Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Welcome everyone to this mornings’ session focussing on the new tax landscape for UK non UK domiciliaries following last week’s budget. For security reasons you have joined this session automatically on mute and without any video. If you have a question you can use the Q&A function located at the bottom of your screen. If you have any technical issues which we hope you don’t during the event, please let us know via the chat and one of our technical team will be able to support you. My name is Carol Katz and I am pleased to be joined by my, three of my colleagues this morning in private wealth and tax here at Mishcon de Reya. Charlie Sosna, Hannah Dart and Annie Bouch. The Chancellor’s budget was only a week ago and we have sifted through the draft legislation all 103 or so pages of it to help you understand and help ourselves understand the tax landscape which has changed for non-doms. There were other announcements last week including changes to the availability of reliefs for inheritance tax such as agricultural and business property relief as well as changes to carried interest but this session will be focussing on the specifics relating to non-doms. If we have time we might interweave those and we’re open to questions at the end that you might be able to ask but right now I am very conscious of timing and everyone’s got busy and important days to get on with and we’ll canter through this session. I’d like to ask you Charlie, can you just let us know why the budget has been so important?
Charlie Sosna
Partner
Head of Private Wealth and Tax
Thanks Carol. I don’t think it’s overstating it to say this is really significant changes for those in the non-dom arena you know the non-dom regime has been in existence for circa over 200 years and because it’s been around for so long the high net worth international community and their advisors kind of understood it at a high level whether they were based in the UK or outside. The reality is there were issues with non-dom regime, it was way more complicated than people thought it was at the high level. I vividly remember a client a couple of years ago who had res-non-dom now for about five years saying ‘man if I understood it was as bad as this I would never have come to the UK’ and that was with the benefit of obviously my very clear and concise tax advice. Obviously it disincentivised those who were res-non-doms naturally bringing their money into the UK and the conflict of domicile was quite vague and left a little bit uncertainty over planning so it’s definitely been ripe for change. They have been tinkling around the edges for a while with charges and restrictions on how long you can claim the regime for but it’s been in the firing line I think probably. In short, that’s all gone, a new regime from April 2025 and perhaps that’s a good thing. There’s more certainty now subject to the draft legislation passing without change which I can’t see there being any significant changes and for a short period the new regime is actually far more attractive than the old one. I am going to be really generous and let Annie and Hannah do all the heavy lifting on the technical detail but at high level what are we looking? Well from April 2025 a completely residence based system domicile is a connecting factor for UK tax has pretty much gone subject to some small caveats about application of double tax duties and things like that and as a general position I think that’s probably going to be welcomed, again more certainty which is never a bad thing. No more remittance basis, this new four year what they are calling ‘FIG regime’ so Foreign Income and Gain regime will apply for those that are coming to the UK after ten consecutive non-UK resident years. So great for four years, what to do after four years or if you have already sort of been in the UK for a while, needs a little bit more thought. Completely new inheritance tax regime, again not based on domicile, completely on residence. Have you been resident in the UK for ten or more of the last twenty years is going to determine your exposure there. And then the knock on effect of all of that on Trusts. No more excluded property status for settler’s long-term residence – that’s quite a big one. No more Trust protections where your settler’s UK resident and not benefitting from a regime. So there’s definitely some thinking to do there and all of this as I say, is coming in from April so we haven’t got a huge amount of time. Anyone that’s used to this kind of world knows between sort of 1 January and April flies by so people have got to think and move pretty fast now I think, now we’ve got the draft legislation at least.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Thanks Charlie. I mean you did say generously that you’re going to ask Annie and Hannah to do some more of the heavy lifting so Annie, perhaps you can give us some of the detail now that we know that the remittance space is being abolished. What does it actually mean?
Annie Bouch
Managing Associate
Private Wealth and Tax
Thanks Carol. So the position is changing for income tax, capital gains tax and inheritance tax. We start with income tax and capital gains, how the FIG regime will work is that for the first four years of UK residence an individual can claim the new regime provided they have not been UK resident for ten consecutive years before. So that means for those arriving in April 2025 they must have been non-resident since 2015/16. If someone became resident before 6 April 2025 provided they are still within their first four years of UK residence and were non UK resident for ten years before that then they can use the FIG regime for the remainder of the time within the four years. So for example, if someone became resident in 2022/23 they were non UK resident for ten consecutive years prior to 2022/23 they can claim one year of the FIG regime in 2025/26 as that will be their fourth year of UK residence. If you qualify for the FIG regime then during your first four years you will not pay income tax or capital gains tax on foreign income and gains the FIG arising in those tax years and you can also bring the FIG into the UK tax free. Most types of FIG are eligible for the relief including Trust distributions from a non-UK resident Trust however, some income covered by the remittance basis is not eligible such as foreign employment income although overseas work day relief could be available there. Then after four years of UK residence the individual is subject to UK tax on their worldwide income and gains but this is subject to the position under any double tax treaty. There are some subtleties to be aware of such as how residence is defined. It’s based on the UK’s statutory residence test. It’s irrelevant whether someone is treaty resident or not under a double tax treaty and also split years count as full UK resident years for the regime. The relief is only available for four years which means if a person leaves the UK temporarily and returns within the four year period for example, they are resident in Year 1, they go non-resident in Year 2 and Year 3, they can still claim the regime if they return in Year 4 but would not have a right to claim it in Year 5 despite being away for two of the four years. There are two further points to note. FIG relief is only available to post 5 April 2025 FIG so this means any FIG arriving before that date does not qualify and where someone has previously claimed their remittance basis, left and then returns after ten years qualifying for the new regime, they can only claim the relief on their FIG arriving in the new period not for the periods where they were previously taxed on the remittance basis.
