Reforms to the taxation of non-domiciles: further consultation

Question 1

1. Introduction

Accepted Answer

At the Summer Budget 2015, the government announced that it would change the tax regime for people who have a foreign domicile (‘non-doms’). These changes will bring an end to permanent non-dom status for tax purposes and mean that non-doms can no longer escape a UK inheritance tax (IHT) charge on UK residential property through use of an offshore structure like a company or a trust. At the Autumn Statement 2015, the government made a further announcement that it would consult on how to change the Business Investment Relief rules to encourage greater investment into UK businesses.

A consultation was published in September 2015 setting out the detail of the proposals to deem certain non-doms to be UK-domiciled for tax purposes. This document provides an update on those proposals. This document also sets out the detail of proposals to charge IHT on UK residential property. This part of the non-dom reforms has not previously been subject to consultation, and the government is keen to hear views on how to make the extended charge work effectively.

Post EU referendum, the aspiration for a tax system that balances fairness and international competitiveness remains the same, and the government believes it is still appropriate to proceed with these reforms. We invite respondents to put forward their views which we will consider carefully as the reforms are developed.

This document also invites views on the ways in which Business Investment Relief could be changed to encourage greater investment from non-doms into UK businesses, helping them to grow and expand. This is part of the government’s wider efforts to encourage inward investment in the UK and to encourage entrepreneurial activity in the UK.

1.1 Background

The announcements made at the Summer Budget 2015 will mean that individuals who live in the UK for a long time will have to pay UK tax on their worldwide income and gains in the same way as an individual who is domiciled in the UK. They will also mean that any individual who is born in the UK and who has a UK domicile of origin will no longer be able to claim non-dom status for tax purposes while they are living in the UK, even if they had subsequently left the UK and acquired a domicile of choice in another country. These are referred to as the “deeming provisions” of the reforms.

The government has already consulted extensively on these changes:

alongside the Summer Budget, the government published a technical document explaining the overall package of reforms
on 30 September 2015, the government published Reforms to the taxation of non-domiciles which consulted on the detail of the deemed-domicile proposals. The consultation ran for 6 weeks and received 65 responses
on 9 December 2015, the government published part of the draft legislation for these changes, with further legislation published in draft on 2 February 2016

Budget 2016 announced that the whole package of reforms to the non-dom regime would be legislated in Finance Bill 2017 because the government believes that the changes will be better legislated as a single package. These include the deeming provisions, for which draft legislation has previously been published.

Budget 2016 also announced that the government would legislate for two further measures to help those who become deemed-domiciled after having been resident for 15 of the past 20 years to transition to the new regime. Further details of these announcements are set out in this document. It also sets out most of the intended protections for non-resident trusts which were originally announced at Summer Budget 2015.

The government is grateful to those who have already provided their views on the proposals through the consultation process and hopes they will continue to express their views. Responses were received from a range of professional bodies, firms and individuals. A list of those who sent responses is included in chapter 7. A number of technical amendments have been raised, some of which have led to changes in the detail of the draft legislation. This is explained in detail in this document.

1.2 Stage of consultation

The options set out in this document are at stage 2 (determining the best option and developing a framework for implementation including detailed policy design) of the government’s framework for tax consultation.

1.3 How to respond to the consultation

The consultation will run for 9 weeks. Please send comments by 20 October 2016 to:

Personal Tax Team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

Email: nondomreform@hmtreasury.gsi.gov.uk

Question 2

2. Inheritance tax on UK residential property

Accepted Answer

2.1 Background

Individuals who are non-domiciled in the UK currently enjoy a significant advantage over other individuals for IHT purposes. UK domiciled individuals are liable to IHT on their worldwide property. However, those who are non-UK domiciled are only liable on the property which is situated in the UK. This is the case both for individuals who are resident in the UK and those who are resident elsewhere.

Any residential property in the UK owned by a non-domiciled individual directly will be within the charge of IHT. However, it is standard practice for such individuals to hold UK residential properties through an overseas company or similar vehicle. Where this is the case, the property of the individual consists of overseas shares which will be situated outside the UK and are therefore excluded from IHT. This is known as ‘enveloping’ the UK property and the effect is that the property is taken outside the scope of tax.

Enveloping properties in this way only provides a tax advantage to individuals who are domiciled outside the UK. It is not available for any other individual, either those who are domiciled in the UK under general law or those who are deemed to be so domiciled under statutory rules because they have been resident in the UK for a long period.

2.2 Proposed changes

The government plans to bring residential properties in the UK within the charge to IHT where they are held within an overseas structure. This charge will apply both to individuals who are domiciled outside the UK and to trusts with settlors or beneficiaries who are non-domiciled.

These changes will come into effect from 6 April 2017 and will be legislated as part of the 2017 Finance Act.

Charging IHT on UK residential property

To implement the extended IHT charge, the government proposes to remove UK residential properties owned indirectly through offshore structures from the current definitions of excluded property currently provided by sections 6 and 48 of the Inheritance Act (IHTA) 1984. The effect will be that such UK residential properties will no longer be excluded from the charge to IHT. This will apply whether the overseas structure is owned by an individual or a trust.

Once the legislation comes into effect, shares in offshore close companies and similar entities will 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. There will be no change to the treatment of companies other than close companies and similar entities.

Similarly, where a non-domiciled individual is a member of an overseas partnership which holds a residential property in the UK, such properties will no longer be treated as excluded property for the purposes of IHT.

No change will be made to the taxation of UK property which is held by corporate or other structures which are owned by UK domiciled individuals or by trusts made by UK domiciled individuals.

Question 1: Are there any difficulties in introducing the IHT charge by amending the legislation in this way?

The change will be effective for all chargeable events which take place after 5 April 2017. For these purposes, the definition of a chargeable event will follow existing IHT rules and will include:

the death of an individual holding shares in an overseas close company which owns UK residential property
the redistribution of the share capital of an overseas close company which owns UK residential property
the death of a donor making a gift of shares in a close company which owns UK residential property where that gift was made within 7 years of death
a gift made by a non-domiciled individual of shares in a close company owning UK residential property
the death of a donor or settlor who benefits from a gift of UK residential property or of shares in a close company which owned such property within 7 years of death
any ten-year anniversary of a trust holding UK property through an offshore company
the death of a life tenant with a pre-March 2006 qualifying interest in possession in a trust from which they have an entitlement to income

Question 2: Are there any reasons why the extended charge should not apply to all chargeable events?

Properties affected

The legislation will need to define the types of property which will become liable to IHT. However, introducing a wholly new definition for IHT purposes could risk creating unnecessary complexity and uncertainty. The government therefore intends that the new charge should be based as far as possible on other definitions of residential property which currently exist within tax legislation.

