Given a free hand after 5 years of coalition economics, George Osborne was today very much expected to announce a truly Conservative budget. Did he?
Undoubtedly there was caution, and a certain degree of reference to the salutary lessons of Greece's current problems. But then he appears to have thrown caution to the wind with far reaching changes to the remittance basis, so that resident non domiciliaries ('RNDs') will be subject to taxation on the arising basis tax after more than 15 out of 20 years of residence. The good news is that no one will have to bother paying the £90,000 remittance basis charge after 2017, which applies after 17 out of 20 years of residence, as of course by then RNDs will be deemed domiciled for all taxes.
That's a good headline, but when one looks at the detail it becomes apparent that the changes are rather less seismic than they might first appear and that there are planning opportunities which will be available between now and April 2017 when the changes are due to come into operation.
The first question is what is the rationale behind the change? We know that RNDs are major contributors to both tax receipts and the economy generally, with £8.2bn being the last estimate of their contribution. It seems rash when, as the Chancellor reminded us, 'the greatest mistake this country could make would be to think all our problems are solved' to then shake the foundations of a system that makes the UK incredibly attractive to international investors, entrepreneurs and job creators.
The move is expected to raise £385m by 2020-21 – hardly worth it one would think. It can only be assumed that the answer lies in the political impact not economics, and, one assumes, a desire to ensure that this is no longer a political hot potato. As we shall see though, the changes are not necessarily as dramatic as they seem.
As to why 15 years, that, we are afraid, appears to be anyone's guess.
WHAT DOES IT REALLY MEAN?
HMRC has published a technical briefing to go alongside the announcement and the following key points stand out:
- Both existing and future excluded property trusts remain valid planning options; indeed
- Trusts established prior to having been resident for 15 out of 20 years will ensure income and gains realised and retained within the trust will not be taxed, even after the settlor and/or beneficiaries are deemed domiciled under the new test;
- Distributions and benefits received from such trusts will however be taxed, whether remitted or not;
- The recently increased £90,000 remittance basis charge is somewhat of a red herring – since it kicks in only in after 17 out of 20 years of residence, clearly it will fall away (although it is possible that there will be a further increase in the remittance basis charges for shorter term residents by 2017);
- Domicile as a matter of general law remains unaffected;
- The children of longer term RNDs will not automatically become deemed domiciled when their parents do – their position will be tested on the length of their residence (bad news for UK schools maybe);
- Longer term deemed domiciled residents will have to remain non-resident for more than five complete tax years to break general deemed domicile – this aligns with the current requirements for capital gains and income tax residence;
- Longer term RNDs who have already established non-trust offshore structures – e.g. companies – will wish to review these prior to 2017.
THE GOOD NEWS
The good news is that with planning in good time, offshore trusts will remain a good deferral and inheritance tax planning structure. The bad news is that accessing benefits will be rather unattractive. Trustees will wish to be especially mindful of the impact of the supplementary charge, which means distributions of gains which are within the structure for six or more years are charged at a 44.8% rate, as it will no longer be possible to address this by distributions offshore.
THE STING IN THE TAIL
The rather large caveat to trusts remaining attractive is that it will no longer be possible to shield UK residential property from IHT by holding it through a non-UK company within an excluded property trust (or simply within an non-UK company). Currently, UK residential property held through a non-UK company, whether directly or within a trust, is not subject to IHT – it is course however subject to ATED and to the recently introduced capital gains tax charge on non-residents.
It was announced that legislation will be introduced to enable shares in the company holding UK residential property to be 'looked through' so that IHT will apply as though the property was held without the company. This is apparently meant to align the treatment with the capital gains tax charge on non-residents holding UK residential property.
Of course, for many clients where confidentiality is paramount and who are already relaxed about having to pay ATED, it is hard to see that this will change matters. However, for those who have been willing to view ATED as the price for peace of mind for inheritance tax, it may well be a prompt to restructure. The challenge will be to ensure the property can be extracted without triggering significant gains and other charges, although there are some tried and tested means of achieving this proposal.
This change will be subject to a consultation to ensure amending legislation is not cast overly wide, and it is intended that any changes will have effect as of April 2017.
HEREDITARY NON DOMS – NO CHANGE
Despite much speculation that hereditary non domicile status would be removed or significantly amended, there has in fact been no change at all to this.
Instead, in the rather unusual scenario where a UK domiciliary acquires a domicile of choice elsewhere – e.g. through establishing a home elsewhere and deciding to settle there – and then returns for a short period to the UK, perhaps for a job posting, with the clear intention of returning to his new home, will not be able to claim non-domicile status.
Perhaps the most heartening sentence in the Chancellor's speech in relation to RNDs was 'We will consult to get the detail right'. The changes are set to take effect in April 2017, and a consultation paper is to be issued later this summer.
The first key point to take away is that these are not necessarily the dramatic changes that they first appear, and trusts do and will continue to offer very significant benefits for RNDs, provided they are established in advance of 15 out of 20 years of UK residence and properly run.
The second key point is that there is a transitional period of almost two years to get one's affairs properly structured in preparation for the changes announced today.
We would certainly urge anyone who is non-UK domiciled and who is close to having been UK resident for 15 out of 20 years to start planning in earnest and in particular:
- Making sure an excluded property trust is set up in good time;
- Making sure you are absolutely aware of exactly when 15 out of 20 years will arise – as with deemed domicile at present we expect this can in practice be rather less than 15 years and could be as little as thirteen years.
- for existing structures, it will be important to decide between stripping out income and gains offshore while the remittance basis applies and retaining assets within excluded property trusts;
- Reviewing existing non-trust deferral structures and making sure these are changed so as to be as efficient as possible in good time;
Above all else though, we recommend a non-panicked approach, which holds good in tax planning as in many other areas of life!