Recent developments to the taxation of non-domiciled individuals in the UK

There have been recent updates on the treatment of offshore trusts going forward under the new non-dom regime in the UK which will apply as of 6 April 2017, which we referred to in our previous update. Although much of the movement has been positive, there remain areas of uncertainty.

Broadly, permanent non-dom status has been brought to an end and the remittance basis will no longer be available to non-doms who have been resident in the UK for more than 15 out of the previous 20 years (‘deemed non-doms’).

Offshore trusts established by non-doms before 6 April 2017 will be given protected status. This means that non-UK capital gains and non-UK income will only be taxable on beneficiaries when distributed to them whether they are received in the UK or outside of it.

This status applies provided there are no additions to the trust. Any additions that do not fall within the exemption for payment of fees and tax liabilities will render a trust structure transparent for tax purposes and all income and capital gains will be taxable on a UK resident settlor regardless of whether there are any distributions out of the trust to any beneficiary.

Maintaining protected status will therefore be a key issue for offshore trusts going forward, and there are still discussions underway with HMRC as to what will be considered an addition.

Offshore trusts still offer tax advantages to non-doms, but these are much more restricted than before.

There have also been alterations to the regime that would extend UK inheritance tax to UK residential property held indirectly through offshore companies or offshore trust / company structures. Such property, previously exempt from UK inheritance tax, will now be chargeable.

The original suggestion was that debts from connected parties would not be deductible when calculating the chargeable value of the offshore company which would be limited to the element that is related to UK residential property. Now, the debt will be deductible, but the debt itself becomes a chargeable inheritance tax asset in the hands of the lender unless they are a genuine third party commercial lender.

There remains the potential of double charges where the debt is not deductible for inheritance tax charges so that the full value of the property is subject to tax, but the debt is still treated as a chargeable asset itself.

The UK residential property charges will apply to non-UK residents, who may well be unaware of the changes or assume that they do not apply to their situation, particularly if they have merely loaned funds to a family member to purchase a property in the UK.

If you would like further information on the above, please contact Hazel Johnson.

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christopher paus

appreciate being kept updated.
Kind regards,