2017 has been a year of uncertainty and frustration for nondomiciled individuals and their advisors, in light of the snap election and a new parliamentary timetable. Proposals were scrapped, reversed or postponed, resulting in a whirlwind of changes taking effect retrospectively from 6 April 2017. The tax burden for non-doms is set to continue in 2018, with a further tightening up of the anti-avoidance rules on offshore trusts. Property investors continued to be targeted in 2017, with new mortgage interest relief restrictions and the announcement of radical changes to the CGT treatment of commercial property. The year also saw further moves to transparency, with tough penalties for non-compliance.
The tightening of the screw on non-doms
6 April 2017 changes
Due to the snap election in May, we saw new legislation staggered throughout the year, introducing some (but not all) of the much anticipated and far-reaching changes to the taxation of non-doms.
As of 6 April 2017, non-doms who have been UK tax resident for 15 of the previous 20 tax years will lose their non-dom status and become deemed domiciled ('deemed-dom') for all UK tax purposes. They will no longer benefit from the remittance basis and will be subject to income tax, CGT and IHT on their worldwide assets. Affected individuals can, however, rebase their assets to the April 2017 value if they became deemeddom on 6 April 2017. This means they won't be taxed on historic gains accruing on a disposal of non-UK assets acquired before becoming deemed-dom. Those gains can even be remitted tax free, putting them in a better position than before the changes. A further helpful measure included in the new rules is a temporary two year window from 6 April 2017 to allow non-doms who had been on the remittance basis to 'cleanse' their mixed funds, i.e. to segregate foreign income and capital gains from clean capital.
The new rules also afford protections to settlors who become deemed-dom after April 2017 and had settled an offshore trust structure before acquiring deemed-dom status. The settlor will not automatically be taxed on the arising basis on foreign income and gains arising within the trust structure. This is referred to as a protected trust and the settlor will only become liable to tax on the foreign income or gains if he or she receives a benefit from the trust. The settlor can, however, be taxed on income if close family members (which include the settlor's spouse, cohabitee and minor children) receive a benefit but are not themselves taxed due to being nonresident or remittance basis users.
Protected trusts offer a real benefit for settlors who acquire deemed-dom status, as they can still benefit from a form of tax deferral, albeit no longer with the ability to receive and spend trust distributions outside the UK tax free. Protected status is permanently lost if any value is added to the trust so great care will be needed to avoid inadvertent tainting.
We saw new legislation staggered throughout the year, introducing some (but not all) of the ... far-reaching changes to the taxation of non-doms
The new rules (all found in Finance (No. 2) Act 2017) are harsher on formerly domiciled returners, i.e. those born in the UK with a UK domicile of origin but who later lost this. Such individuals will immediately be treated as UK domiciled for most tax purposes as soon as they return and become UK residents. They will not be entitled to cleanse mixed funds, nor will they have access to the protected trust regime.
6 April 2018 changes
The long awaited Finance Bill (No. 2) 2017–19 (which will eventually be enacted as Finance Act 2018) was published on 1 December 2017. It contains several new anti-avoidance rules relating to offshore trusts that will prohibit previously acceptable tax planning techniques.
Distributions of trust gains to non-residents will no longer reduce the pool of trust gains available for matching. This means trustees will need to change their previous planning strategy of washing out gains by paying them to a non-resident beneficiary (who could include the settlor) and then making a further distribution to a UK resident tax free on the basis that there are no more gains to match.
In a separate change to offshore trusts, when a capital payment is made to a close family member of a UK resident settlor (where the beneficiary does not pay tax on it due to being non-resident or a remittance basis user), the tax treatment of that distribution will be aligned with the April 2017 changes to the treatment of income. The settlor will be taxed as if the payments were received by him.
Previously, trust distributions or benefits received by a non-taxable person (by virtue of being non-resident or a remittance basis user who does not remit the payment or benefit) could be passed tax free to a UK resident recipient by way of an onward gift. New rules will provide that where the original recipient makes an onward gift to a UK resident, the latter will be taxed as if they had received a capital payment or benefit directly from the trust equal to the amount of the onward gift. In its current (third) iteration, the draft legislation indicates that the rules will only apply if there is an arrangement or intention at the time of the original payment to make the onward gift and it is made either before or within three years of the trust distribution.
