The Government recently issued the final version of the draft legislation affecting ‘non doms’, due to take effect on 6 April 2017, as a further update to the draft Finance Bill 2017. The new material mainly concerns the tax treatment of income in offshore trusts. It also updates the proposals for rebasing of offshore assets for certain individuals and for the cleansing of mixed funds by certain individuals.
Our comments on the earlier draft published in December 2016 can be found here
On a general note, it is likely that the Finance Bill 2017 will not be enacted until the summer of 2017. The effect of this is that taxpayers and trustees may need to make significant decisions and put actions into effect before 6 April 2017 at a time when the final form of the legislation – which takes effect from that date – is unknown.
Turning to the key points that affect income tax, the current proposals provide some protection for trusts settled by non-domiciled individuals who come to be ‘deemed domiciled’ under the new rules because they have been resident in the UK for more than 15 out of the last 20 years. Broadly speaking, such trusts will, if they meet certain criteria, enjoy some protections from the full range of anti-avoidance provisions that could make trust and underlying company income charged to tax in the UK. Unfortunately these protections are not available to trusts settled by ‘returning’ non doms, i.e. those who were born in the UK with a UK domicile of origin.
These protections are generally as anticipated in our earlier comments and the key one is that ‘relevant foreign income’ (broadly, most types of offshore income) retained within the trust is not subject to income tax.
In slightly more detail, the protection applies to both the settlements regime and the transfer of assets abroad provisions. These two current regimes work separately and if both apply then the settlements regime takes precedence. The protection from the transfer of assets abroad provisions applies to all trusts where the settlor is neither actually UK domiciled nor deemed UK domiciled under the new rules and, broadly speaking, to significant participations in underlying companies.
This protection will be lost if funds are added to the trust (with certain exceptions) after the later of:
- 5 April 2017; and
- the settlor becoming deemed domiciled.
Protection will also be lost if the settlor actually becomes UK domiciled under general law.
Income paid out to and benefits enjoyed by the settlor or close relatives will be matched to foreign source income and potentially subject to income tax.
Onward gifts of trust income to close relatives will be treated as trust income in their hands.
The rebasing proposals were not entirely clear at first and it has subsequently been clarified by HMRC that offshore funds that do not have reporting status (these used to be called ‘roll up funds’) and whose profits on disposal are calculated on capital gains tax principles but charged to income tax can be rebased to 5 April 2017 by those individuals who become deemed domiciled for all tax purposes on 6 April 2017 (provided that they have previously paid the remittance basis charge). Until now it had appeared that these funds would not benefit from rebasing and this clarification is welcome although it is of no assistance to many of those who have already effected transactions based on the earlier proposals.
Cleansing mixed funds
The updated proposals allow certain individuals to ‘nominate’ which income and gains are transferred to other accounts. This is possible for individuals who have claimed the remittance basis (but not for returning non-doms) and has to be done by 5 April 2019.