Out-Law News 4 min. read

No concessions for non-doms that choose to unwind enveloped property ownership, says Treasury


Non-domiciled taxpayers who choose to 'de-envelop' UK properties that they own through offshore companies once the government removes the inheritance tax (IHT) advantages of such structures will not benefit from any transitional protections, the Treasury has announced.

Although the government "can see there might be a case of encouraging de-enveloping", it does not "think it would be appropriate to provide any incentive" to do so, according to the latest consultation on the proposals.

The government said that it would "consider the cost" associated with de-enveloping, or effectively transferring the property back into personal ownership, when it first announced planned changes to the way in which non-doms are taxed as part of the 2015 Summer Budget. It is seeking views on whether its change of position would lead to any "hard cases or unintended consequences" for taxpayers as part of the latest consultation, which closes on 20 October.

Tax expert Fiona Fernie of Pinsent Masons, the law firm behind Out-Law.com, said that a lack of transitional arrangements would create liquidity and capital gains tax (CGT) issues for those affected by the changes.

"Over the years, foreign domiciled taxpayers have purchased UK residential properties through companies or trusts, using arrangements that were perfectly legitimate at the time," she said.

"A series of policy announcements over the past few years have effectively changed the legal position with retrospective effect. The removal of IHT relief on enveloped properties removes the last advantage from structuring ownership in this way. Now, taxpayers must pay the annual tax on enveloped dwellings (ATED) every year - but those who choose to unwind the arrangements will face considerable liquidity and CGT barriers to doing so," she said.

The UK government intends to end permanent non-dom status for tax purposes as of 6 April 2017. From this date, those who have been resident in the UK for 15 out of the previous 20 years will be deemed UK domiciled for tax purposes, while anyone who is born in the UK to UK resident parents will no longer be able to claim non-dom status if they leave the UK but then return and take up residency in the UK.

If introduced in its current form, the draft legislation proposed by the government would implement a 'deemed domicile' rule that would prevent long-term UK residents from claiming non-dom status. This would be implemented by restricting access to the remittance basis regime for those individuals who meet the deeming tests. One impact of this would be that the £90,000 remittance basis charge, payable by those who have been UK resident for 17 out of the last 20 tax years, would no longer be available.

'Domicile' is a concept distinct from both nationality and place of residence in a given tax year, and effectively means where a taxpayer has his or her permanent home. The rules are complex and defined through a long line of case law. Individuals who are resident and domiciled in the UK are taxed on their worldwide income and gains; while non-doms are able to claim the remittance basis of taxation, which does not tax foreign income and gains provided they are not 'remitted' to the UK, in return for an annual charge which increases depending on how long that person has been in the UK.

The government consulted on the deemed domiciled provisions towards the end of last year. It has now confirmed its intention to take forward its proposals in substantially the same form from 2017, as it believes that it "strikes the right balance between fairness in the way the rules operate without adding unnecessary complexity to the existing framework". It will, however, introduce new transitional provisions for the "very small number of people" who were non-resident before the announcements were made and who disposed of chargeable gains in the UK on the basis of their status.

Under current rules, IHT is only charged on UK property directly held by non-doms, so owning UK property through an offshore vehicle removes that property from the scope of IHT. The consultation sets out how the government will change the rules so that IHT is charged on all UK property held by non-doms, whether directly or indirectly, ending the "significant advantage" that non-doms currently have over other individuals for IHT purposes.

The government has proposed removing UK residential properties owned indirectly through offshore structures from the definition of "excluded property" set out in the IHT legislation. This would mean the UK residential properties owned by an offshore structure would be subject to IHT, regardless of whether the ultimate owner of the structure was an individual or trust. Shares in offshore close companies and similar entities would no longer be excluded property "if, and to the extent that, the value of any interest in the entity is derived, directly or indirectly, from residential property in the UK", according to the consultation.

The government also intends to create a targeted anti-avoidance rule, "the effect of which will be to disregard any arrangements where their whole or main purpose is to avoid or mitigate a charge to IHT on UK residential property", according to the consultation.

On offshore trusts more generally, the government intends for non-doms who set up an offshore trust, but who then become deemed domiciled under the new rules, would not be taxed on trust income or gains retained by the trust. Tax rules would instead be based on the taxable value of benefits received by the deemed domiciled individual without reference to the income and gains arising in the offshore trust.

The rules have been amended slightly from the version published last year in response to feedback, which was concerned about the complexity of applying two different regimes to UK domiciled taxpayers and to non-doms. There were also concerned that the new rules would be punitive for non-doms who settle assets into and receive benefits from a trust which has minimal or no income and gains. The proposed rules remain unnecessarily complex despite the changes, according to tax expert Fiona Fernie.

In addition, the consultation confirms proposals to prevent excluded property trusts set up by UK-born people with a UK domicile of origin being treated as such when those people return to the UK, meaning that such trusts might be excluded property one year and relevant property in the next year where someone is frequently coming and going from the UK.

The government is also consulting on changes to business investment relief (BIR), which applies where individuals who are taxed on the remittance basis invest their foreign income and gains in UK businesses. It is seeking views on how to "amend and expand" the scheme to encourage increased take-up, as well as suggestions on how to simplify any "unnecessarily complex" aspects of the rules.

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