Spring Budget 2017 - Offshore matters
1. Non domiciliaries
Significant changes in the taxation of non domiciliaries will come into effect at 5 April but the law to effect these is still evolving. The main part of the legislation was issued in December 2016 but further developments have now been published in response to the consultations on the original draft and there have been some positive movements.
Capital Gains Tax (CGT) rebasing
Non domiciliaries who will become deemed domiciled on 6 April 2017 because they have been UK resident for more than 15 years, may choose to revalue their assets at 6 April and thus extinguish any capital gain accrued to date. The original draft legislation indicated that to qualify the individual must have paid the Remittance Basis Charge (RBC) in any year before April 2017. In the Budget documentation issued today, it is of particular note that there is no mention that the RBC must be paid in order to qualify for rebasing. Hopefully this is a relaxation of the rules rather than simply an oversight. We await further clarification on this point.
Also, it was previously suggested that rebasing would not apply to non-reporting offshore funds, where the profit is subject to income tax on disposal rather than CGT. Following the consultation responses, it has been confirmed that offshore funds can be rebased in the same way as direct investments which is a welcome relaxation.
Mixed foreign account ‘cleansing’
A second transitional relief allows people to access clean capital where it has been mixed with income and capital gains in the past. This is known as ‘cleansing’. Although valuable it had been thought the rules only applied to income and gains post 6 April 2008 (the last time there was a major change in the non domiciliary rules). We now have confirmation that these provisions will apply to pre-2008 income, capital gains and clean capital, as well. There will be a two year period in which to undertake the exercise and we advise that you should wait until the precise mechanics are confirmed to optimise your position.
Inheritance Tax (IHT) and UK residential property
From April 2017, IHT will be charged on all UK residential property, even where it is held by a non-domiciliary via an offshore structure. Previously interests of less than 1% of the total value of an underlying company or partnership would be disregarded for IHT purposes but this de minimis has now been increased to 5% which is more meaningful.
Offshore trusts – income tax
We already know about the proposed availability of protection for capital gains arising in an offshore trust structure where the settler is not domiciled in the UK or is deemed domiciled in the UK (under the ’15 out of 20 rule’).
The Government has recently released the first draft of the income tax legislation, which covers the way in which non-UK source income within an offshore trust structure will be taxed in these circumstances. The main points to mention are:
Income tax protections:
- From 6 April 2017 foreign source income within a trust will no longer be deemed to belong to the settlor where they are also a beneficiary. At present if the trust were to bring the foreign income to the UK (without it being a distribution to the beneficiary) this action would be attributed to the settlor and he/she would be taxed on it. From now on, the trustees (or an underlying company) will be free to remit such undistributed income to the UK (e.g. to pay professional fees) without a UK tax charge arising for the settlor, which can only be helpful. This ‘protection’ will particularly improve the UK tax position for foreign domiciled settlors who currently report trust income on the arising basis.
- Foreign income within a trust will instead only be taxed on the settlor when they or a close family member (spouse, partner and minor children) receive a benefit or a distribution from the trust structure.
- These generous protections will be lost if any addition is made to the trust after the settlor has become deemed domiciled. It is therefore crucial that all trusts are reviewed to ensure there are no existing arrangements in place which could constitute an addition, eg interest free loans made by the settlor to the trustees.
To balance all this good news, there is some tightening of the rules. In particular, under the new ‘anti-conduit’ rule, it will no longer be possible for a non-taxable beneficiary (i.e. a non-UK resident or a remittance basis user) to receive a trust distribution and gift this to a UK resident beneficiary without UK income tax or capital gains tax implications. Instead, the UK resident beneficiary will be deemed to have received the funds direct from the trust. This rule will apply only to onward gifts made within three years of the trust distribution unless arrangements (widely defined) for the onward gift are already in place, in which case there is no time limit.
2. Facing the consequences of non compliance
Under the Common Reporting Standard (CRS) over 100 countries, including the UK, are already committed to automatically exchanging financial account information. These exchanges have started to take place and by 30 September 2018 all 100 countries are expected to have exchanged information. The effect of this is that it will bring details of undisclosed income and gains into the hands of HMRC. The Government have issued legislation to enforce a requirement upon taxpayers to declare tax on their offshore interests. This is known as the “Requirement to Correct” (RTC).
Announced in the 2016 Budget, and to be included in Finance BiIl 2017, this policy is essentially to encourage taxpayers to disclose before 1 October 2018 within the existing regime. Otherwise a taxpayer could face serious consequences, including “Failure To Correct” (FTC) penalties which are much higher and potentially 200% of the unpaid tax.
The taxes covered are Income Tax, Capital Gains Tax and Inheritance Tax. HMRC have also confirmed they are not introducing any additional processes for the RTC; taxpayers should disclose through one of the current disclosure facilities or otherwise direct to HMRC. The unpaid liabilities must have arisen before and up to 5 April 2017.
The FTC penalty will start at 200% but will be reduced depending on the taxpayer’s level of co-operation and whether their disclosure was prompted or unprompted. A taxpayer’s behaviour will not be relevant unless they can show there was a reasonable excuse for not meeting the tax obligation, but the indication is that there will be very few occasions which will qualify as a reasonable excuse.
The FTC will be in point even for the most innocent situations such as a long lost bank account but can only relate to unpaid liabilities arising before and up to 5 April 2017. The FTC penalty represents a distinct change in tactics by the Government in their bid to stamp out offshore tax evasion. With the CRS in place, HMRC no longer need to encourage disclosure using favourable disclosure facilities and these new rules reflect that.
3. Non-resident companies
Non-resident companies are currently outside of the UK Corporation Tax regime. They do pay income tax on UK source income (such as rental profits). They can also be subject to Non-resident Capital Taxes.
It has been announced in the Spring Budget 2017, that the Government intend to consult as to whether to bring these companies fully within the corporation tax regime.
Subject to this change, non-resident companies may benefit from a reduction in tax rates due to the projected falling corporation tax rates. The existing company restrictions, however, on the levels of interest that may be deducted as an expense and how existing or future losses are relievable, may not be so welcome for certain companies.
Further updates will follow once details of the consultation are known.
4. Offshore developers and dealers in UK land
It used to be possible for an offshore company to purchase UK land, develop it and then sell it at a profit without a UK tax liability. This involved careful structuring to take advantage of the operation of tax treaties with various jurisdictions (usually Jersey, Guernsey or the Isle of Man).
The Government and HMRC have taken action to stop this. They extended the scope of UK corporation tax and income tax. A non-resident that has a trade of dealing in or developing UK land will now be fully subject to tax on all of the profits of that trade. The rules can also apply to the disposal of shares or partnerships deriving more than 50% of their value from UK land. The changes applied to all disposals on or after 5 July 2016 with an exception where the contract for disposal was entered into before 5 July 2016.
The intention was to exclude the standard property disposal arrangement where the parties are committed on making the contract on or before 5 July 2016, but the transfer takes place a short time later. However, some contracts were entered into at an early stage in the development with transfers being made over an extended period of months or years. The result is that some profits from these long term contracts are not within the charge. This was not the intention when the legislation was enacted.
It is therefore proposed to make changes to bring all such profits recognised in the accounts on or after 8 March 2017 into the charge to UK Corporation Tax or Income Tax, regardless of the date the contract was entered into.
This change will only impact a limited number of taxpayers.
There is plenty to think about, please contact Alison Palmer or your usual Mercer & Hole contact if there is anything you would like to discuss.
Date: 9th March, 2017
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