One potential model is the definition of a dwelling which was introduced in Finance Act 2015 for the purposes of capital gains tax (CGT) on disposals by non-residents of residential property in the UK. This definition can be found in paragraph 4 of Schedule B1 to the Taxation of the Capital Gains Act (TGCA) 1992 and includes:

any building which is used or suitable to be used as a dwelling
any building which is in the process of being constructed or adapted for use as a dwelling
the grounds in which such a building is situated

The types of property which are excluded from this definition of a dwelling include:

care or nursing homes
any building with 15 bedrooms or more which has been purpose-built for student accommodation and occupied by students
prisons and military accommodation

There are a number of important distinctions between non-resident CGT and the intended IHT charge. One is that non-resident CGT is not payable by any individual who is resident in the UK. Another is that it is not charged on a dwelling where it is used as a main home. It is not the intention to exclude such properties from the scope of the extended IHT charge. It has therefore been necessary to make amendments to ensure that the extended IHT charge applies to all UK dwellings as it is intended. This is reflected in the draft legislation published as part of this document.

An alternative approach would be to follow the definition of a dwelling for the purposes of the annual tax on enveloped dwellings (ATED) in section 112 of Finance Act 2013. ATED applies to high-value UK residential properties which are owned by a company, a partnership with a corporate member or a collective investment vehicle. For the purposes of ATED, the definition of a dwelling excludes hotels, guesthouses, hospitals, student halls of residence, boarding schools, care homes and prisons.

The amount of ATED which is chargeable is determined by the value of the dwelling in question so that properties whose value is less than £500,000 are not subject to tax. In addition, any dwelling which is let as part of a property rental business is not within the charge to ATED, nor does it apply to trustees. However, the scope of the new IHT charge will apply to trustees and will not have any minimum value threshold, nor is the intention to exclude residential properties which are let out on arm’s length terms to a third party.

As the scope of the IHT charge will be significantly wider than that of ATED, adopting its definition of residential property will need more extensive amendment than would that used for the purposes of non-resident CGT. The government is therefore more attracted to using the non-resident CGT definition as the basis for the extended IHT charge.

Question 3: Do you agree that the definition of a dwelling introduced for the purposes of non-resident CGT would provide the most suitable basis for the extended IHT charge?

Changes of use

In some cases, a residential property might have previously been used for a non-residential purpose. The extended IHT charge will need to take account of such situations to determine the amount which will become liable to IHT whenever a chargeable event occurs.

In the case of non-resident CGT, there are rules which apply in such situations and which are designed to ensure that tax is charged on the basis of a just and reasonable apportionment of the value of the property. This apportionment is calculated on the basis of the length of time for which the property has been used for a residential purpose.

However, in the context of IHT, there are difficulties in an approach based on apportioning the value of a property according to its use since it was first acquired. Unlike CGT, IHT does not operate on the basis of annual tax years but instead is based on a snapshot of an estate taken immediately before a chargeable transfer is made. The apportionment of value in the same way therefore may not be the best approach.

Instead, the government proposes to introduce a rule based on that which currently applies for the purposes of Business Property Relief (BPR). This stipulates that relief will only be available where the property in question has been owned by the transferor for at least two years immediately before the transfer takes place.

Adapting this approach for the purposes of the new IHT charge will mean that a property will be within the charge to IHT where it has been a dwelling at any time within the two years preceding a transfer.

This approach will mean that there will be no need for any apportionment of value for properties which have been used for a residential purposes and for non-residential purposes over time.

However, there will be the need for an apportionment where a property has been used for residential and for other purposes at the same time, such where it consists of a flat above a commercial premises. Provided the property has wholly or partly met the definition of a dwelling at any time in the previous two years, it will be chargeable to IHT. However, the tax liability which arises will be determined by the extent to which the property has a residential use.

Question 4: Do you agree that this is the most suitable approach for dealing with situations where the use of a property is mixed or has changed over time?

The IHT charge: valuation

Currently, there is no requirement to value property which is held by a non-domiciled individual through an overseas company because it is excluded property. However, once the rules are changed to stop UK residential property being treated as excluded property, it will become necessary to establish its value for IHT purposes. This will follow the general approach for IHT so that tax will be charged on the open market value of the property at the time of the relevant chargeable event.

The government considers that the most effective approach will be to charge IHT on an estate to the extent that any underlying assets consist of UK residential property. Where an estate holds shares in an overseas company which in turn owns UK residential property, the estate will be within the charge to IHT to the extent that the value of those shares relates to a UK property.

In a simple example, a non-dom is the sole shareholder of an overseas company whose sole assets consist of a UK residential property. The company has no liabilities. At the individual’s death, their estate will consist of the overseas shares which have an open market value of £950,000. At the same time, the UK property has an open market value of £1 million. In such a situation, the value of the estate is £950,000, and this is derived wholly from the UK residential property. This would mean that IHT would be charged on the entire estate which has an open market value of £950,000. This is broadly the treatment which would apply in the case of an individual who is domiciled in the UK.

A structure which holds residential property indirectly through a company or other entity overseas may also hold other assets, such as non-UK properties, and these will remain outside the scope of IHT. Therefore, any approach for establishing the value for IHT will need to distinguish between different categories of property. It will also need to reflect the fact that individuals can often hold UK property in a number of offshore companies and similar complicated structures.

Question 5: Are there any potential difficulties in this approach?

The IHT charge: debts

In line with the current IHT rules, the new charge on residential property will apply only on the value of the UK residential property at the point of the chargeable event and will take account of any relevant debts. For these purposes, relevant debts are those which relate exclusively to the property, such as amounts outstanding on a mortgage which was taken out to purchase the property. However, any debts which are not related to the property will not be taken into account when determining the value chargeable to IHT.

In cases where an offshore entity holds debts which relate to the UK residential property alongside other assets, or where an entity holds only a part share in the residential property, it will be necessary to take a pro-rata approach in determining how much outstanding debt can be offset against the value of the property in calculating the IHT charge. This is broadly in line with the IHT rules as they currently apply to UK domiciled individuals.

The government intends that any loans made between connected parties will be disregarded when determining the value of the property which will be chargeable to IHT.

Question 6: Are there any difficulties in this approach to determining the value of property chargeable to IHT?

Tax avoidance

There have been instances in the past in which individuals have taken steps to avoid a charge to IHT. The government is keen to counter any similar attempts to avoid the charge arising on UK residential properties. With that in view, it proposes to include a targeted anti-avoidance rule in the new legislation, 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. This anti-avoidance rule is included in the draft legislation.

For these purposes, the definition of an arrangement will follow that which currently exists in section 74C of the Inheritance Act and will include any scheme, transaction or series of transactions, agreement or understanding, whether or not legally enforceable, and any associated operations.

Question 7: Will the proposed anti-avoidance rule be an effective way of countering attempts to avoid the IHT charge?

2.3 Liability and accountability

Under current IHT rules, where UK property is owned directly by an individual or a trust, a return needs to be submitted whenever there is a chargeable event. Responsibility for paying the tax due falls to the executor, the trustees or the beneficiaries of the estate. This will remain the case once IHT becomes chargeable on UK residential properties held through enveloped structures.