Property tax changes
The April 2017 changes also removed the 'excluded property' status of offshore companies owning UK residential property. Such companies are now effectively look-through, offering no shelter from IHT for nondoms. Following the introduction of ATED, ATED related CGT and penal SDLT rates, this IHT change arguably represents the final nail in the coffin for the holding of UK residential property through offshore companies by non-doms and their trusts.
The April 2017 changes even affect non-doms who make loans to UK property buyers, or non-doms pledging offshore assets as collateral for such loans. The right to repayment of the loan, or the value of the pledged assets, will now be an asset subject to IHT. In extreme cases, this could result in multiple tax charges on multiple parties.
In extreme cases, this could result in multiple tax charges on multiple parties
This year also saw the start of another tax hit on buy-to-let landlords, with the introduction of new rules restricting mortgage interest relief. From 6 April 2017, the amount of interest relief which higher rate taxpayers can claim against their taxable rental income will be restricted to basic rate (20ffi) income tax. This is being phased in gradually from April 2017 to April 2020. Over the next few years, landlords with large mortgages and low yielding properties will be severely affected, and in many cases will pay tax on non-existent profits.
The current CGT exemption for non-UK resident investors in UK commercial property has long been considered at risk. That risk has now come to pass following the announcement in the Autumn Budget that from April 2019, all non-UK residents (both individuals and entities) will fall within the scope of UK CGT or corporation tax on the disposal of UK commercial property. This aligns the position with residential property.
The new rules will apply to both the direct disposal of UK property and the disposal of indirect interests in UK property, such as the sale of a 'property rich' company by a person (or connected person) who has at least a 25ffi interest in that company. A 'property rich' company is broadly one where 75ffi or more of its gross value at disposal is represented by UK property. Applying CGT to non-residents on the sale of property rich companies is a new concept even for residential property.
One welcome measure announced at the Autumn Budget is that SDLT relief will now be granted to first time buyers of residential properties worth up to £500,000. The first £300,000 will benefit from a new 0ffi rate of SDLT, saving up to £5,000. If the property value exceeds £500,000, then normal rates of SDLT are due on the whole purchase price. Whether this encourages new first time buyers or simply offers an unexpected cash bonus to those who would have bought anyway remains to be seen. Where a property is priced at or around £500,000, expect to see first time buyers being marginally outbid by other purchasers who can afford to bid just over the limit with no adverse SDLT consequences.
There have been significant changes to the level of information automatically provided to tax authorities by financial institutions such as banks and trust companies. To tie in with this new global data sharing, HMRC launched its worldwide disclosure facility, enabling taxpayers who think they may have made an omission or mistake in their tax affairs to disclose the fact and take advantage of the current penal system (a maximum of 100ffi of the tax charge plus interest). When the disclosure facility ends on 30 September 2018, the failure to correct rules will be introduced, with penalties of up to 200ffi of the unpaid tax and, in the most serious cases, up to 10ffi of the asset value, where a tax liability is discovered that could have been reported under the disclosure facility. The disclosure deadline coincides with the start date for HMRC to automatically exchange tax information with late adopters under the common reporting standard (CRS).
In line with the current transparency agenda, HMRC has introduced a trusts registration service (TRS), which will record all UK and non-UK trusts with a UK tax liability in a tax year and includes information about the beneficial owners of the trust. The TRS deadline for new trusts is 5 January 2018. The registration and reporting deadline for existing trusts is 31 January 2018. Trustees will need to review the position each year to determine whether or not they have a duty to register or, if already registered, update the register.
What to look out for in 2018
From 6 April 2018, the EIS annual limit for individuals investing in knowledge intensive companies will increase from £1m to £2m, and the annual investment limit for such companies receiving investments will increase from £5m to £10m.
In spring 2018, the government plans to consult on entrepreneurs' relief, and will consider how shareholders can remain eligible for the relief where their shareholding or voting right are diluted to below the 5ffi qualifying level by the issue of new shares at subsequent investment rounds.
Also in spring 2018, the government will publish a consultation on how the taxation of trusts might be made simpler, fairer and more transparent. Given the complexity of the current trust taxation regime, this is encouraging and will hopefully lead to simplification.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.