City of London - Skyscrapers

Non-dom planning opportunities

Tom Elliott
City of London - Skyscrapers

The government has stated its commitment to restrict the tax advantages of non-dom status for long term residents of the UK. However, there remain provisions which offer scope to mitigate the potential UK tax exposure, and we have highlighted below the three key opportunities available.

Rebasing of non-UK assets

Subject to various qualifying conditions, the acquisition cost of a foreign asset owned by an individual is automatically subject to an uplift to its market value on 5 April 2017. In practical terms, this means that any gain accruing prior to that date is not subject to UK tax on the disposal of the asset.

The qualifying conditions are as follows:

  • the asset must have been owned at 5 April 2017 and must have been foreign situs from 16 March 2016 (or the date of acquisition if later) to 5 April 2017
  • rebasing only applies to assets held personally, not to those owned by non-UK trusts or companies. 

The individual must:

  • have become deemed domiciled as at 6 April 2017 as a result of having been UK resident for at least 15 of the preceding 20 tax years
  • not have been born in the UK with a UK domicile of origin (a formerly domiciled resident (FDR))
  • remain non-UK domiciled under general law at time of disposal
  • have paid the Remittance Basis Charge (RBC) in at least one tax year prior to 2017/18.
  • Although rebasing is automatic, it is possible to elect for this not to apply on an asset by asset basis if this gives a more favourable result, for example if the original cost exceeds the value on 5 April 2017. As rebasing applies to all qualifying disposals after 5 April 2017, it may be worthwhile seeking contemporaneous valuations now rather than trying to obtain them in many years’ time when a sale is planned.

    If an individual has never previously paid the RBC (because their tax liability was lower based on the arising basis) it may also be appropriate to consider whether to pay the RBC for 2016/17, in order to satisfy that qualifying condition for rebasing.

    Each situation will be different based on an individual's likelihood of selling particular assets, but where assets are standing at a gain at 5 April 2017 compared to original cost and it is thought that they might be sold in the future, the one off cost of paying the RBC could lead to a significant saving in CGT in the future.

    We show below the possible impact for two individuals making a sale in 2017/18 who would both be deemed domiciled at 6 April 2017, Ann who had been UK resident for 15 years and Bob who had been resident for 19 years in 2016/17. The facts are as follows:

    Both individuals Ann Bob

    Calculation with original cost Calculation with rebased cost Calculation with rebased cost
    Share proceeds on disposal in 2018/19 £1,000,000 £1,000,000 £1,000,000
    Original cost value at 6 April 2017 (£200,000) (£600,000) (£600,000)
    Gain £800,000 £400,000 £400,000
    Tax due at 20% £160,000 £80,000 £80,000
    Plus RBC now payable for earlier year n/a £60,000 £90,000
    Total tax due £160,000 £140,000 £170,000

    Ann would make an immediate tax saving of £20,000 (£160,000 – £140,000) by choosing to pay the RBC of £60,000 for 2016/17, whilst Bob would in fact incur a tax cost of £10,000 (£170,000 – £160,000). However both will now be in a position to use the rebased value of all assets at 6 April 2017 for future sales, leading to possible future CGT savings. The key point is that the position does need to be considered in the round, based on the likelihood of future sales, rather than just looking at the immediate cashflow position. A claim for the remittance basis is time limited and therefore it may not be possible to delay the decision as to whether to pay the RBC for 2016/17 until an actual sale is made.

    Segregation of mixed funds

    All non-UK domiciliaries (with the exception of FDRs) have the opportunity to segregate funds held in offshore accounts, which may comprise a mixture of income, capital gains and clean capital, into their constituent elements. Doing this offers the potential to reduce the UK tax cost of future remittances and for segregation to apply there is no requirement for the individual to be treated as deemed domiciled in the UK or to have paid the RBC in prior years. This is however a time-limited provision expiring on 5 April 2019.

    HMRC has also now published guidance in support of the new legislation. In practice, the segregation of mixed funds is a three-step process:

    1. Gathering information, such as bank statements and details of the sources of the funds in the account in question.
    2. Calculating the income and/or capital gain and/or capital held in the account.
    3. Segregating the mixed funds.

    In some cases, offshore accounts will already have been analysed on an annual basis so any segregation exercise may be relatively straightforward. Additionally, sale proceeds from disposals of assets can now be segregated, meaning that any original clean capital could now be identified and eventually remitted to the UK tax free, which was not possible in the past. However, the historic position may need to be investigated in some detail and it will be necessary to weigh up the professional costs involved against the potential future tax benefit. The availability of accurate records may also be an issue in some situations, although it is possible to partially cleanse an account if only some records are available to be analysed.

    The legislation is highly prescriptive as to the mechanics of how segregation is achieved in practice. It is therefore important to take advice to ensure that any transfers made from a mixed fund achieve the desired tax outcome.

    Protected trusts for deemed domiciled settlors

    Trusts created by non-domiciled settlors will have ‘protected status’, even after the settlor has become deemed domiciled.

    Prior to becoming deemed domiciled as a result of having been resident in the UK for 15 of the preceding 20 years a non-domiciled individual may therefore settle non-UK assets into Trust. This gives the benefit of the income and gains deriving from those non-UK assets being able to remain in the Trust tax free without the settlor having to claim the remittance basis of taxation or incur the cost of the RBC.

    Protected status will be lost if a Trust is ‘tainted’. Tainting occurs if certain additions are made to the trust after the settlor has become deemed domiciled in the UK.

    The non-UK assets held within the Trust will benefit from being excluded property for Inheritance Tax (IHT) purposes (subject to the changes to the IHT treatment of UK residential property held indirectly — covered in our separate note on this subject).

    Protected status will not apply if the settlor was an FDR when the Trust was created and subsequently becomes UK resident. For these individuals the Trust gains and income will be taxed on the settlor on the arising basis. For IHT purposes, the Trust assets will lose their excluded property status.

    If you wish to discuss either of these opportunities in further detail please contact your usual Crowe partner or one of our specialist Private Client Partners. 

    Contact us

    Tom Elliott
    Tom Elliott
    Partner, Head of London Private Clients