However, where UK property is owned through an overseas company, HMRC might have difficulties in identifying whether a chargeable event has taken place and hence whether a liability to IHT has arisen. To address this, the government intends to extend responsibility for reporting to HMRC when chargeable events have taken place and for paying any tax which arises.

The government believes HMRC should have an expanded power to impose the IHT charge on indirectly-held UK residential property so that the property cannot be sold until any outstanding IHT charge is paid. In addition, a new liability will be imposed on any person who has legal ownership of the property, including any directors of the company which holds that property. This will ensure that IHT is paid, though only when HMRC are aware that a charge has arisen and have taken steps to collect the liability. The relevant legislation will be published later in 2016.

Question 8: Do stakeholders agree that these steps will effectively ensure compliance?

2.4 Transitional arrangements

The IHT charge will apply to all chargeable events which take place after 6 April 2017.

At the 2015 Summer Budget, the government said that it would consider the cost associated with de-enveloping of properties. However, while the government can see there might be a case for encouraging de-enveloping, it does not think it would be appropriate to provide any incentive to encourage individuals to exit from their enveloped structures at this time.

Question 9: Are there any hard cases or unintended consequences that will arise as a result of there not being any tax relief for those who want to exit their enveloped structures?

Question 3

3. Deemed UK domicile for long-term residents

Accepted Answer

3.1 Background

This chapter sets out the details of the proposal to deem long-term residents as UK domiciled for tax purposes once they have been resident in the UK for 15 of the past 20 years.

In September 2015, the government consulted on the proposals to treat non-doms as deemed UK domiciled for tax purposes once they have been resident in the UK for 15 of the past 20 years (the “15/20 test”).

The test is based on the number of tax years that an individual has been resident in the UK. The consultation document outlined the intention to count years of residence including years spent while the individual is under the age of 18. However, the individual could lose their deemed-UK domiciled status if they became non-resident and spend at least six years as a non-resident.

By way of example, an individual who has lived continuously in the UK since (say) 1985 will become deemed-domiciled in April 2017 under the new rules, as they will have been resident for 15 of the past 20 tax years. However, if they leave the UK in April 2018 and they are non-resident for six consecutive tax years (2018-19 to 2023-24), the deemed-domicile status will fall away by the tax year 2024-25. If the individual were to return to the UK in May 2024 and assuming they retained their foreign domicile status under general law, they would be able to claim non-dom status for tax purposes until 2039-40, when 15 consecutive years of residence would again mean they became deemed-domiciled for tax purposes.

The consultation asked the following questions about the way the government intended to legislate for the new rule to deem people as domiciled once they have been UK resident for 15 of the past 20 years.

Consultation question 1: Do stakeholders agree that the approach outlined in this document is the best way to introduce the test for deemed-domicile status?

Consultation question 2: Are there any difficult circumstances that might arise as a result of the intended approach that could be avoided with a different test?

3.2 Consultation responses on questions 1 and 2

Many of the responses acknowledged that the government’s intentions for long-term resident non-doms were reasonable and that the 15/20 test was a sensible way to deliver the policy intention. Opinions varied on some of the detail. Some thought that 15 years was too short a period to treat people as being deemed-domiciled. A number pointed out that the way the statutory residence test works would mean that it was possible to become deemed-domiciled after spending only a little more than 13 years in the UK, if a non-dom became UK resident towards the end of one tax year and became non-resident early on in a later tax year.

A small number of individuals said that taxpayers ought to be able to use the statutory residence test for years before the test was introduced, rather than relying on the previous legislation and case law to determine their residence status for earlier tax years.

A significant number of respondents thought it was unreasonable to treat years spent in the UK during childhood as counting towards the deemed-domicile test. Respondents said that it was unfair to treat an individual as being deemed-domiciled before they reach adulthood, as a child is unable to decide where to base themselves. Furthermore, respondents thought that counting years spent in the UK during childhood could make it less attractive for people to use schools and colleges that are located here, given that a child could potentially be treated as deemed-domiciled for tax purposes before they leave full-time education.

Finally, several respondents suggested that there was a potential mismatch between the income tax and capital gains tax position, and the inheritance tax position where the year in which the 15/20 test is met is a split year under the statutory residence test. These respondents felt that the income and capital gains tax provisions appear to give relief in respect of the non-UK part of the year whereas there is no similar relief in the inheritance tax provisions in relation to chargeable transfers made in the non-UK part of the year.

3.3 Government response

The government believes that the proposal outlined in the consultation document and the draft legislation strikes the right balance between fairness in the way the rules operate without adding unnecessary complexity to the existing framework. The government’s position on the substantive questions raised with regards to how the deemed-domicile test would work in practice is set out below.

3.4 (i) Using the statutory residence test for determining residency for the period prior to the statutory residence test being in place

The government has decided that a non-dom who is determining their residence status for a tax year in order to decide whether they are deemed-domiciled should use the rules that were in place in the year in question. Allowing individuals to use the statutory residence test for years before the test was legislated would mean that a small group of people might be able to disregard a year for the purpose of the deeming rule even where they had filed a tax return for that year on the basis that they were resident for tax purposes. It would also mean that the deemed-domicile test would be different from the test for determining when an individual needs to pay the remittance basis charge for long-term residents.

The government therefore intends that an individual should determine their residence status using the rules that were in place for the relevant year rather than the statutory residence test for the purposes of the deemed-domicile rule.

3.5 (ii) Years spent in the UK during childhood

On the subject of years spent in the UK during childhood, the government believes that it would be difficult to defend a test which disregarded years of residence in the UK during childhood. If the test did not start to count years of residence until the individual was 18, an individual who had lived in the UK for their entire life could be in their thirties before they became deemed-domiciled. The government does not think this is appropriate and is of the view that the flexibility of the test allows non-doms who have grown up in the UK to claim non-dom status if they wish to do so by leaving the UK for sufficiently long that the deemed-domiciled status falls away.

3.6 (iii) Disregarding years where individual can claim split year status

The government considers that to disregard tax years where an individual has been able to claim split-year status would bring greater complexity to the rules. The rule which treats non-doms as deemed-domiciled after they have been resident for 15 of the past 20 years is based on the statutory residence test, under which an individual is either resident or not resident for the whole tax year. This approach is also consistent with the way in which tax years are counted for the purpose of the remittance basis charge. This means that those individuals who are continuously resident in the UK will move from paying the £30,000 charge when they have been resident for 7 of the past 9 tax years to paying the £60,000 charge when they have been resident for 12 of the past 14 years and then becoming deemed-domiciled for tax purposes once resident 15 of the past 20 years. It also means that the £90,000 remittance basis charge for those resident for 17 of the past 20 years will cease to apply.

