Last year’s summer Budget contained many tax measures for private individuals which have since passed into law; around pensions, let property and dividend income.
One area still remains very much unclear and that is the taxation of international private clients – resident in the UK, or resident overseas with UK residential property.
Two key areas will affect the international private client:
- Longer term residents who are not domiciled in the UK will effectively be taxed as UK individuals after 15 years.
- Those who own UK residential property through overseas structures are likely to find that their tax position will change and should consider whether their structure is still appropriate.
No law has been produced, but some announcements have been made by HMRC, so we have an indication of what is intended.
Deemed domicile and remittance basis – what we know
So far, we know that:
- the new rules are due to start from 6 April 2017;
- for income, capital gains and inheritance tax (IHT) purposes, those who have been UK resident for at least 15 out of the previous 20 tax years will be regarded as ‘deemed domiciled’ and fully within the UK tax net. No remittance basis will be available and foreign assets will be subject to UK IHT; and.
- those who have a UK domicile at birth, who leave the UK and acquire a domicile outside of the UK, will always be treated as UK domiciled if they resume UK residence.
It’s not all bad though. The announcements do provide room for an offshore trust to be set up prior to becoming deemed domiciled to protect offshore assets from UK IHT.
Residential property ownership – what we know
Many UK resident non-UK domiciled individuals, as well as many non-UK resident individuals, use foreign corporate structures to hold UK residential property. One reason for this is to avoid UK IHT.
The government’s intentions are that:
- new rules will start from 6 April 2017; and
- it will seek to ‘look through’ any foreign corporate structure, so that rather than looking at the individual or trustees owning shares in a company, they will be deemed to directly own the underlying residential property. This would bring the property into the UK IHT net for the company’s owners, being the individuals or trustees.
What we don’t know
Without any legislation, it is difficult to clearly understand how many of these rules will operate in practice.
We also know that there is an intention to change the way in which distributions from offshore trusts are taxed, but no details on this have been made available yet. Given the changes above, this is a key missing part of the jigsaw that needs to be understood to plan effectively.
The intention is that all of these changes are to be effective from 6 April 2017 so clarity is needed soon. However, given what we do know, it makes sense to start discussions soon if you are likely to be affected.
There will be many tax and non-tax considerations to be discussed, especially around the ownership of assets within families, the possibility of using new structures and the collapsing of existing arrangements. It is better that these options are talked through now, rather than waiting for the legislation and further detail, as there is likely to be a very short period of time in which to implement any plan.