Summary of Consultation Paper issued 30 September 2015
Government’s stated policy aims:-
Persons who are UK resident in 15 out of the last 20 tax years will become “deemed domiciled”. They will pay tax on their worldwide personal income and gains, but foreign income and gains sheltered within an offshore trust will escape taxation.
Persons who were born in the UK with a UK domicile of origin cannot return to the UK and claim the remittance basis, even if they believe that they have previously established a foreign domicile of choice. All trust structures set up by such individuals whilst claiming a foreign domicile of choice will be treated as having been set up whilst domiciled in the UK.
The government offers just over a month’s consultation on the new proposals and not the normal 12 weeks. This is not sufficient time for such wide ranging reforms.
Persons will become deemed domiciled in the UK (“deemed-doms”) for all taxes once they have been UK resident in 15 out of the last 20 tax years. In consequence, they cannot claim the remittance basis to shelter personal foreign income and gains. Furthermore, all assets are potentially subject to UK IHT regardless of where they are situate.The rules on residency will mean that the statutory residency test will be applied post 2013, but prior to that date residency will be determined by common law which means that there could be some uncertainty.
The internationally mobile could leave the UK and become non-UK tax resident for 6 years and then return for another 15 years of claiming the remittance basis before becoming deemed domiciled again.
The rules will apply to minors, so a child born in the UK could become a deemed-dom at 16. A child will continue to inherit the father’s (or mother’s) domicile under common law, not their parent’s deemed domicile.
The year of arrival and departure part way through the tax year will still count for the 15 ex 20 test. For persons who are dual resident, i.e. resident in the UK and another jurisdiction, a year of UK residency will still count towards the deemed domicile test even if they are technically resident in the other jurisdiction under the terms of a double tax treaty.
Taxation of Trusts
The Government intends that deemed-doms will be treated in the same way as a UK domiciled person with certain protections that will be introduced for offshore trusts, provided that these have been set up before becoming a deemed-dom.
The Government intends to tax a deemed-dom on the value of benefits that either they, their spouse or children, receive from offshore trusts and underlying entities on a worldwide basis. This is a considerable change in policy as previous HMRC publications suggested that deemed-doms would be taxed on “benefits, capital and income” received from a trust.
It is not clear whether distributions to minor children will be treated differently to adult children.
However, a settlor or transferor won’t pay tax on foreign income or gains sheltered within the offshore structure. UK source income will be taxable on arising basis, as is generally the case at present.
Tax will be applied to the value of the benefit, whether it is remitted to the UK or not. It does not matter whether it is funded with income or gains. This is a huge shift as at present tax is applied to a remittance to the UK according to what is actually remitted, whether income, capital gains or capital.
The consultation document is silent as to what tax will be applied to the benefit. It could be treated as income and therefore subject to income tax, or there could be a new rate of tax for trust benefits.
No draft legislation has been supplied, we suspect that this is due to the complexity of the problem and because policy has yet to be decided.
The existing deemed domicile test for inheritance tax purposes will be reduced to UK residence in 15 out of 20 tax years, down from the current 17 out of 20 tax years test.
It will require 6 years of non-residence to break deemed domicile for inheritance tax.
Assets held in trust prior to becoming a deemed-dom will remain “excluded property” and therefore outside the scope of UK inheritance tax.
Currently, UK domiciled people can cease to be deemed-dom for inheritance tax after 3 years of non-UK residency. The Government is considering aligning the rules with foreign domiciliaries, so that they have to be non-resident for 6 years after having acquired a domicile of choice elsewhere.
From April 2017 persons born in the UK with a UK domicile of origin, who subsequently acquire a foreign domicile of choice under common law, will be treated as having deemed UK domicile if they return and become UK tax resident.
They can still acquire and retain a foreign domicile of choice if they stay non-UK resident.
There will be no protection to offshore trusts set up whilst not domiciled in the UK for income tax, capital gains tax or inheritance tax. The Government is consulting on whether there should be a short grace period of residence only for inheritance tax.
There are still tax planning opportunities for persons born abroad with a UK domicile of origin who subsequently obtain a foreign domicile of choice.
We are pleased that the Government has recognised that the UK tax system has to remain competitive to continue to attract foreign investment.
We will be following the progress of the new legislation closely and will be advising our clients with existing trust arrangements where they can be improved.
We expect that individuals who are approaching the 15 year deadline by 5th April 2016 should establish offshore trusts.
For expert advice on the taxation of foreign domiciliaries contact us on 0203 0088 100 or firstname.lastname@example.org