Changes to non-dom rules give taxpayers little time to organise tax affairs

Changes to the non-dom rules contained in the draft Finance Bill 2017 leave affected taxpayers with little time to organise their affairs warns RSM.

The long awaited draft Finance Bill published on 5 December 2016 includes provisions which will impact on non-doms from April 2017 in relation to:

  • non-dom individuals resident in the UK for more than 15 out of the last 20 years;
  • non-resident trustees; and
  • ownership of UK residential property through structures which currently exclude them from Inheritance Tax

The government has confirmed that the rules will go ahead from April 2017, despite the new rules being published in draft form only four months before they come into force. 

Commenting on the changes, Gary Heynes, RSM’s Head of Private Client said:

‘We are pleased that the government has listened and acted on feedback with respect to the taxation of overseas trusts, but the measures that relate to the ownership of UK residential property appear to be far more punitive than initially feared.

‘Much of the detail included in the draft Finance Bill was already known, but there are nevertheless significant changes made to previous announcements which, at this late stage, give taxpayers very little time to review their affairs to ensure they are compliant.’

The main changes include:

Individuals who will be deemed domiciled on 6 April 2017

For those who have been resident in the UK for 15 out of the last 20 tax years, they will have until 5 April 2017 to re-arrange assets, possibly utilising a trust if they wish to take advantage of the ‘protected settlements’ rules which the government is introducing as part of the changes. This could ensure that income and gains which arise overseas would only be taxed in the UK if paid to them.

If no action is taken, and assets are held personally, they will be liable to tax from 6 April 2017 and the protected settlements benefit will no longer be available to them. It is likely to take a number of months to review arrangements for impacted individuals, agree the right structure and implement and clients should be taking action during December to avoid missing out of the government’s opportunity.

Overseas trustees

Significant changes have been made since the August consultation on how trust distributions and benefits will be taxed. It is intended that:

  • payments out of trusts to non-resident beneficiaries will not reduce the pool of gains and therefore the scope to 'wash out' gains;
  • payments to a close family member of the settlor (spouse, co-habitee or minor child) will be taxed on the settlor unless the individual is already liable as a beneficiary;
  • foreign income arising in a trust or an underlying company will not be taxed on the settlor as it arises (ie, it is protected from tax). Note that foreign income arising in a directly held by an individual will be liable to tax, unless there is a “normal” defence against the anti-avoidance rules;
  • any additions to the trust by a deemed dom or a connected trust will mean it loses protection status;
  • anti-avoidance rules are also being introduced to ensure that there is a limited avoidance by re-routing payments outside of tax and then after a short time back to the UK resident individuals; and
  • benefits received will also be taxed differently: interest free loans will require that interest is actually paid and not just accrued to avoid a benefit, the use of art will be charged at the office rate of interest rather than the currently accepted minimal benefit charge;

As a result of these changes, all overseas trustees should be reviewing their trusts and consider:

  • the level of stockpiled gains and whether there is scope to wash out before April 2017;
  • whether benefits need to be paid out before April to avoid a charge on the settlor; and
  • existing benefits such as loans, use of Art or chattels where the value of the benefit is likely to be higher from 6 April 2017.

UK residential property

As expected, UK residential property held in a structure which currently excludes it from UK Inheritance Tax (IHT), will be brought into IHT insofar as the value reflects the value of residential property located in the UK.

While the rules will permit the deduction for loans to reduce the equity value, even from connected persons, the rules have been further extended to bring those loans (for the purchase of or improvement to UK residential property) into the scope of IHT. Valuation issues are likely to arise, both on the value of the property and loans, depending on the specific terms.

Many will consider removing the property from the corporate structure and in most cases it will be essential to do this prior to 6 April 2017. There are a number of tax, legal and financing considerations which are likely to take months to resolve, so the process should ideally be started this month.