Further, the suggested mismatch between the income tax and capital gains tax position and the position for inheritance tax is simply a reflection of the fact that deemed-domicile status will apply for a whole tax year.

By way of example: an individual who is not domiciled but who is resident for 14 consecutive years and then leaves the UK in year 15 would claim split-year status under the statutory residence test. For year 15, they will be non-domiciled in the UK and able to claim the remittance basis in respect of income tax and capital gains tax for the UK part of the split year.

In year 16 they will become deemed-domiciled because they were resident in the UK for 15 of the previous 20 years, but if they remain non-resident they will not be liable to income tax, other than on UK-source income, and capital gains tax, other than on UK residential property. However, their deemed-domicile status means there would be a potential inheritance tax liability on foreign assets if they die or make a chargeable transfer during the year.

3.7 Other issues raised with regards to the impact of the introduction of deemed-domicile changes

In addition to the general approach to determining the deemed-domicile changes, a number of other issues which can relate to transitional protections were raised during the consultation. The consultation document did not ask any questions about the transitional protections that had been outlined in the technical note which was published on Budget day in July 2015. The government remains committed to theses transitional protections.

The section below takes these transitional issues in turn. In particular:

the treatment of assets sold during a period of non-residence when the remittance basis would have applied under the current rule
the treatment of those who left the UK before they became deemed-domiciled for IHT under the 17/20 year rule and then returned here
rebasing foreign assets for capital gains tax
the treatment of offshore income and gains

3.8 (i) Treatment of assets sold during a period of non-residence when the remittance basis would have applied under the current rule

Respondents suggested that there should be some protection for those individuals who became non-resident before the Budget announcement and who sell assets during their non-resident period on which they would have expected to use the remittance basis when they returned to the UK. In these circumstances, the effect of the temporary non-resident rules are that disposals of assets made while non-resident are charged to capital gains tax at the point the individual returns to the UK, if they return here within five years of their departure date. So an individual who is deemed-domiciled on their return to the UK may have to pay UK capital gains tax on disposals made while they were non-resident and before the new rules were announced.

Some stakeholders sought clarification of the tax treatment which would apply where an individual who is subject to the remittance basis receives employment income relating to a period when they were not deemed-domiciled under the 15 out of 20 rule but is paid after they become deemed-domiciled.

3.9 Government response

The government has considered the representations made concerning those individuals who cease to be resident and later return to the UK and are deemed-domiciled, who find that disposals they have made while non-resident are within the scope of the temporary non-residence rules.

The government agrees that this would have an unintended effect on a very small number of people, by bringing gains into the charge in the UK where a disposal took place before the announcements were made. To mitigate this, a transitional rule will be introduced that will ensure that the reforms do not have retrospective effect on those individuals who were non-resident before the announcements were made.

On the treatment of the employment income relating to an earlier tax year, the government can confirm that such income will be taxable only to the extent that it is remitted to the UK. This is in line with the current treatment, which currently applies to deferred payments made after an individual ceases to be taxed on the remittance basis.

3.10 (ii) Treatment of those who left the UK before they became deemed-domiciled for IHT under the 17/20 year rule and then returned here

Respondents suggested that when an individual left the UK for sufficient time under the old rules to ensure that they did not become deemed-domiciled for IHT (under which an individual would become deemed-domiciled once resident for 17 out of 20 years) and then later returned to the UK, they should be protected from the effect of these reforms.

Respondents also suggested that the government should consider transitional rules to protect potentially exempt transfers (PETs) under the inheritance tax rules made while an individual is not domiciled from becoming failed PETs after the individual has become deemed-domiciled.

3.11 Government response

The government does not agree that those people who left the UK and then subsequently returned should be protected from the effects of these reforms on their deemed-domiciled status for inheritance tax purposes, even if they returned to the UK before the date the announcements were made.

However, the government does agree that where an individual transfers a property that is situated abroad while they are non-UK domiciled and then dies after having become deemed-UK domiciled, the transfer should be outside the charge to inheritance tax. This is in line with the current treatment of transfers made by non-domiciled individuals who die after having become UK domiciled. The government does not intend to change this treatment.

3.12 (iii) Rebasing foreign assets for capital gains tax purposes

A number of respondents suggested that those non-doms who have lived in the UK for a long time should be able to rebase their overseas assets for CGT purposes before the new rules take effect from April 2017. They thought that with no legislative provision for rebasing, the change in the rules would encourage non-doms to sell and repurchase their overseas assets before April 2017, whilst potentially penalising those who hold less liquid assets. Respondents therefore suggested that the reforms should be introduced in such a way that only gains that accrue after April 2017 should be taxable in the UK. It was suggested that this would help non-doms adjust to the new regime, particularly those who hold assets which are not liquid or easily tradable.

3.13 Government response

The government agrees that it would be punitive to require long-term resident non-doms to pay CGT on gains that have accrued on foreign assets held while the individual was a non-dom. To address these concerns, Budget 16 announced that those individuals who will become deemed-domiciled in April 2017 because they have been resident for 15 of the past 20 years will be able to rebase directly held foreign assets to their market value on 5 April 2017.

Individuals will be able, if they wish, to rebase overseas assets to the market value of the asset at 5 April 2017 with the result that any gain which accrued before April 2017 will not be charged to CGT in the UK. However, any further increase in the value of an asset between April 2017 and the date of disposal will be charged to CGT in the normal way.

Rebasing will apply on an asset by asset basis and there will be no requirement that any part of the sales proceeds relating to the part of the gain which arose before April 2017 should be left outside the UK. Where the asset was originally purchased with clean capital, the entire proceeds from the disposal can be brought to the UK without triggering a remittance. However, where it was purchased wholly or partly with foreign income and gains, an element of the disposal proceeds will still relate to those income and gains and so will be subject to the remittance basis in the normal way when the proceeds are brought to the UK. The protection will be limited to those assets which were foreign situs at the date of the Summer Budget 2015.

Rebasing will provide transitional protection for those non-domiciled individuals who have been resident in the UK for a long period, and to ensure that the protection is properly targeted it will be restricted to those who had paid the remittance basis charge in any year before April 2017. The government will legislate for this transitional protection in Finance Bill 2017 alongside the rest of the non-dom reforms. Draft legislation on this aspect of the reforms will be published later in 2016.

Those 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 will not be able to rebase their foreign assets.

3.14 (iv) Offshore funds of foreign income and gains

A concern raised by a number of respondents is that those non-doms who have lived in the UK for a long time and who hold a large pool of offshore funds containing capital as well as income and gains will, from April 2017 onwards, have to pay tax on any future growth in the fund as it arises. However, they will still be unable to bring the pre-April 2017 capital into the UK until they have first paid tax on the pre-April 2017 foreign income/gains.

