The new UK Chancellor, Philip Hammond, delivered his first (and last) Autumn Statement on 23 November, with draft provisions for inclusion in the Finance Bill 2017 (the Draft Provisions) published on the 5 December 2016. With the Draft Provisions covering some of the major changes to the taxation of non-UK domiciled individuals and their offshore structures from 6 April 2017, this article focuses on the key points arising from the Autumn Statement and the publication of the Draft Provisions which are likely to affect individuals with interests in international structures.
New Measures Affecting Non-UK Domiciliaries (Non-Doms)
We have covered the proposed changes to the so called “Non-Dom” rules in previous publications, and the Chancellor confirmed that the majority of the previously proposed changes will take effect from 6 April 2017. The Draft Provisions were published on 5 December 2016 leaving a very short window of time for affected Non-UK domiciled individuals (Non-Doms) to take any steps to mitigate the impact of the changes on their affairs.
We now have confirmation that settlors of offshore trusts established prior to them becoming deemed domiciled under the new rules will not be taxed on an arising basis on foreign income and foreign gains which are retained in the trust, provided that no funds are added to the trust after the settlor has become deemed domiciled.
The provisions previously mooted whereby no taxable benefits could be provided by the structure to settlors or connected persons, without the structure then becoming transparent for all tax purposes have been withdrawn. This is good news for those affected by the Draft Provisions as deemed UK domiciled individuals can continue to receive benefits from offshore structures without foreign income and gains of the Trustees being treated as belonging to the individual on an arising basis.
With effect from 6 April 2017, the opportunity to make large capital payments to non-UK residents and non-UK domiciliaries, and effectively “wash out” stockpiled gains of the trustees without the matched payments being subject to tax in the UK, will be withdrawn.
Anti-avoidance measures are being introduced to tax the settlor of trusts on capital payments provided to close family members who are non-UK resident or non-UK domiciled, where the payment is not subject to UK tax in the recipients’ hands. Further measures are also being introduced to prevent capital payments being paid to non-UK resident beneficiaries who then make an onward gift to UK residents without tax attaching. Both of these measures are due to take effect from 6 April 2017.
In light of the above, we would therefore encourage all affected settlors to review their capital requirements over the coming years to ascertain whether a large distribution pre-April 2017 would be advisable in their circumstances.
The rules relating to Business Investment Relief (BIR) will be changed from 6 April 2017 and the new rules will make it easier for Non-Doms who are taxed on the remittance basis to bring money into the UK for the purpose of investing into UK businesses.
All Non-Doms should urgently review their existing structures now that the draft legislation has been published to understand exactly how the new rules will affect both themselves and the offshore structures in which they/their family have an interest.
Structures Owning UK Residential Property
Any Non-Doms who still own UK residential property through a structure must take urgent advice and allow enough time to restructure prior to 5 April 2017. It had been hoped that there might be some relief from CGT or SDLT for Non-Doms “de-enveloping” their property structures, but it is clear that this will not now be the case.
The Draft Provisions make clear that not only will the value of certain interests in UK residential property held in structures be subject to inheritance tax in the hands of individuals and trustees, but the value of loans made to allow individuals and trustees to acquire maintain or improve UK residential property is also potentially in the scope of inheritance tax for the lender. Likewise any collateral provided by a third party potentially exposes that third party to UK inheritance tax on the value of the collateral provided, in certain circumstances, and the potential for exposure to double taxation as a result of these rules is real.
Targeted anti-avoidance measures will be introduced to effectively ignore any arrangements intended to sidestep the new rules and these are expected to be widely drafted to catch seemingly straightforward situations.
A major surprise in the draft provisions is that when a property is disposed of or a loan is repaid, the proceeds of sale or repayment value remains in scope of IHT for two years. Any individuals or trustees considering selling a residential property, or repaying loans which would be affected by the Draft Provisions, would be well advised to consider doing this before 6 April 2017 in order to avoid the additional 2 year inheritance tax exposure.
ATED annual charges will rise in line with inflation for the 2017-2018 tax year.
The Chancellor has proposed extending the member payment provisions that apply to UK tax-relieved pension funds that are transferred to a qualifying recognised overseas pension scheme (QROPS). This means that administrators of QROPS must ensure that the transferred pension fund is administered and invested in accordance with UK rules for 10 consecutive tax years from the date the member ceased to be UK resident.
