HMRC recognise that the new rules for non domiciliaries are punitive and, to soften the blow, they have proposed to offer two clear opportunities: In this article we look at the first being rebasing.
Individuals who will become deemed domiciled in April 2017, because they have been resident for 15 out of the previous 20 tax years (‘15 out of 20 rule’), will be able to rebase their directly held foreign situs assets to the market value on 5 April 2017. This form of relief only applies to non-UK assets which were owned on 5 April 2017.
As a result, on disposal any capital gain which arose prior to 5 April 2017 will not be taxable. Any further increase in the value between April 2017 and disposal will be charged to UK CGT as it arises. The gain must be calculated in the normal way with conversion to Sterling, thereby incorporating exchange rate fluctuations.
For example, Jill will become deemed domiciled on 6 April 2017. She owns shares in a listed Swiss company, which were acquired for £100,000 in 2012, they are worth £150,000 on 5 April 2017 and she later sells them for £175,000 in 2019 realising a capital gain of £75,000. Jill has the opportunity to rebase the shares to their value on 5 April 2017 i.e. £150,000. As a result, only the capital gain which arose after 5 April 2017 of £25,000 will be subject to UK CGT and the capital gain which arose prior to 5 April 2017 of £50,000 will never be subject to UK tax.
Rebasing will only apply to assets which were not situated in the UK between 16 March 2016 (or the date of acquisition, if later) and 5 April 2017. An asset will be treated as situated in the UK if it was brought to, received or used in the UK by or for the benefit of the individual or a ‘relevant person’ (e.g. their spouse or minor child). This will not include assets which qualified as exempt property for remittance purposes e.g. clothing, footwear, jewellery and watches for personal use, assets worth less than £1,000 or assets which were temporarily imported to the UK for less than 275 days.
Where the asset was originally purchased with clean capital, the entire proceeds from the disposal can then be remitted to the UK without triggering a further UK tax charge. However, where it was purchased wholly or partly with foreign income and gains, the normal mixed fund rules will still apply upon remittance to the UK. (See Alice Pearson’s article on cleansing).
Returning to the example of Jill, she acquired the Swiss company shares using foreign income of £20,000 and foreign capital gains of £30,000 arising in a year in which she claimed the remittance basis. When Jill later remits the sale proceeds to the UK the foreign income and capital gains utilised to purchase the shares will still be subject to UK tax.
Rebasing will be automatic but you are able to make an irrevocable election for rebasing to not apply within four years after the end of the tax year in which the disposal occurs. This election may be beneficial in some circumstances, for example if rebasing will reduce a capital loss and can be made by reference to each disposal. It is important that UK tax advisers work closely alongside foreign investment managers to ensure that rebasing is applied appropriately, elections to opt out of rebasing are made within the time limit and the correct base cost is recorded for UK tax purposes.
Although this is a valuable opportunity, it is not available to everyone. Rebasing will be restricted to those who have paid the Remittance Basis Charge (RBC) in any year before April 2017. It may therefore be beneficial for non domiciliaries to claim the remittance basis and pay the RBC for the first time in one of the four years to 5 April 2017, particularly for those who are asset rich but cash poor.
For example, Ben is a UK resident non domiciliary. His offshore wealth is largely tied up in non-income producing foreign property, which is standing at a large capital gain. His foreign income and capital gains do not warrant payment of the RBC and so he has not previously made a claim for the remittance basis. It may however be worthwhile Ben paying the RBC for 2015/16 or 2016/17 purely in order to benefit from rebasing and protect the gains accrued on the foreign properties up to 5 April 2017 from UK tax.
Rebasing is restricted to individuals who will become deemed domiciled in the UK on 6 April 2017 under the 15 out of 20 rule. The individual will also need to remain deemed domiciled in the UK under this rule for all subsequent tax years up to the year of disposal.
Unfortunately, individuals who become deemed domiciled in years after April 2017, and those who become deemed domiciled because they were born in the UK with a UK domicile of origin (‘returners’), will not be able to rebase their foreign assets. These individuals could consider disposing and re-acquiring after 30 days their foreign assets in a remittance basis year to manually rebase their assets. For returners this will have to take place before 6 April 2017.
Although the legislation is still under consultation, it is unlikely that rebasing will apply to non-reporting offshore funds, which are subject to income tax on disposal rather than CGT. Individuals who will become deemed domiciled on 6 April 2017 under the 15 out of 20 rule may therefore wish to claim the remittance basis for 2016/17, dispose of the non-reporting funds prior to 5 April 2017 and reacquire after 30 days to achieve a manual uplift in the base cost. This is subject to investment advice.
We strongly recommend that foreign assets are reviewed and valuations as at 5 April 2017 are obtained to ensure optimum benefit. Please contact Lisa Spearman to discuss this further or your usual Mercer & Hole contact.