It would of course be possible for a non-dom to bring any new growth in an offshore fund into the UK without paying tax on pre-April 2017 income and gains in the underlying funds as long as these income and gains remain offshore. However, although the fund might well include “clean” capital used to set it up in the first place, this cannot be remitted until after all the taxable income and gains have been remitted, so effectively the capital may be trapped in a mixed fund. The only way to avoid this would have been to have held the “clean” capital in a separate account. However, many long-term residents hold mixed funds in which capital is not segregated from income and gains in this way. The result will be that any remittance from the mixed fund will be treated as income and gains first, meaning that capital cannot be brought to the UK until those income and gains are exhausted.

A range of ideas have been suggested to help individuals in such circumstances to transition to the new rules. Some respondents have suggested a time-limited flat rate of tax on remittances from offshore funds, while others have suggested a time-limited opportunity to allow non-doms to rearrange their mixed funds to separate ”clean” capital from income and gains. The intention of both ideas is to encourage long-term resident non-doms to remit funds into the UK and pay tax on those amounts which might otherwise be left offshore.

3.15 Government response

The government recognises that the mixed fund rules can be complicated, and that these reforms will mean that those non-doms who become deemed-domiciled in April 2017 who were taxed on the remittance basis will have to pay tax in the UK on their offshore income and gains on an arising basis for the first time. It will also mean that an individual with a mixed fund will find it difficult to bring any money from the fund into the UK without paying tax at their top rate of tax when they do so. For some, this will be a punitive outcome, as the fund will be comprised of a mix of both foreign income which would be taxable at the highest rate of tax as well as money that would be taxable at a lower rate; for example, foreign gains which would be taxed at a top rate of 28% or clean capital, which would not be taxable at all even when remitted.

The government has therefore decided to introduce a temporary window in which such individuals will be able to rearrange their mixed funds overseas to enable them to separate those funds into their constituent parts. This window will last for one tax year from April 2017 and it will provide certainty on how amounts remitted to the UK will be taxed.

During this time, non-doms with mixed funds will be able to rearrange their mixed funds and separate out the different parts. This will mean, for instance, that they will be able to move their clean capital, foreign income and foreign gains into separate accounts, and will then be able to remit from their accounts as they wish and pay the appropriate amount of tax. There will be no requirement for the non-dom to make a remittance from their newly segregated accounts in any particular order or within any particular time limit. This will mean that an individual who separates their mixed funds may, if they wish, remit funds from each separated fund, even if that remittance takes place in a later tax year after the transitional period has ended.

The special treatment will only apply to mixed funds which consist of amounts deposited in bank and similar accounts. Where the mixed fund takes the form of an asset (for example a valuable painting), it will not qualify for the special treatment. However, an individual will be able to sell any overseas asset during the transitional window and separate the sale proceeds in the same way as any other money.

Cleansing will not be available where an individual is unable to determine the component parts of their mixed fund. The mixed fund rules have always required a remittance basis user to track and monitor their offshore funds in order to benefit from the remittance basis, and while the government is willing to introduce a transitional rule to help people to separate their funds, this will not extend to those who are unable to identify the source of those funds.

This treatment will be available to any non-dom who was not born in the UK with a UK domicile of origin – it will not be restricted only to individuals who have been resident for 15 of the past 20 years who will become deemed-domiciled under the new rules. An individual need not be resident in the UK in April 2017 to be able to use this protection, but it will only be of any benefit to those individuals who have been UK resident at some point in time and who have used the remittance basis of taxation.

Draft legislation will be published on this protection later in 2016.

3.16 Protections for non-resident trusts

The government confirmed at the 2015 Summer Budget that non-doms who have set up an offshore trust before they become deemed-domiciled here under the 15/20 test will not be taxed on trust income and gains that are retained in the trust or its underlying entities and such excluded property trusts will have the same IHT treatment as at present.

As part of the consultation document published in September 2015, the government outlined proposals to base the new rules on the taxable value of benefits received by the deemed-domiciled individual without reference to the income and gains arising in the offshore structure.

3.17 Consultation response

Responses to the consultation made clear that stakeholders were very concerned about the impact of a benefits charge. Most respondents said that they were concerned about the complexity of having two different regimes for UK domiciles and for non-doms. More fundamentally, respondents thought that the benefits charge was punitive for non-doms who settle assets into and receive benefits from a trust which has minimal or no income and gains. Respondents thought it was unfair that UK domicilliaries would continue to be taxed only when there were income or gains in the trust whilst non-doms who became deemed-domiciled would have a tax treatment which could be more punitive in some circumstances.

3.18 Government response

The government understands the concerns raised by respondents and does not intend to introduce a charge which could in some circumstances have a punitive effect on non-doms compared to UK domiciles. The government has therefore decided not to pursue such a benefits charge but instead to legislate the protections without introducing an entirely new regime. These proposals are outlined below.

3.19 (i) Capital gains tax anti-avoidance legislation – Section 86

The CGT anti-avoidance legislation at section 86 TCGA 1992 taxes, broadly, an individual who is resident and domiciled in the UK who has settled assets into a non-resident trust on chargeable gains arising in the trust (or attributable to the trustees under section 13), if they retain an interest in the trust. This is the case regardless of whether they receive any benefit from the gains.

In order to tax those who become deemed-domiciled in the UK in the same way as those who are UK domiciled, the government intends to extend section 86 to apply to all those who are deemed-domiciled. This will ensure that those who are deemed-domiciled pay tax on gains arising in a non-resident trust in the same way as an individual who is domiciled in the UK.

To deliver the protections, the government will ensure that the legislation does not extend to the settlor of a non-resident trust who is deemed-domiciled where the trust was set up before they became deemed-domiciled and no additions of property have been made since that date. However, if the settlor, their spouse, or their minor children and/or stepchildren receive any actual benefits from the trust then the protection will not apply.

3.20 (ii) Capital gains tax anti-avoidance legislation – Section 87

Section 87 taxes, broadly, any UK-resident individual on capital payments they receive from a non-resident trust to the extent that there are chargeable gains arising in that trust (or attributable to the trustees under section 13). The legislation applies regardless of the individual’s domicile status and is not confined to the settlor of the trust. Following the introduction of the new deemed-domicile rule, UK resident individuals who receive capital payments or benefits from a non-resident trust or underlying entity, and who are deemed-domiciled, will be subject to CGT under section 87, regardless of where the benefits are received.

Settlors who become deemed-domiciled will not be taxed under section 87. Their trusts will either not be protected, in which case they would be liable for all gains under section 86 or, if the trust is protected, it will lose its protection once a benefit is paid out to them, their spouse or minor children resulting in the settlor being taxed on all gains arising.

3.21 (iii) Settlements legislation

The settlements legislation taxes individuals who settle assets into trust on an arising basis on trust income if they have retained an interest in that trust (section 624 ITTOIA 2005). It also taxes the settlor on income paid to, or for, the benefit of the settlor’s unmarried minor children, or otherwise treated as the income of such a child (section 629 ITTOIA 2005). Where income of a trust is not taxed on the settlor as above, capital sums paid directly or indirectly to the settlor, which include loans paid by the trustees to the settlor, are taxed as the income of the settlor (section 633 ITTOIA 2005).

