As seems to be the case every year, as we lead up to the 6 April UK tax year-end, the more enquiries we get from clients and advisors looking to undertake planning and implement structuring before the client becomes ‘deemed domiciled’ in the UK for all tax purposes. So what is all the rush about?
Each year, the window of time to meet the client, complete the on-boarding, deal with and execute all documentation to establish the structure and, if luck is on our side, have the assets transferred in time (or at least the beneficial ownership of the asset(s)) gets smaller and smaller. I recount three particular clients, ranging from the very cooperative to one who insisted on rewriting the entire Trust Deed on 1st April, for whom I completed this entire process within days – resulting in some very dark circles under my eyes. Notwithstanding this minor affliction, it gave me a great sense of achievement in that I had been able to ensure that my clients did not miss their once in a lifetime opportunity and, from a personal perspective, accomplish a somewhat impossible task.
So what is all the rush about?
Changes to UK tax rules in April 2017 mean that non-domiciled individuals who have been tax resident in the UK for 15 out of the preceding 20 tax years are ‘deemed domiciled’ in the UK for all tax purposes. Consequently, they are subject to income tax and capital gains tax as it arises and their worldwide estate is subject to UK IHT.
Up until the point at which they become deemed domiciled, non-doms can elect to be taxed on the ‘remittance basis’, whereby they are liable to UK tax on UK source income and gains on an arising basis, but only liable to UK tax on foreign income and gains that are transferred into or enjoyed in the UK. Furthermore, their non-UK estate is (generally speaking) outside the scope of UK IHT.
The UK tax implications of being deemed domiciled can be mitigated by planning in the preceding tax year(s) and the use of offshore trusts can be particularly advantageous, provided they are set up and managed correctly. However, the ability to settle an offshore Trust prior to becoming deemed domiciled is a once in a lifetime opportunity, which if not taken up is lost forever (or will incur unfavourable tax implications).
The April 2017 UK tax changes did not impact non-doms right to settle excluded property trusts, in order to shelter non-UK assets from UK IHT, prior to becoming deemed domiciled. This remains a fundamental benefit of settling an offshore trust as UK IHT is currently 40%.
The rules also provide for the additional advantages of the ‘protected settlements regime’ for income tax and capital gains tax purposes. Essentially, the regime provides for foreign income and gains to roll-up, free of tax, and will only be taxed in the event the Settlor (or another UK resident beneficiary) receives a benefit.
A further benefit for non-doms who take advantage of the regime, most likely an unintended consequence of the regime, is that income and gains will roll-up, free of tax, but without the need to pay the remittance basis charge of up to £90,000.
There are strict legislative requirements which must be observed so as not to lose these invaluable protections forever. Care must be taken to ensure that such trusts are administered by trustees who are familiar with and have experience in managing Protected Settlements so as to avoid issues such as ‘tainting’ which could result in all of the protections being lost forever and the settlor becoming taxable on all the income and gains of the trust on an arising basis - not a position which any trustee would wish to find themselves.
Never a more poignant time
For those non-doms who are approaching 15 years’ UK tax residence, establishing a trust before they become ‘deemed domiciled’ is something they and their advisors should seriously consider. Not only does a trust provide inheritance tax protection but there are also income and capital gains tax advantages. This is in addition to many other non-tax related benefits trusts provide such as wealth protection and succession planning.
With the back drop of COVID-19 to this year’s end of tax season, there has never been a more poignant time to consider succession planning. At VG we’re successfully operating remotely during this unprecedented time and well-placed to assist with all types of wealth structuring for private clients globally.
Note: VG does not provide tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax or legal advice. You should consult your own tax and legal advisors before engaging in any transaction.