Collateral damage

The UK tax regime for wealthy non-domiciled individuals, particularly those who are or become resident in the UK, is currently extremely uncertain. The rules are subject to frequent change, creating a problem for individuals who have based themselves in Britain, at least in part, because of its relative stability.

'Non-dom' status has become heavily politicised. In a country grappling with a vast national deficit and a public perception of increasing inequality (fueled in part by spiraling house prices) a small block of wealthy foreign individuals make an easy target both for finger pointing and revenue raising. Only the fear of a mass exodus of wealthy foreigners, taking their tax receipts and business with them, prevents the changes from being even more drastic.

With this backdrop, advising non-domiciled clients on their UK tax affairs is a tricky business, requiring constant education and re-assessment. The three most significant recent changes are summarised below.

Changes to the remittance basis

The Summer Budget 2015 saw the government announce a major overhaul of the remittance basis of taxation.

The basic proposal is that the ability to claim the remittance basis will now be restricted for the following individuals from April 2017:

• Non-domiciled individuals who have been resident in the UK for 15 years or more; and

• Non-domiciled individuals who have a UK domicile of origin and return to the UK.

Individuals that fall into either category will not be able to claim the remittance basis after April 2017, which means that their worldwide income and gains will become subject to UK income and capital gains tax, regardless of whether or not it is brought to the UK. The deemed domicile rules for Inheritance tax IHT purposes will also be aligned with the new rules.

The details published by HMRC do, however, leave it possible for individuals in the first category to plan their affairs using trusts before they reach 15 years of residence (or before April 2017, whichever is later). Such a move is a big boost to the offshore trusts industry.

It appears that those who set up an offshore trust before they become deemed domiciled will not be taxed on trust income and gains, if they are retained in the trust and such trusts will have the same IHT treatment as at present. There will however be UK tax charges where distributions are made from such trusts, either to the settlor themselves or their spouse or children.

Our view is that the design of these changes has been shrewd. For those considering moving to the UK, it will be unlikely that the changes will deter them, as 15 years of the remittance basis remains generous. Likewise, those whose residence is approaching 15 years will generally have established significant ties to the UK, so relatively few may choose to leave, especially given the opportunity for them to use effective offshore trust planning before this time.

IHT residential property changes

Another significant change announced in the budget is targeted directly at UK residential property ownership.

Under the proposal, offshore companies and other vehicles holding UK residential property will now be transparent for IHT purposes. This is regardless of the value of the property, whether it is occupied by the beneficial owner or commercially rented out, and regardless of whether or not the Annual Tax on Enveloped Dwellings (ATED) is already paid in respect of the property.

For individuals owning such companies in their own name, the proposed changes will now simply bring the value of the property within the scope of UK IHT. The death of the owner of the shares in the company will therefore become an event which is potentially chargeable to IHT.

This will also have a major impact on trusts, which will be brought within the rules that currently apply to direct trust ownership of UK properties by offshore trustees. The consequence will be that the trust will become subject to IHT charges on 10 year anniversaries, distributions of UK properties from the trust may become subject to exit charges, and the gift with reservation of benefit rules (GROB) may also apply.

These changes are significant. Coming so soon after ATED, clients will now again have to carefully consider their options and re-visit the reasoning for setting up the structure in the first place. In many cases structures will have been established for non-tax reasons, and it is critical that these considerations (such as succession planning and confidentiality) are not forgotten in the tax analysis.

Collateral

Following last summer's abrupt change in HMRC policy on resident non-domiciled individuals that take loans using unremitted foreign income or gains as collateral, in a further development on 15 October 2015, HMRC announced a partial backtrack. Loans taken out by remittance basis users before 4 August 2014 will now continue to benefit from the previous concessionary treatment.

This follows heavy criticism from representative bodies that re-structuring such arrangements and replacing them with non-foreign income and gains collateral would have been costly, difficult and unfair due to the retrospective nature of the change. The change is to be welcomed.

Chris Moorcroft is a senior associate at Harbottle and Lewis