Again, the legislation does not depend on an individual’s domicile status, although currently those non-doms who claim the remittance basis are only taxed on foreign source income where it is remitted to the UK. Following the introduction of the new deemed-domicile test, those settlors who are deemed-domiciled will no longer be able to claim the remittance basis, so the settlements legislation will apply to all foreign-source income.

Amending the settlements legislation

To deliver the protections, it will be necessary to ensure that the legislation at section 624 does not apply to a deemed-domiciled settlor on foreign income arising to a non-resident trust that they had set up before becoming deemed-domiciled, if the income is retained within the trust. UK source income arising to a non-resident trust will continue to be taxed on a deemed-domiciled settlor as it is now currently. The legislation at section 633 onwards taxing a non-domiciled settlor on capital sums they receive from a non-resident trust to the extent the capital sums can be matched to trust income available will be extended to deemed-domiciled settlors.

However, if the settlor, their spouse, minor children or other relevant person receives a distribution of relevant foreign income arising in a year when the settlor was non-domiciled and the trust was protected that distribution will be taxed on the settlor under section 624 to the extent that it can be matched against relevant foreign income arising in that year and in any other years when the settlement is protected and the settlor is a long term resident non-dom.

3.22 (iv) Transfer of assets abroad – Chapter 2 Part 13 ITA 2007

The transfer of assets abroad (TOAA) legislation is designed to prevent UK-resident individuals from avoiding UK income tax by transferring the ownership of assets to persons abroad while still being able to enjoy the benefit of the income those assets generate. TOAA is wide reaching, applying to UK-resident individuals who settle assets into a non-resident trust or other offshore entity directly or indirectly (section 720 and section 727 ITA 2007), as well as UK-resident individuals who did not transfer assets into the trust, but who receive benefits from the trust or offshore entity as a result of the transfer (section 731 ITA 2007).

To deliver the protections, it will be necessary to partially dis-apply the part of the TOAA legislation at section 720 ITA 2007 that would apply to deemed-domiciled settlors who set up a non-resident trust before they become deemed-domiciled, to prevent them from being taxed on the foreign income of the trust or any underlying entity if it pays out dividends to the trust. If it doesn’t, the income arising to the foreign company will still be taxed under section 720.

UK-source income

UK-source income arising to a non-resident trust or underlying entity that is available to the deemed-domiciled settlor/transferor will continue to be taxed as it currently is for a non-domiciled settlor under section 624 ITTOIA 2005 or section 720/ 727 ITA 2007. Where the trust is settlor interested, the settlor will be taxed on the income on an arising basis under section 624 ITTOIA 2005, with any income arising within an underlying company being taxed under section 720 or section 727 ITA 2007.

Non UK-source income

Under the existing legislation, if the settlor/transferor has power to enjoy or entitlement to a capital sum then for a remittance basis user, the foreign-source income is taxable to the extent it is remitted to the UK. The individual is not taxable on the benefits they receive. Under the proposed new rules which will provide the protections for non-resident trusts, the intention is that the foreign source income is not assessable on an arising basis, but instead the transferor is liable to income tax on any worldwide benefits received. If the settlor, their spouse, minor children or other relevant person receive any actual benefits from the trust for example by way of an income or capital distribution or enjoyment of trust assets, the trust will still be protected but the distribution will be taxed on the settlor under section 720 to the extent that it can be matched against relevant foreign income arising in that year.

It will be necessary to provide a mechanism for matching any benefits against relevant foreign income. This could be achieved by using similar provisions to those in section 733 which relate to the matching of benefits under section 731 to income arising under the settlement but with matching confined in this case to relevant foreign income arising, where the settlement is protected and the settlor is a long-term resident non-dom.

The part of the TOAA legislation at section 731 that taxes any UK-resident individual, excluding the transferor/settlor who receives a benefit arising from a non-resident trust that is linked to the transfer, will remain in place.

The draft legislation outlining the amendments to the TOAA provisions will be published later in the year.

Extending the non-transferor provisions to all non-doms

The government will continue to consider this point.

Additions to settlements

The government believes that it is appropriate that the protections outlined above apply where assets in a trust were held by the trust before the settlor became deemed-domiciled in the UK under the new rules. Where property has been added to a protected settlement since the date on which the settlor became deemed-domiciled, the settlement will lose its protection. In effect, any addition after that date will taint the whole settlement so that it will lose its protection for that tax year and all future years. Where the settlement was created before 6 April 2017, only additions made on or after that date can taint the settlement because that is the earliest date on which the settlor can become a long-term deemed-dom. It is possible that in the future a person may fall in and out of long-term deemed-dom status. In such cases, the settlement will be tainted by any additions made after the first occasion on which the settlor becomes a long-term deemed-dom after the date of creation of the settlement.

The transitional rules introduced in 2008 relating to section 87 will continue to apply to where the individual receiving the capital payment is deemed-domiciled but not where he is an individual born in the UK with a UK domicile of origin. The reliefs in question are rebasing (where elected for) and the reliefs are applicable where either the matched trust gains or the matched capital payment dates back to 2007-08 or an earlier year.

3.23 Consultation responses on questions 3 to 5

The consultation published in September also sought responses on the following areas:

the £2,000 de-minimis rule
foreign capital losses
inheritance tax issues

Consultation question 3: The government is interested in views from stakeholders about the need for preserving the £2,000 de-minimis threshold for those no-domiciled individuals who become deemed UK domiciled.

Consultation question 4: Do stakeholders agree that the approach outlined in this document which will change the inheritance tax rules for those UK domicilliaries who are leaving the UK is straightforward and reasonable?

Consultation question 5: Do stakeholders agree that the period a spouse needs to remain non-resident before the inheritance tax spouse election ceases to have effect should be amended to 6 years?

3.24 (i) £2,000 de-minimis rule

The consultation asked about whether those who become deemed-domiciled should still be able to rely on the £2,000 de-minimis protection. Under the current rules, any non-dom who has less than £2,000 of unremitted income or gains does not have to elect to use the remittance basis and need not report the amounts in the UK or pay tax on them. They do not forfeit the personal allowance (as all other remittance basis users do), nor do they have to pay the remittance basis charge.

Respondents were split evenly between those who thought that once an individual has been resident for 15 years they ought to be required to pay tax in the same way as any UK-domiciled individual, and those who thought that the £2,000 de minimis was still an important administrative protection which prevented people from becoming non-compliant on relatively small amounts of tax.

A number of respondents thought that the £2,000 threshold should be increased.

3.25 Government response

The government agrees that the de-minimis protection should remain at £2,000 for any individual who is not domiciled in the UK, even when they become deemed-domiciled for tax purposes.

