26 Apr 2017

CAPITAL letters - Issue 22

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Finance Bill - Government drops most offshore tax measures!

After an unseemly rush of re-structuring and de-enveloping, motivated by a government determined to bring in its tax reforms on 6 April, we are now told that most of those measures have been dropped. This is highly irritating – it's widely accepted that the whole reform process could have been handled better by a government which has struggled to keep to its own legislative timetable, leaving tax advisors very little opportunity to arrange their clients' affairs before the (now defunct) deadline. A classic example is the last iteration of the Finance Bill on 20 March which, finally, delivered the remaining detail promised but, at the same time, blind-sided us with further unexpected changes.

Yesterday's announcement said that in order to ensure Finance Bill 2017 becomes law before the forthcoming general election, the majority of the clauses included in the draft bill are to be dropped. These include:

  • The introduction of the new deemed domicile rules for income tax, capital gains tax and inheritance tax, including the trust "protections";
  • The valuation rules for benefits provided by settlements to beneficiaries; and
  • The extension of the inheritance tax (IHT) net to offshore companies or loans representing UK residential property.

It is anticipated that these provisions will be included in a further Finance Bill after the election, whichever party is then in government. It is not yet known whether the measures when introduced will be backdated to 6 April 2017 or will take effect from 6 April 2018, which may also give the government a chance to introduce the already deferred provisions relating to onwards gifts and washing out of chargeable gains from offshore trusts at the same time.

Annoyingly, the numerous changes to the taxation of offshore pensions (see Capital Letters edition 20) together with the new QROPS transfer charge will remain and will become law shortly.

Changes to IHT

For those who have already taken action to remove UK residential property from structures, there is nothing to be done now. It is expected that the changes have been deferred, not dropped altogether, so anyone who has already taken action can sit back and watch everyone else scramble to achieve the same now that the deadline has possibly been extended. The saving of an extra year's ATED should help sweeten the pill for those who were quick to react and de-enveloped before 31 March.

As noted, we do not yet know whether the changes when introduced will take effect from 6 April 2017 or be deferred to 6 April 2018, so anyone who did not manage to de-envelope by 5 April 2017 (shame on you) should take advice now on their structure. Even if the changes do eventually take effect from 6 April 2017, the way the IHT exit charge on property leaving trusts is calculated means that acting sooner rather than later is beneficial. If the change does not come in until 2018, acting now could avoid the IHT exit charge altogether.

Changes for non-domiciliaries

The deferral of the introduction of the new deemed domicile status for income tax and capital gains tax ("super deemed domicile") has created a number of areas of uncertainty. It is not yet clear whether those who believed themselves to now be super deemed domiciled have already become UK domiciled or whether they have been handed a one year extension. In any case, we hope (and hope is all we have left…) that the government will introduce transitional rules to protect those who have already acted in good faith based on the draft provisions – such as anyone who has rebased their assets and/or used mixed fund cleansing.

Changes for offshore trusts

As for the related deemed domicile changes, we await confirmation of whether the changes will be backdated when introduced or take effect next tax year, so that it is not yet clear whether protected trusts have come into existence or will be deferred for another year. For now, settlors, beneficiaries and trustees of such trusts should presume that the old rules continue to apply until further guidance/clarification is issued.

What should you do now?

Apart from pouring yourself a stiff drink (unless, of course, you are driving or operating heavy machinery) all I can advise is to sit and wait to see what the government will do next. Of course, we have no effective government until after the general election and it is not known what colour that government will be, but it is assumed that whoever is in charge will continue with these reforms.

In the meantime, a large number of clients will be in a state of limbo – if you have been living here for 15 years then are you super deemed or non-domiciled? You certainly can't be both at the same time as that would offend against the laws of physics, which states that you cannot be in two places at the same time. What if you have made a disposal on the basis that your offshore assets were re-based? Will you have realized a gain and, if so, will it be chargeable? Will you get the remittance basis and, if so, what is the cost?

The removal of the provisions from the Finance Bill has created massive uncertainty for those who have acted based on the (numerous) draft versions of the Finance Bill and we look forward to some clarity. However, assuming this uncertainty is swiftly resolved; one could say that the deferral is a positive step which allows proper Parliamentary consideration of the very complex provisions in due course. It is hoped that this will enable some of the ambiguities and anomalies to be ironed out before the provisions become law, so that the delay results in clearer legislation for everyone. Unfortunately the cost of that is further uncertainty in the meantime – which has been the default state of non-doms, their trustees and advisers since the reform to non-dom status was first announced. The other good news is that it may have created extra time for those wishing to de-envelope to do so in a tax efficient manner.

The last remaining question is whether the government will back-date the reforms to 6 April 2017 or, as the tax profession has been advocating all along – defer them until April 2018. The sensible thing to do is to defer them until 2018, which is why my money is on a back-dating!

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James Quarmby

James Quarmby
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T:  +44 20 7809 2364 M:  +44 7958 776 759 Email James | Vcard Office:  London

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