on or before 30 September 2018. A taxpayer who fails to correct their affairs will be subject to Failure to Correct sanctions, which will be tougher than any existing penalties and could amount to 300% of the under declared tax. This is part of the government’s ongoing aim of reducing the ‘Tax Gap’.
Non-UK resident companies with UK income
The government is considering bringing all non-UK resident companies that receive taxable income in the UK into the corporation tax regime, to ensure that all companies are subject to the rules which apply generally for the purposes of corporation tax, including the limitation of corporate interest expense deductibility and loss relief rules. The government will consult on this measure and the options for change at the time of the Budget in March 2017.
Sanctions for ‘enablers’ of tax avoidance arrangements
The government is pressing ahead with proposals to penalise ‘enablers’ of tax avoidance – those who design, market or facilitate the use of tax avoidance arrangements which are defeated by HMRC. Under the proposals an arrangement will be treated as having been defeated by HMRC not only where a court or tribunal finds that the arrangements do not achieve their purported tax advantage, but also where a taxpayer reaches a settlement with HMRC that the arrangements do not work even if this is because he cannot afford to continue to fight HMRC in the courts or does not wish to. The proposed sanctions include a fine and naming ‘enablers’.
Under the proposals, a person or firm could fall within the definition of an ‘enabler’ if it:
- devises the tax avoidance scheme or advise or assist a person who devises the scheme;
- acts as a middleman;
- provides planning and bespoke advice on jurisdictions, investments and structures;
- sets up companies, trusts and other vehicles;
- provides legal services and documentation which underpin the structures or which obscure the true nature of the arrangements.
Offshore reporting funds
Investors in offshore reporting funds are generally subject to income tax on the annual fund income, but pay capital gains tax on any gain when the fund is sold. Certain expenses, including performance fees, are set off against fund income, which reduces the level of income tax payable by investors. Legislation will be introduced so that from April 2017 those performance fees cannot be set of against fund income, but instead only against gains on disposal. This may mean that these funds produce slightly more annual income, thereby increasing the tax payable by investors.
Non-doms: reminder of key changes
From 6 April 2017:
- a non-dom who has been tax resident in the UK in 15 out of the last 20 tax years will be treated as if he is UK domiciled for all tax purposes.
- a non-dom who becomes deemed domiciled on 6 April 2017 (and has paid the remittance basis charge in any earlier tax year) can elect to re-base any foreign asset held directly by him so that he is only subject to CGT on any increase in the value of the asset from 6 April 2017. Rebasing will not be available to a non-dom with a UK domicile of origin who becomes deemed domiciled on 6 April 2017, or to any non-dom who becomes deemed domiciled after 6 April 2017. There will be no need to dispose of an asset to rebase it.
- all non-doms will be given one tax year (from 6 April 2017 to 5 April 2018) to re-arrange offshore mixed bank accounts to separate out any ‘clean capital’ in those accounts. If mixed funds have been used to buy an asset the asset can be sold and then the sale proceeds can be separated into different elements.
- non-UK trusts set up by a non-dom before he became UK deemed domiciled will enjoy some limited protections. We understand the government’s current thinking is that a non-dom who has become UK deemed domiciled but who set up an offshore trust before becoming UK deemed domiciled:
- will be taxed on the UK source income of the trust on an arising basis;
- will not be taxed on the foreign income of the trust as it arises (provided he does not add funds to the trust after he has become UK deemed domiciled). However, if he, his spouse/civil partner or minor child/grandchild receives a distribution or benefit from the trust (whether of income or capital) at a time when he is UK resident and UK deemed domiciled he will be subject to tax on the foreign income of the trust and any underlying company up to the value of the distribution or benefit;
- will not be subject to tax on the gains of the trust on an arising basis (provided he does not add funds to the trust after he has become UK deemed domiciled). However, if he, his spouse/civil partner or minor child/grandchild receives any benefit from the trust (whether capital or income) at a time when he is UK resident and UK deemed domiciled he will be subject to tax on the gains of the trust and any underlying company up to the value of the distribution or benefit;non-UK assets of a trust set up by a non-dom before he became UK deemed domiciled will continue to be outside the scope of UK IHT.
- non-doms who were born in the UK with a UK domicile of origin will be treated as UK domiciled for all tax purposes in any tax year in which they are UK resident. In addition, if they become UK resident, offshore trusts set up by them whilst non-dom will be taxed as if they were set up by a UK domiciled individual.
- all UK residential property held by a non-dom, whether directly or indirectly, including UK residential property held by offshore companies, offshore trust and company structures and non-UK partnerships will be subject to UK inheritance tax from 6 April 2017. The changes will affect all UK residential property of any value whether it is owner occupied or let. They will not, however, bring other UK assets held indirectly by non-doms (through, for example, a non-UK company) within the charge to UK IHT.