The government does not intend to increase the current threshold. However, any resident non-dom who becomes deemed-domiciled and therefore subject to UK tax on their offshore income and gains may also claim the new personal savings allowance against their foreign as well as their UK savings income, and the new dividend allowance against both their foreign and UK dividend income, alongside the UK’s Personal Allowance. Income up to the value of these allowances does not have to be reported and is not taxable in the UK.

3.26 (ii) Foreign capital losses

The consultation document outlined the government’s intention to allow those non-doms who become deemed-domiciled to offset their foreign capital losses against capital gains that arise in the UK. The government agrees this is reasonable once an individual becomes taxable on their worldwide gains.

The majority of respondents supported the proposals outlined in the consultation document. However, a number of responses to the consultation also suggested a more generous provision that would allow those who become deemed-domiciled to retrospectively treat any foreign capital losses incurred since becoming resident in the UK as available to offset against UK capital gains.

3.27 Government response

The government does not agree that long-term resident non-doms who become deemed-domiciled should be able to offset their foreign capital losses from the point they first become resident against their UK capital gains. This treatment does not apply to those non-doms who become UK domiciled simply because they have decided to stay permanently in the UK, and it would therefore be difficult to justify a more generous treatment for those who become deemed-domicile.

However, the government does think that the current rules will need to be changed in respect of the elections that remittance basis users make in order to be able to offset their foreign capital losses. It is intended that after April 2017, a foreign loss election will last only until the individual concerned becomes UK domiciled, or becomes deemed-domiciled. If that individual later loses their UK domicile or deemed-domicile status then they will be able to make another election.

3.28 (iii) Implications for inheritance tax

The consultation confirmed that the IHT deemed-domicile provisions would be changed to bring them into line with the proposed changes to income tax and CGT. This would have the effect of treating an individual as deemed-domiciled for IHT when they have been resident in the UK for at least 15 of the past 20 years, bringing forward the point of deemed-domicile status from the start of the 17th year of residence to the start of the 16th year of residence within that 20 year period. As is the case with the income and CGT provisions, for those who leave the UK before 6 April 2017 but would nevertheless be deemed-domiciled under the 15/20 rule on 6 April 2017, the present rules will apply.

The effect of the 15/20 year deeming rule will be that an individual who is not resident could potentially remain deemed-domiciled in the UK for up to six years after they have left the UK. Under the current IHT rules, an individual is deemed-domiciled in the UK when they have been resident in 17 out of 20 years, meaning that the deemed-domiciled status can only continue for up to four years after they leave the UK.

The consultation document also proposed a change in the rules for those individuals who are domiciled in the UK. The government was of the opinion that it would be inappropriate to introduce a new rule which would mean that those who are domiciled in the UK could potentially cease to be domiciled in the UK under general law more quickly than those individuals whose UK-domiciled status is only deemed.

The consultation document suggested a rule which would treat a UK-domiciled individual as non-domiciled on the date that they acquire a domicile of choice in another country, or the point when they have not been resident in the UK for six years, whichever is the latest.

Respondents have said that they are concerned about the effect of the test which deems a non-dom as UK domiciled for tax purposes after they have been resident for 15 of the past 20 years, meaning that an individual can remain deemed-domiciled for six years after they leave the UK before the status falls away. For income tax and capital gains tax this has little practical effect while the deemed-dom remains non-resident. However, it does mean that if they return to the UK and become resident again within the six-year period, then they will revert to the arising basis of taxation on their foreign income and gains rather than being able to claim the remittance basis. For IHT, the deemed-domicile status means that if an individual dies then their world-wide estate is chargeable to UK IHT for up to six years (as opposed to up to four years under the current rules) after the individual leaves the UK. Respondents thought that the extension of deemed-domicile status for inheritance tax during years of non-residence is quite onerous and will lead to cases of double taxation as well as a lack of compliance.

3.29 Government response

The government agrees that there was no policy intention to lengthen the period of time that non-doms leaving the UK are treated as being deemed-domiciled for inheritance tax purposes, but the 15/20 test does inadvertently give this outcome.

The government will change the deeming rule so that although individuals become deemed-domiciled for tax purposes after spending 15 out of 20 years as a UK resident, that status will fall away once they have been non-resident for more than four consecutive years. This broadly maintains the existing treatment of departing non-doms for IHT purposes.

3.30 Spousal election

The consultation also asked respondents to consider an increase in the four year period of non-residence before an electing spouse’s connection with the UK is broken. By moving to a 15 out of 20 deeming provision, it would follow that the period of non-residence should be amended to 6 years. This was outlined in the draft legislation published alongside the consultation published on 30 September 2015.

Almost all the respondents agreed that the spousal election should align with the wider deemed-domiciled test.

3.31 Government response

The government agrees that the spousal election should align with the deemed-domicile test. Therefore since the 15 out of 20 deeming rule is now being changed so that deemed-domicile status is lost after a 4 year period of non-residence the 4 year non residence period for spousal election purposes will remain unchanged thus maintaining the existing treatment.

Question 4

4. Born in the UK with a UK domicile of origin

Accepted Answer

The September consultation document also outlined the government’s proposals to treat an individual as being deemed-domiciled in the UK for tax purposes when they are living in the UK if they were born in the UK and had a UK domicile of origin.

Many of those who responded to the consultation thought the policy of treating those who were born in the UK with a UK domicile of origin as being UK domiciled was unfair, as an individual’s place of birth is beyond their control. A number of respondents said that the policy shouldn’t apply if the individual had left the UK during their childhood or by the time they finished full-time education.

4.1 Government response

The government is of the view that having a UK domicile of origin is a very significant link to the UK, and that basing the test on the individual’s birthplace makes the test straightforward and easy to define.

Introducing further rules to soften the effect of this test would introduce more complexity to the tax system to cater for a very small group of people who will be affected by this test. Furthermore, without relying on a more nuanced and subjective test, there will still be a cut-off point where the test would distinguish between an individual who is caught and another who escapes the effect of the test.

The government does not intend to change the policy that was outlined in the consultation document for those individuals who were born in the UK with a UK domicile of origin.

However, a number of specific questions were raised in the consultation and are taken in turn below.

4.2 (i) Grace period for inheritance tax

In response to concerns that were raised in stakeholder meetings during the summer, the consultation set out a protection for those individuals caught by this new rule who were here only for a short time. The intention is that an individual who returned to the UK and who would otherwise be caught by the deemed-domicile rules would not be treated as being domiciled in the UK for inheritance tax purposes unless they had been resident for at least one of the two tax years prior to the year in question. This would provide a “grace period” so that those who returned only for a short period of time would not have to rewrite their wills; the protection ensures that an individual’s foreign assets are outside the scope of inheritance tax if they are back in the UK only for a short period of time. The government did not intend that the grace period would allow returning UK doms to be able to use the remittance basis.

Consultation question 6: In what circumstances would having a short grace period for inheritance tax help to produce a fair outcome?

