UK Government drops most offshore tax measures
The Chancellor of the Exchequer announced that in order to ensure Finance Bill 20176 becomes law before the forthcoming UK general election, the majority of the clauses (72 of the 135) included in the draft bill are to be dropped. These include:
- the introduction of new deemed domicile rules for income tax, capital gains tax and inheritance tax, including the trust protections, affecting thos resident non-domiciled in the UK for 15 of the last 20 years.
- the valuation rules for benefits provided by settlements to beneficiaries,
- the extension of the inheritance tax (IHT) net to offshore companies or loans representing UK residential property.
- a cut to the annual tax-free allowance on dividend income from £5,000 to £2,000
It is anticipated that these provisions will be included in a further Finance Bill after the election, whichever party is then in Government. However, it is not yet known whether the measures when introduced will be backdated to 6 April 2017 or will take effect from 6 April 2018. Delaying the introduction would allow the Government to introduce the already deferred provisions relating to onwards gifts and washing out of chargeable gains from offshore trusts at the same time.
The numerous changes to the taxation of offshore pensions together with the new QROPS transfer charge will remain and will become law shortly.
Changes to IHT
For those who have already taken action to remove UK residential property from structures, there is nothing to be done now a part from enjoying the fact that an extra year's ATED has been saved. If you did not manage to de-envelope by 5 april 2017 advice on your structure should be sought now to clarify your options and the actions to take.
We do not know when the changes eventually will take effect, but the way the IHT exit charge on property leaving trusts is calculated it means that acting sooner rather than later is beneficial. If the change does not come in until 2018, acting now could avoid the IHT exit charge althogether.
Changes for non-domicilaries
The deferral of the introduction of the new deemed domicile status for income tax and capital gains tax ("super deemed domicile") has created a number of areas of uncertainty. It is not clear whether those who believed themselves to now be super deemed domiciled have already become UK domiciled or whether they have been given a one year extension.
The proposed (and now delayed) changes would mean that
- individuals who have been UK tax resident for more than 15 of the previous 20 years become deemed UK domiciled so that they no longer qualify for the remittance basis and become subject to income tax and capital gains tax on their personal worldwide income and gains. In addition, their worldwide assets could be subject to inheritance tax in the UK.
- non-doms who had claimed the remittance basis and paid the remittance basis charge would be given an opportunity to "rebase" the cost of their assets to their value at 5th April 2017.
- non-doms would be given an opportunity to "cleanse" mixed funds so that clean capital could be identified.
Changes for offshore trusts
Since we do not kow if the changes wil be backdated when introduced or take effect next year, it is not clear whether protected trusts have come into existence or will be deferred for another year. Settlors, beneficiaries and trustees of such trusts should presume that the old rules continue to apply until further guidance or clarification is issued.
Should you take any action now?
Until the uncertainty has been resolved, it is difficult to take any action. If the measures are deferred until April 2018 then you will be given more time to de-envelope in a tax efficient manner and to reconsider your position. In particular, you should seek advice on:
- removing UK residential properties from corporate structures
- setting up qualifying trusts before they become deemed domiciled; and
- other pre-deemed domicile planning