The boomerang effect
A particularly significant announcement that will shortly be effective from 6 April 2017, affects those individuals born in the UK with a UK domicile of origin and makes them deemed domiciled for all taxes for any periods they are resident in the UK.
This will typically affect those who were born in the UK to UK domiciled parents, who have established a new non-UK domicile, and are currently living or considering moving back to the UK.
By way of example, Philip was born in the UK in 1963 to UK domiciled parents. His parents emigrated from the UK to Australia when he was 5 years old, where he has lived ever since and therefore obtained a domicile in Australia. Recently a job opportunity in London has arisen and Philip intends to return to the UK. He will be caught by these new rules. Alternatively, the rules would still apply if Philip has already relocated to the UK and remains UK resident after 6 April 2017.
These new rules particularly impact those who:
- Are currently claiming the remittance basis of taxation, and/or
- Those who have settled offshore trusts.
Broadly, from 6 April 2017, those affected will no longer have access to the remittance basis if UK resident and will be taxed on worldwide income and gains in the tax year in which they arise. Foreign income and gains from earlier years will be taxable only subject to them being remitted to the UK.
Income and gains arising within offshore trusts, settled by those caught by the new rules, will now be taxable on the settlor personally and the Trust will be subject to the normal UK Inheritance Tax (IHT) regime.
If these changes are likely to impact you, then there are a number of steps that should be taken prior to 6 April 2017 to allow tax flexibility and efficiency once the new rules kick in, as well as to provide longer term planning opportunities:
Becoming non resident
- For those who wish to escape the new rules, Mercer & Hole can advise regarding obtaining and retaining a non-UK resident tax status under the UK statutory residence test.
IHT grace period for ‘short’ period of return
- We understand that those who return to the UK for a ‘short’ period of time should not be treated as domiciled in the UK and foreign assets will remain outside the scope of IHT.
- The remittance basis protection for income tax and Capital Gains Tax (CGT) will not be available for those returning for a ‘short’ period.
- Mercer & Hole can assist with a UK tax health check of your current investments to make sure they are UK tax friendly (i.e. utilise ‘reporting’ offshore funds, offshore bonds etc).
- We can liaise with your investment manager to establish which investments could be realised prior to 6 April 2017 to crystallise capital gains offshore or should be retained to utilise foreign capital losses.
- We can advise as to tax efficient investing in the UK via Business Investment Relief.
- We can offer guidance on the setup of new segregated overseas accounts to provide tax efficient and flexible access to your offshore funds whilst reducing the administrative burden of ongoing UK tax reporting.
- We can advise on the available tax mitigating options, including the exclusion of benefit of the settlor to facilitate continued IHT protection.
If you wish to discuss any of the points raised in the article above then please contact Henry Lowe on 020 7236 2601.
Date: 15th December, 2016
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