Most of those who responded to the consultation thought that the grace period should extend to all taxes, so that the individual could use the remittance basis, and most who commented thought it ought to last for two to three years.

4.3 Government response

The government does not agree that there is a compelling case to soften the effect of these reforms further. The remittance basis is a very generous relief and the government is of the view that it is inappropriate to offer this tax relief to those who were both born in the UK and who were domiciled in the UK at their birth.

4.4 (ii) Impact of the reforms on non-resident trusts

The answers to questions 7, 8 and 9 focused on the impact of the reforms on those returning UK domiciles who had set up non-resident trusts.

Consultation question 7: What difficulties do stakeholders envisage there could be for trustees tasked with calculating the 10 year charge in these circumstances?

Consultation question 8: Do stakeholders agree this is the most reasonable way to deliver these reforms? Are there any circumstances when applying these rules would produce unfair outcomes?

Consultation question 9: Would the rules as described leave any significant uncertainty? If so, how?

Respondents have said that it would be difficult for the trustees of non-resident trusts to know the residence status of an individual non-dom. Furthermore, if an individual moves in and out of the UK, the status of the trust will change year by year as it switches between being treated as a relevant property trust and an excluded property trust. Trustees will face very different reporting requirements if the settlor of a trust becomes UK resident and is treated as being UK domiciled. This will require the trustees to reconstruct the historical records of transactions in the trust so that they can determine the tax treatment of income and gains arising.

Respondents also thought the changes to make those born in the UK with a UK domicile of origin deemed-domiciled when they return to the UK were particularly harsh because of the effect on those who had set up non-resident trusts while they were domiciled elsewhere. The policy intention set out in the consultation was that a returning UK-born individual who was UK domiciled at the time of their birth would have their non-resident trusts treated in the same way as a trust that was set up while they were UK domiciled. This would only be the case while the individual is resident in the UK.

This has the effect of making income and gains in the trust taxable on the deemed-dom as they arise when the individual is resident in the UK. It also has the effect of making a trust chargeable to inheritance tax when the individual is resident in the UK but in this case with the benefit of the grace period. Respondents suggested that those who would be affected in this way may want to unwind trust structures but would find this difficult as doing so would result in tax charges. Consequently, they may feel trapped in structures and face unexpected tax liabilities.

Some respondents thought that the new rules should only apply to people who return to the UK after Summer Budget 2015 or after April 2017. Others have suggested that non-resident trusts affected should be able to rebase assets held, so that only gains which accrue after April 2017 would attract a tax charge.

4.5 Government response

The government intends to legislate the reforms as set out in the initial consultation document.

Question 5

5. Business Investment Relief

Accepted Answer

5.1 Background

Business Investment Relief (BIR) was introduced in April 2012 to encourage individuals who are taxed on the remittance basis to invest their foreign income and gains in businesses in the UK. To date, over £1.5 billion has been invested in UK businesses under the scheme.

Generally, a UK resident non-domiciled individual who is taxed on the remittance basis will be subject to UK tax on the overseas income or gains which they bring to the UK, regardless of the purpose for which such funds are used. In some circumstances, this can be a significant disincentive for non-domiciles who wish to invest in a business in the UK. In introducing BIR, the government sought to address this issue and provided a means to encourage these individuals to invest their money in the UK and support the UK’s economy.

At Autumn Statement 2015 the government announced it would consult on ways BIR could be changed and expanded to make it easier for remittance basis taxpayers to bring their money from overseas to invest in UK businesses. The government is particularly keen to invite innovative ideas around how the BIR can be used to encourage further investment in the UK.

Any legislative changes will be included in Finance Bill 2017 and will take effect from 6 April 2017.

5.2 The current rules

BIR helps UK businesses to attract inward investment by allowing individuals who use the remittance basis to bring their overseas income and gains to the UK without any liability to tax where they do so in order to make a commercial investment. The scheme effectively treats funds brought to the UK for the purposes of making a qualifying investment as not remitted to the UK and therefore not liable to tax.

The types of company in which a qualifying investment can be made under the scheme are very widely drawn. The definition includes an investment in:

a company carrying on a commercial trade or preparing to do so, including one whose activities consist of generating income from land
a company carrying out research and development activities
a company making commercial investments in trading companies
a holding company of a group of trading companies

There are no restrictions preventing the scheme being used for investments in a company with which an investor has a separate involvement, such as being paid as a director on an arms’ length basis in the ordinary course of business. Any investment must be made within 45 days of the date on which the funds are brought into the UK.

Unlike other government schemes designed to encourage investments, there is no financial limit on the amount that an individual can invest using the scheme. However, the scheme is not available for investments to acquire existing shares nor for investments in companies which are listed on a recognised stock exchange.

5.3 Protecting the scheme from abuse

For the scheme to be effective in encouraging inward investment, it is essential that suitable safeguards are in place to ensure it does not allow abuse and tax avoidance. In the absence of such safeguards, there is a risk that the scheme might be used as a means of bringing overseas funds to the UK for personal use without being subject to tax as would be the case under the remittance basis.

The scheme therefore contains a number of rules which are designed to counter avoidance.

Further information on the scheme.

5.4 The purpose of the consultation

The government believes that the BIR can be amended and expanded to make an even greater contribution to inward investment by encouraging non-doms to invest their overseas funds in the UK.

The consultation therefore seeks views on how this could be done so that BIR allows greater investment in UK businesses. The government is keen to see increased take up of the scheme and recognises that those who have practical experience of using it are likely to have valuable views on this issue.

The government is therefore keen to hear suggestions and comments on what changes might be made to the scheme to increase its effectiveness as an investment incentive and would particularly welcome innovative ideas on how this could be achieved. The government would also be very interested in evidence that any proposed changes would have a real impact on the level of UK investment.

Question 10: In what ways might the current scheme be changed to encourage greater investment in the UK?

Question 11: Are you able to provide any evidence which might indicate that these changes will lead to a significant increase in UK investment?

At the same time, the government wishes to ensure that the scheme is not used in a way that was not intended, in particular as a means of tax avoidance.

However, some concerns have been expressed that the way the scheme operates is unnecessarily complicated and that this complexity can in some circumstances discourage people from making an investment who might otherwise do so. It is unclear whether this has a significant impact on individuals considering an investment in the UK.

The government would be interested to hear of any aspects of the scheme which are unnecessarily complex which might be simplified without undermining its purpose.

Question 12: What aspects of the scheme might usefully be simplified while maintaining its policy objective and encourage greater take up?

Similar concerns have been expressed that the rules designed to prevent abuse are too broad in their scope and can in some circumstances apply to transactions that are entirely innocent and commercially standard. The government would welcome views on whether the scope of the anti-avoidance provisions is too wide.

Question 13: What changes would you make to ensure the anti-avoidance provisions are properly targeted to prevent tax avoidance?

Question 6

6. Summary of consultation questions

Accepted Answer

Inheritance tax on UK residential property