Guidance

Non-domicile taxation: technical briefing on overseas trusts

Published 21 March 2017

Introduction

Summer Budget 2015 announced proposals to reform the taxation of foreign domiciled persons. These changes will affect foreign domiciled persons who have been resident in the UK for 15 of the past 20 years and will be effective from 6 April 2017.

The government also announced that provisions would be put in place to ensure that income and gains arising in overseas trusts created by foreign domiciled persons before they become deemed domiciled under the 15/20 test will not be taxed if they are retained in the trust or its underlying entities. Draft legislation setting out these trust protections was published at Autumn Statement with further details published on 5 December 2016 - Draft legislation and 26 January 2017 - Draft legislation: deemed domicile - Income Tax, Capital Gains Tax and Inheritance Tax.

The draft legislation on the trust protections was consulted on between 5 December 2016 and 22 February 2017. Stakeholders were advised that where the legislation was incomplete or incorrect, the necessary amendments would be made no later than the date for the publication of the Finance Bill. However, it has not been possible to make all of these changes in time and consequently, the government has taken the view to defer publication of the provisions affected. This note sets out the provisions that have been published on 21 March 2017 and those that will be included in a future Finance Bill.

Legislation published in Finance Bill

Capital Gains Tax TCGA Schedule 5:

• disapplication of section 86 in respect of deemed domiciled individuals (trust protections)
• tainting rules

Chapter 5 of Part 5 of ITTOIA (Settlements):

• disapplication of sections 624, 629 and 633 in respect of protected foreign source income (trust protections)
• tainting rules

Chapter 2 of part 13 of ITA 2007 (Transfer of Assets Abroad):

• disapplication of sections 720 and 727 in respect of protected foreign source income (trust protections)
• tainting rules
• extension of section 731 benefits charge to settlors (other than those who are UK domiciled or deemed domiciled because they were born in the UK with a UK domicile of origin)
• close family member rule - transfer of s 731 benefits charge to the settlor where the beneficiary is a close family member of the settlor and not liable to tax on the benefit

These provisions will be effective from 6 April 2017.

Other provisions in the Bill:

• valuation of Benefits rules for loans, chattels and land (Schedule 14) - the commencement date is 6 April 2017
• disregard of carried interest from capital gains tax charges arising under sections 13, 86 and 87 TCGA 1992 - the commencement date is 8 July 2015

Legislation to be published in a future Finance Bill

Capital Gains Tax TCGA Schedule 5:

• disregard of section 87 capital payments to non-residents
• disregard of section 87 capital payments to migrating beneficiaries
• transfer of s 87 benefits charge to the settlor where the beneficiary is a close family member of the settlor and is not liable to CGT on the payment
• attribution of gains to recipients of onward gifts (recycling rule)

Chapter 5 of Part 5 of ITTOIA (Settlements):

• benefits charge for settlor and close family members of settlor
• benefits charge on settlor when beneficiary is close family member and is not taxable on the benefit
• attribution of deemed income to recipients of onward gifts (recycling rule)

Chapter 2 of part 13 of ITA 2007 (Transfer of Assets Abroad)

• attribution of deemed income to recipient of onward gift (recycling rule)

Summary of changes made to the 26 January 2017 draft legislation

Amendment to the Capital Gains Tax legislation

Changes have been made to the provisions about additions of property to a trust which will lead to a loss of trust protections (tainting rules) - go to Condition D at paragraph 5A(5) of Schedule 5 TCGA 1992

These provide that tainting will occur when property is added to the trust by the settlor or a settlement connected with the settlor at a time when they are domiciled or deemed domiciled in the UK and that additions of value will be treated in the same way as additions of property.

There are also specific rules dealing with the following:

• loans entered into on arm’s-length terms
• property or income provided otherwise than under a loan without any intention to confer gratuitous benefit
• the principal of a loan which is made to the trustees of a settlement on arm’s-length terms
• the payment of interest to the trustees of a settlement under a loan made by them on arm’s-length terms
• repayment to the trustees of the settlement of the principal of a loan made by them
• allowing property or income to be added to pay trust expenses
• treatment of on demand loans including a grace period for those outstanding at 6 April 2017
• the definition of ‘arm’s-length terms’ in relation to loans (official rate of interest)

Amendments to the Settlements Legislation

Similar changes have been made to the tainting rules as set out above in relation to CGT (go to Condition D at section 628A (6) ITTOIA 2005)

Amendments to the Transfer of Assets legislation (Chapter 2 of Part 13 of ITA 2007)

Similar changes have been made to the tainting rules as set out above in relation to CGT (go to section 721A(2)(f) and (3)(h) and s729A(2)(f) and (3)(h) ITA 2007)

• disapplication of sections 726 and730 in respect of pre 6 April 2017 foreign income retained in the trust or company but treated as arising to the settlor so that it remains in the section 733 pool to be taxed when distributed to the settlor or a beneficiary under section 731 but not if remitted by the settlor
• disapplication of section 732 (section 732 (1)(d) where the individual in receipt of the benefit is the transferor and is either UK domiciled or deemed domiciled in the UK under condition A in section 835BA
• provision for benefits partly remitted to be taxed on the beneficiary with the unremitted part to be taxed on the settlor where the beneficiary is a close family member (section 733A(2)(b))
• close family member rule refers to a beneficiary being a close member of the settlor’s family at the date the benefit is received rather than at any time of the year of matching - section 733A(1)(b)(ii)
• where any tax for which the settlor is liable under the close family member rule, the settlor is entitled to recover the amount of tax paid from the individual only and not the settlor - section 733A(5)
• provisions to prevent double charges where the settlor has been taxed on a benefit received by a beneficiary post 6 April 2017
• provisions clarifying that where settlor liable under section 733A this will be relevant foreign income to which the remittance basis applies - section 735B