In a surprise move yesterday, the UK government announced that most of the tax changes announced in this year’s Finance Bill published on 20 March will now be postponed. The reason given is that Parliament will not have sufficient time to scrutinise the Bill before the recess due to a General Election being called in the UK on 8 June. The tax changes being postponed include all changes to the tax regime for non-doms and the changes to inheritance tax on UK residential property owned in overseas structures.
The delay will be a source of great frustration and anxiety to many clients and their advisers because major restructuring was required by 5 April 2017 to avoid the negative effects of the new regime, which has been planned by the UK government for almost two years.
At the time of writing, no further explanations have been released by the UK government or the tax authority and in view of the General Election it seems quite possible that no further information will be released until the summer. A new Finance Bill will be introduced by the new government but the timing of that is not yet known, nor is it known whether all of the planned changes will be left unchanged from the existing Finance Bill.
The key consideration is whether the planned changes will take effect from 6 April 2017 as planned or will be delayed until 6 April 2018. Those non-doms who have been UK tax resident for 15 years and were told they would become deemed UK domiciled on 6 April 2017 could now become deemed UK domiciled on 6 April 2018. If that is the case, those non-doms may have to pay the Remittance Basis Charge of £90,000 for an extra year; this will be an unexpected cost to those non-doms who settled non-UK assets into overseas trusts by 5 April this year and believed they would not be taxed on the income of the structure as it arose. Conversely, for non-doms who were unable to take advantage of the planned new rules for “protected trusts”, a delay may represent good news if they can save costs by paying the Remittance Basis Charge for another year.
Another positive for some is that a delay may give non-doms another opportunity to make changes they wouldn’t otherwise have time to make; to settle new excluded property trusts, to take trust distributions overseas while they can still benefit from the remittance basis of taxation or to receive income or realise gains overseas in tax year 2017/18 on which they had expected to suffer UK tax.
But spare a thought for those non-doms who believed that the promised changes to the UK tax regime meant the only realistic option for them was to leave the UK; they may now find they could have remained in the UK for at least another year.
Another very important effect of any delay is that the rebasing of personal overseas assets to 6 April 2017 values may not have effect as planned. Non-doms with plans to sell such assets and remit the proceeds to the UK on the basis this would be free of UK tax if the assets were purchased from clean capital must put those plans on hold for now as a matter of urgency.
Similarly, non-doms should defer plans to sell rebased assets with a view to creating liquid cash funds for the cleansing of mixed funds as these provisions are also delayed.
Many clients becoming exposed to inheritance tax on UK residential property assets took the step of removing assets from corporate ownership as payment of the ATED charge was no longer worthwhile. In some cases this will have generated capital gains tax liabilities and inheritance tax exit charges if assets left trust structures. It would seem particularly unfair, having imposed a deadline of 5 April 2017 for action to be taken, for the UK government to insist on such tax liabilities being paid in the event that the proposed changes to inheritance tax were eventually abandoned, but we expect this issue will not arise on the basis that the measure is simply being delayed.
Unfortunately, we are now entering a period of uncertainty over whether the previously announced changes will be introduced in their original form and simply delayed, whether they will be modified in any way or will some of the measures be dropped completely and new changes announced?
In our view, the time to announce a delay of the non-dom and IHT changes was when the UK voted to leave the EU, with the resultant need to make the UK as attractive as possible to non-doms as inward investors. The government did not take that opportunity to pause for thought and the delaying of the draft legislation that was published on 20 March reflects very poorly on the UK’s reputation as a stable tax environment.
Please contact us if you have any questions or concerns you’d like to raise on these topics.