There is also to be a further amendment to the definition of an “overseas pension scheme” which may impact existing QROPS and QNUPS arrangements. We will monitor developments but we do not anticipate any effect on QNUPS. For QROPS it would seem that Malta in particular will be unaffected by the proposed changes due to its EU status. Those with QROPS or looking to establish QROPS in other jurisdictions should consult with us in the first instance.
The level of annual allowance allowed once an individual has taken advantage of Osborne’s “freedom and choice” changes to draw funds out of a pension scheme, has fallen from £10,000 (25% of the normal annual allowance) to £4,000 (10% of the normal annual allowance). It is an interesting shift - £4,000 in contributions in later life is not a large amount and is likely to make little difference to pension savings.
The Chancellor also announced that there would be an alignment of the UK tax treatment of UK and offshore pensions. A consultation paper has been promised but we expect that the 10% rebate on foreign pensions will disappear. However on a more positive note, this would appear to confirm the possibility for a QNUPS member to benefit from a 25% tax-free lump sum. It was confirmed that lump sum payments other than the 25% tax free payment will be subject to income tax but this is effectively the same as the current position. A QNUPS remains outside of an individuals UK Inheritance Tax estate as no changes have been made to the QNUPS conditions or the tax law that exempts the QNUPS from Inheritance Tax.
Tax Compliance and Tax Reporting
The Government has said that it will consult on a new legal requirement for intermediaries who arrange complex structures for clients holding money offshore to notify HMRC of the structures and the clients using them. This is of course consistent with the major move towards greater transparency over the past year or two via the Common Reporting Standard (CRS) and the ongoing consultation on the public register of beneficial ownership of UK residential property.
The Government has also reiterated its commitment to strengthen tax avoidance sanctions and to further tackle tax evasion. There is a new legal “Requirement To Correct” a past failure to pay UK tax on offshore interests which is aimed at drawing focus to the limited time for individuals to bring their UK tax filing up to date before information reaches HMRC under the CRS. It has been made abundantly clear that non-compliant individuals will face far harsher sanctions (up to 300% of the under-declared tax) if they do not voluntarily remediate their tax reporting failings by the deadline of 30 September 2018. The Government will now remove the defence of the taxpayer having relied upon non-independent advice as taking “reasonable care” when considering penalties for those who use such arrangements.
The Government will also introduce new penalties (including naming and fining) for any person (an enabler) who has enabled another person or business to use a tax avoidance arrangement which is later defeated by HMRC. Under the proposals an arrangement will be treated as having been defeated by HMRC not just where a court or tribunal finds that the arrangements do not achieve their purported tax advantage, but also where a taxpayer reaches a settlement with the HMRC that the arrangements do not work, even if this is because he cannot afford to continue to fight HMRC in the courts or does not wish to do so. The definition of “enabler” is very wide indeed.
Other Noteworthy Matters
Corporation Tax will be cut to 17% from 6 April 2020.
The Government is considering bringing all non-resident companies which receive taxable income from the UK into the UK’s corporation tax regime. There will be consultation on the options and implications. In short, the Government wants to deliver equal tax treatment to ensure that all companies receiving UK income are subject to the same corporation tax rules, including the limitation of corporate interest expense deductibility and loss relief rules. If such rules are adopted, then it is likely to have a significant impact on offshore companies receiving UK rental income who, instead of filing Non-Resident Landlord returns, would then instead file Corporation Tax returns. On a positive note this could mean paying Corporation Tax (at 17% from 2020) instead of paying 20% Income Tax at present. However, they may well not be able to claim tax relief to offset that tax liability to the same extent that they can currently under the Non-Resident Landlord regime.
Where UK taxpayers invest in offshore reporting funds, they pay income tax on their share of the fund’s reportable income, and they pay CGT on any gain on disposal of their shares or units. The Government will legislate to ensure that performance fees payable by such funds and which are calculated by reference to any increase in the fund’s value, will no longer be deductible against reportable income, but will instead reduce any tax payable on the capital gains derived from the disposal of the shares or units. This has the effect of equalising the tax treatment between investing in onshore and offshore funds for UK residents.
A Corporation Tax deduction will be denied for employers who use disguised remuneration arrangements, unless there is a corresponding Income Tax and NIC charge on the employee within a permitted (but as yet unspecified) time period. Intriguingly, the Chancellor also intends to extend the disguised remuneration tax regime to self-employed persons.
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