The Finance Bill 2017-19 has brought in new rules for returning residents.
- Individual must have been born:
- In the UK; and
- with a UK domicile of origin (but have since subsequently acquired a non-UK domicile of choice).
- If that individual returns to the UK, from April 2017 they will be treated as deemed domiciled for income tax (IT) and capital gains tax (CGT) in the first year they become UK resident and for inheritance tax (IHT) in the following tax year (one year grace period).
The tax effect
- Worldwide taxation: No remittance basis, no CGT rebasing, no separation of mixed funds
- Any trusts created while non-domiciled (thus outside IHT regime), will become subject to IHT shortly after settlor returns to UK, i.e.
- 6% IHT charge every 10 years
- Up to 6% exit charges
- Possible IHT on death of settlor if trust is settlor-interested
- Any assets put into trust may suffer an immediate IHT charge of 20% (plus further 20% if death within 7 years)
- IT/CGT - settlor may also be taxed automatically on all income and gains arising in such trusts unless settlor and spouse excluded (and wider family for CGT). Non-resident trustees may have to provide UK tax reporting information on foreign income and gains which thus far have not been required.3. Personal estate
- Taxed on worldwide income and gains - remittance basis not available upon return, unlike other non-doms. However may possibly be offset against tax in other jurisdictions.
- IHT charged on worldwide personal estate, whereas before return to UK only UK-situs assets. NB: only affects tax domicile, not general domicile under regular principles
What should you do?
- Non-UK trustees should be aware of the potential new UK tax reporting obligations if the individual returns to the UK.
- You may need additional to hold information on your clients’ backgrounds – place of birth, domicile of origin (father’s domicile).
What should your clients do?
- Seek advice before returning to UK! If possible at least one full tax year in advance. We can help to plan the return in a tax-efficient manner.
- Whilst still non-domiciled, consider winding up any such trusts, or at least excluding themselves from benefit before returning to the UK.