The Treasury has published updated draft legislation for the planned changes to the taxation of non-UK domiciles. The big news is that the changes will be effective from 6 April 2017 and will not be rolled forward to 2018; bad news for anybody hoping to delay the effects or who wanted a second chance to make changes. The announcement, however, provides certainty and we can now move forward. The positive legislative changes announced, such as the opportunity to cleanse mixed funds and rebase non-UK assets for capital gains tax, remain in place. Work can resume to help clients get the most out of these opportunities.
The cleansing provisions are great news and will allow individuals to re-organise their non-UK assets so that locked-up capital can be brought into the UK without the risk of creating a taxable remittance of old income. However, care will be needed to ensure that any mixed fund cleansing exercise can be tracked and evidenced to HMRC on challenge, otherwise individuals could be landed with an avoidable tax bill. Guidance is awaited from HMRC on their views on cleansing of mixed funds and a key point will be whether there will be any departure from the long-established principle that capital gains cannot be separated from the entire disposal proceeds giving rise to the gains.
The delay in introducing the new legislation may have consequences for individuals who were previously looking to take advantage of rebasing non-UK capital assets to their 5 April 2017 value and selling immediately afterwards. If the assets were purchased entirely from clean capital, the disposal proceeds would have created a source of capital that could be remitted tax free to the UK. This plan is no longer so straightforward. Any growth in value of non-UK assets since 5 April 2017 will now be chargeable to capital gains tax for those who have become deemed domiciled and will have to be factored into any decision to rebase and sell.
The latest draft legislation does contain changes that make the rules on the tainting of protected trusts clearer. The protected trust legislation prevents the income and gains of a non-UK resident excluded property trust being attributed to and taxed on a UK resident settlor as it arises. The UK resident settlor is taxed only when a benefit is taken that can be matched to income and gains of the trust. However, such a trust will lose its protected status if any additional assets or property are settled by a UK domiciled or deemed domiciled settlor, referred to as “tainting”.
It was feared that informal loans to a protected trust could lead to unintended tainting. Loans not on arm’s length terms could result in value being settled into the trust. The latest draft legislation contains specific rules for loans to trusts setting out the trigger events that will cause loans to be regarded as settled capital. Importantly, the new rules provide for a transition period: non-arm’s length loans will not taint a trust if they are repaid by 5 April 2018. It will be essential for trustees and advisors to not only review any existing loans taken out by trustees but also to monitor those arrangements on an ongoing basis.
We must also remember to look forward. Anyone who will be deemed UK domicile from 2018/19 should start looking at their options under the new rules now published so that they have time to put themselves in the best position.
The draft legislation and guidance can be found here.
If you or any of your clients will be affected by the proposed legislation, please contact us.