In 2016 the UK Government announced new rules creating a deemed UK domicile status for non-UK domiciliaries who have been long term UK tax residents.
Taking effect from the 6th of April 2017, deemed UK domiciled individuals will no longer be able to claim the remittance basis of taxation and will instead be assessed on their worldwide income and capital gains on the arising basis. In addition, their global estate will be subject to Inheritance Tax (‘IHT’).
Individuals who arrived in the UK during the 2006/07 UK tax year and have been UK tax resident for whole or part of every subsequent UK tax year, will become UK deemed domiciled from 6 April 2021. There are several planning opportunities which should be considered in advance of this.
Establishing a protected settlement
The protected settlement rules introduced as a part of this regime afford non-UK domiciled settlors of offshore trusts relief by permitting specific exemptions. More specifically, offshore income and worldwide gains realised in such offshore trusts can still be exempt from UK tax, even when the settlor subsequently becomes deemed UK domicile. Additionally, most non-UK situated assets within a protected settlement should remain outside of the scope of IHT.
However, these reliefs are not guaranteed and can be permanently lost if the trust becomes ‘tainted’. In these circumstances the settlement would lose its protected status and the trust would be taxed as if it had been settled by a UK domiciliary. A trust will become tainted where any value is added to the trust by the settlor whilst they are deemed UK domiciled. For example, if the settlor was an employee of a company contained within a protected settlement who receives less than arm’s length remuneration. Another example could be where the settlor lends funds to the protected settlement for less than arm’s length terms. If the protected settlement is tainted this could result in the tax benefits of the structure diminishing all together and irreversibly.
There are various safeguards which may be put in place, a key one of which is the making of a commercial agreement between the settlor, the trustees of the offshore trust and relevant investee companies, known as an Umbrella Agreement.
By including appropriate adjustor clauses, the Umbrella Agreement enables consideration agreed between the parties for any relevant transaction to be adjusted to the market value subsequently agreed by HMRC. This should prevent tainting of a protected settlement which might otherwise occur.
Bringing forward income and capital gains
As income arising after an individual has become deemed UK domiciled will be taxed on the arising basis (as opposed to the remittance basis) it may be beneficial to accelerate income receipts that would otherwise be received. For example, if the individual has interests in private foreign companies they may wish for dividends to be brought forward. In addition, trustees may wish to accelerate income or capital payments to beneficiaries before they become deemed UK domiciled. Detailed advice should be sought in this regard if the income or capital payment is not matched to income or gains which have already arisen in the trust, as these payments can be retrospectively matched at a future date, and potentially taxable in the UK when the remittance basis is no longer available.
Individuals may also consider selling their assets held at a gain which may be sheltered by a remittance basis claim. Care should be taken if the individual will reacquire the assets as there are anti-avoidance provisions which should be considered together with local transaction taxes.
Gifting non-UK assets
Typically, the gift of a foreign asset whilst an individual is non-UK domiciled is not within the scope of UK IHT. Individuals may therefore wish to consider making gifts of foreign assets before they become deemed UK domiciled, helping to ensure the assets remain outside of their estate for IHT. Such a gift should also rebase the value of the asset for capital gains tax purposes, except for gifts between spouses. Care must be taken where the donee is a relevant person of the donor to ensure that the resulting gain is not remitted to the UK.
In addition, there are a number of anti-avoidance provisions which need to be considered for each gift, especially where the donor will retain a benefit over the gifted asset.
Consideration should be given to any interests owned by deemed UK domiciled individuals in non-resident companies. There are wide ranging anti-avoidance provisions which can treat income and gains arising in the foreign company as assessable on them personally. Such foreign income and gains can no longer be sheltered by the remittance basis of taxation once the individual has become deemed domiciled in the UK. Thought should therefore be given as to the most efficient holding structure going forward, or indeed whether it would be optimal for the company to become UK tax resident.
Many non-domiciled individuals who have historically claimed the remittance basis of taxation whilst UK tax resident will have segregated their offshore bank accounts over this period.
Once the individual becomes deemed domiciled and therefore taxed on the arising basis, there is likely no benefit in segregating new income or capital gains going forward, as all will be subject to tax in the UK and can therefore be paid into the individuals clean capital account, or remitted to the UK. However, it is recommended that extreme care is exercised around existing remittance basis offshore income and gains to ensure they are not inadvertently remitted to the UK or mixed with clean capital.
How we can help
Our dedicated tax and legal teams have extensive experience in advising clients on ensuring they maintain tax efficient structures once they become deemed UK domiciled.
If you would like to benefit from our services and discuss suitable options that work for you, please do get in touch with Nick Coward on firstname.lastname@example.org
This post is intended to be a guide for clients and other interested parties. The information is believed to be correct at the date of publication but should not be relied upon as a substitute for professional advice. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in these publications.