Archive 04.3.16 Author: Robert Maas

Non-doms: Planning for 6 April 2017

Archive 04.03.2016 Author: Robert Maas

The proposal on non-doms who have been here for more than 15 years, or who were born here with a UK domicile of origin, is to tax them in exactly the same way as a UK domiciled individual.

This means that they will become subject to all of the anti-avoidance rules that apply to UK domiciled individuals. The only exception that the Chancellor announced was to retain the IHT exemption for excepted property settlements made by long-term non-doms before they reach the 15-year limit (or the 17-year limit for pre 6 April 2017 settlements).

In particular, existing overseas structures for such non-doms need to be reviewed in the light of:

ITA 2007, s 720: which taxes the transferor (or a beneficiary who receives a payment) on income arising to non-residents in consequence of a transfer of assets abroad.

TCGA 1992, s 86: which taxes the settlor on capital gains of an overseas settlement (and via TCGA 1992, s 13 on those of an underlying company) where the settlor, his spouse, children (or their spouses), grandchildren or other issue are possible beneficiaries under the settlement (unless it was created before 19 March 1991) or a company controlled by one of the above receives a payment.

TCGA 1992, s 88: which taxes a beneficiary who receives funds from an overseas settlement on capital gains of the settlement that have not been taxed under s 86, eg where the settlor is non-UK resident but a beneficiary is UK resident.

We generally advise UK resident and domiciled clients that there is no benefit in setting up an overseas structure. (That is not wholly right as in some cases there may be benefits under a double tax agreement).  Accordingly there will be no UK benefits to a long-term non-dom (or one born here) in retaining an offshore structure after 5 April 2017 – although, as, by definition, a non-dom intends to leave the UK at some stage, it is not necessarily advisable to collapse all such structures.

The options open to long-term non-doms are limited.

If you would like to discuss these issues further, or any other tax planning opportunities, please get in touch with our tax team.

  1. Do nothing and pay the tax
  2. Wind up the structure before 6 April 2017
  3. Distribute the free funds in the structure during 2016/17 (or 2015/16), keep the money overseas and pay the remittance basis charge.
  4. Do something to uplift the base cost of the assets in the structure, such as engineer a bed and breakfast transaction
  5. Make gifts to spouse, adult children or others prior to 6 April 2017, so that some of the income and capital gains is taxable on someone with a lower tax rate
  6. If the client is contemplating leaving a substantial amount to charity on his death, consider gifting some of the funds now to a UK resident charitable trust. The client can continue to manage the money and it can continue to grow tax-free
  7. Bring the overseas structure onshore, so as to at least save or reduce the running costs of the structure

The probability is that money held overseas by the individual at 5 April 2017 will continue to be taxed on a remittance basis if it is brought into the UK after that date. This is also likely to apply to income and gains realised before 5 April 2017 that remain within an overseas structure.  This is so, even if the structure is brought into the UK.

There might therefore in some cases be merit in leaving the structure in place and accepting tax on future income and gains. The identification rules for distributions from a mixed fund identify distributions with income and gains of later years in preference to earlier ones, so it should be possible to take out the amounts arising after 5 April 2017 on which tax is paid, without triggering a remittance of earlier gains.

About the Author

Robert Maas

Tax Consultant +44 (0)20 7309 3800