Action List For Those About To Become Deemed UK Domiciled For UK Tax Purposes

Briefing Note

Headlines

• You will become deemed UK domiciled (DUD) on 6th April 2017 either if you were born here or you are already in your 15th tax year of UK residence in the last 20.
• Rules apply from 6th April of RND’s 16th tax year.
• CGT rebasing for RNDs only. Trustees have to consider planning.
• Some grandfathering for pre 6th April 2017 non-UK trusts.
• Washing out gains of non-UK trusts curtailed.

If you are currently non-UK domiciled you will become deemed UK domiciled (DUD) on 6th April 2017 either if you were born here or you are already in your 15th tax year of UK residence in the last 20.

Otherwise you might become DUD in a future tax year in which case the same considerations will apply to you then (subject to any changes in law in the meantime).

You

You and your spouse or civil partner should do this.

Pre 6th April 2017 for non DUDs

The current trust legislation allows for gains to be “washed” out of non UK trusts by making distributions to non UK resident individuals.

The current guidance on the GAAR says that this is acceptable tax planning.

However, from 6th April 2017 if funds representing those gains are remitted to the UK within 3 years, then they remain taxable.

1. Check you are still non-UK domiciled under basic principles. Owning a UK funeral plan and having no long term plan to leave is not where you should be.A house abroad to retire to and a local burial plot are better. If you are currently UK domiciled then none of these rules will apply to you.

2. Double check you were born outside the UK and not within its 12 mile limit, and if you were born stateless, check where your father was born and / or domiciled.

3. Work out when you expect to become DUD (it is not simple and not exactly the same as the statutory residence test (SRT)).

4. Consider what you plan to do if you become a DUD or what you might do to avoid being a DUD. (Ever fancied doing the GrandTour or studying abroad?)

5. Use the remittance basis to the full and get as much distributed out of any offshore trust to be spent or invested outside the UK (but watch inheritance tax). A  family partnership entity could be an ideal vehicle for this.

6. See if business investment relief can be used to bring money not for personal benefit into the UK.

7. Check whether you are a settlor of any settlement for UK tax purposes, i.e. have you contributed assets or value (other than through your work) to a trust’s assets?

8. If you are a settlor, consider whether someone should have an interest in possession in the trust.

9. Check whether you can use the mixed account rules.

10. Check what assets you have worldwide.

10.1. Have them valued as at April 2017 for CGT rebasing purposes.

10.2. See whether you should do some pre 6th April trust gains washing as this will be restricted post 6th April 2017.

10.3. Are they eligible for UK IHT business property relief or agricultural relief, e.g. farm in Colorado, vineyard in South Africa, shares in a private trading company. If not, consider reorganising your corporate interests into three parts, trading, investment fully geared and finance (a house speciality).

10.4. Check whether other UK tax reliefs are available e.g. heritage property open to the public (that vineyard again perhaps?).

11. Consider establishing QROPS or QNUPS for the benefit of you, your children and / or grandchildren’s retirement through ill health or at 55 as a way of  long term planning free from capital gains tax and inheritance tax.

Post DUD

1. Do not add assets to non-UK trusts, waive loans etc.or create new settlements in a year in which you are DUD unless you are prepared to be taxed in the trust’s income and gains unless you

1.1. Exclude yourself, spouse, and minor children from benefit (income tax).

1.2. Exclude yourself, your spouse, your children and your grandchildren from benefit (capital gains tax).

2. Use the reliefs HMRC give you for your taxes. For example:

2.1. Income tax.

2.1.1. ISAs.

2.1.2. Pensions.

2.1.3. EIS, Seed EIS, VCT etc.

2.2. Capital Gains Tax.

2.2.1. Entrepreneur’s relief in respect of a business anywhere in the world, including re-gearing a business to maximise its value.

2.2.2. Small chattel exemption e.g. invest in wine.

2.2.3. Principal private residence relief.

2.3. Inheritance Tax.

2.3.1.See 10.3 and 10.4 above.

2.3.2.Use the 7 year gift rule.

2.3.3.Use the relief for gifts paid out of ordinary income.

NON UK RESIDENT TRUSTEES

Prior to your UK beneficiary becoming DUD

1. Check that you as trustees will still be non-UK resident i.e. you do not have a UK resident trustee.

2. Consider actions 5, 6, 9,10.2, 10.3, 10.4, and 11 for individuals who have not yet become DUD.

3. Note when your first ten-year charge will arise.

4. Do you have an asset standing at a very large gain which it would be worth selling to a new trust and distributing out (gains washing) the receivable? (Trusts do not get any rebasing).

5. Distribute out to pension funds or create pension funds.

6. Depending upon the size of the trust fund, consider a fund structure e.g. an authorised unit trust or a Luxembourg SIF.

BUT MOST IMPORTANT OF ALL

Now is a good time to consider what your plans are for yourself, the rest of your life and your family.

Tax will feature but it should not dictate your life.

Small print

This paper assumes that the reader has a knowledge of UK taxation of HNWIs and RNDs, and is either a client of this firm or an adviser to such a client, and is of course no substitute for advice based on your personal facts and circumstances.

No liability is accepted for reliance by any person upon any statement made in this paper.

Section 61(2) Law of Property Act 1925 applies to this paper.

This paper is not investment advice, all decisions must be made by you or your financial advisers.

This paper is for information only.