So there are two transitional reliefs for income tax and capital gains. The Temporary Repatriation Facility (TRF) and CGTB basing. Under the TRF individuals who have previously claimed the remittance basis can bring into the UK unremitted FIG that arose before 6 April at reduced tax rates. To do this they will need to designate the amount of FIG they will be remitting in their UK tax return and pay the TRF charge on amounts designated. It’s available for three years from 2025/26 so the first two years the rate is 12% and in the third, 2027/28 it will go up to 15% which is still a significant discount against the current maximum income tax rate of 45%. Once the TRF charge is paid and there is no further tax when the individual brings in the funds to the UK either in the year of the TRF or at a later date. Crucially if the TRF charge is not paid with the clean capital or with funds designated under the TRF it will trigger remittance under the existing rules of any FIG undesignated under the TRF will continue to be taxed under the existing rules if remitted to the UK. Also to flag where an individual has paid foreign tax on their FIG, if the TRF is used on those funds there is no credit given for any foreign tax paid against the TRF charge so in some cases individuals will be better off remitting under the existing rules and relying on relief under double tax treaties. Finally the TRF is also available to settlers and beneficiaries who receive a benefit from an offshore Trust but with certain qualifications, for example a beneficiary could receive a capital distribution not an income distribution after the 5 April 2025 but within the three year TRF period and that will be taxed at either 12% or 15%. And then under CGTB basing there is an opportunity to rebase personally held assets to the 5 April 2017 value. To qualify for this an individual needs to meet four conditions; they need to have claimed the remittance basis for at least one year between 2017/18 and the current tax year 2024/25, they need to have not been UK domiciled or deemed domiciled before 6 April 2025, they must have held the asset on 5 April 2017 and disposed of it on or after 6 April 2025, and finally, the asset must not have been UK citus at an point between 6 March and 5 April 2025 so in particular that means being careful with mobile assets such as luxury cars and artworks.
And then moving on to the inheritance tax position for individuals, from 6 April 2025 IHT as Charlie said will depend on tax residence, not domiciles and the tax exposure will be determined by whether a person qualifies as a long-term resident in a given tax year. A long-term resident is someone who has been UK tax resident for ten out of the previous twenty years. So for the first ten years of UK residence whilst UK citus assets including UK residential property will continue to be subject to IHT in the same way, non-UK assets will remain outside the scope of IHT. After ten years of UK tax residence an individual becomes a long-term resident and as a long-term resident they are then subject to IHT on their worldwide estate. For example, if someone becomes resident in or on 6 April 2025 you would look back twenty years to 2005/6 to see if they have been UK resident in ten or more years during that twenty year period. So to avoid becoming a long-term resident you would need to leave by nine years of being a UK tax resident. We then have the concept of an IHT tail, if a person becomes a long-term resident and then they go non-resident they will continue to be subject to IHT on their worldwide assets for a number of years after going non-resident and how it will work is if someone was UK tax resident for ten to thirteen years, their tail is three years. The tail will then increase by one tax year for each additional year of residence. For example a person who is UK resident for seventeen out of the previous twenty years will have a seven year IHT tail. The longest the tail can be is ten years and then after that point you are no longer a long-term resident or subject to IHT on your worldwide estate. There is a transitional rule with the tail for those who go non-resident in 2025/26 and would have already been or become UK deemed domicile under the previous rules, them being UK resident for fifteen out of the twenty previous tax years. For those people they will still be subject to the length of the old tail which is much shorter, effectively only three years if they remain non-resident in the fourth. And then the final point to mention on IHT is gifting. Where an individual has gifted non-UK property and they are a long-term resident at the time of the gift that property is within their estate and so if they die within seven years of the gift it is a failed pet and subject to IHT on death. This is even the case if they are no longer a long-term resident by the time of death. However, if the gift the non-UK property when they are not long-term resident it will not be subject to IHT if they die within seven years on death. That’s because the property is not deemed to be within their estate at the time of the gift. However, there is an exception to this, if the donor has retained a benefit in the gift and by the time of death they are a long-term resident that asset will form part of their estate regardless of if they are a long-term resident or not at the time of the gift. So when you are looking at the IHT exposure on gifts you focus on the long-term resident status of the donor at the time of the gift unless there has been a reservation of benefit in which case their long-term resident status on death is also relevant.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Thanks Annie. I mean it sounds fairly complicated despite Charlie saying this is going to be simpler but I think you’ve got a really great timeline and I think that might help explain some of those measures, especially that tail which seems to be particularly important at the moment for clients to get their heads round.
Annie Bouch
Managing Associate
Private Wealth and Tax
Yeah exactly it is really complicated. So here we have an example timeline for post 2025 tax treatment of someone who would previously be classified as a non-dom. Where this timeline makes reference to tax or no tax, it’s regarding non-UK assets, UK assets will almost always be subject to tax whether you are resident or not and you can see on the bottom row shows how the various tax charges overlap and stop. So here the individual arrives in Year 1, for the first four years they benefit from the FIG regime so they are not taxed on any non-UK income or gains and not subject to a worldwide IHT, there’s no fee to access the FIG regime. After the first four years the FIG regime stops and the individual is subject to a worldwide income tax and capital gains, sorry worldwide tax on income and gains of course subject to the position under any double tax treaty and then at ten years residence the individual also becomes a long-term resident for IHT so are then subject to IHT also on the worldwide estate. At this point if they have a Trust any Trust they settled is no longer an excluded property Trust too and then say our individual leaves in Year 15 to become non-UK tax resident, at this point they are then no longer subject to income tax and capital gains on their non-UK income and gains however they’ll still be subject to IHT on their worldwide estate and that will be the case for another five years because of the IHT tail, therefore as shown in the diagram it’s not until Year 20 that they are no longer a long-term resident and also in Year 20 if they did have a Trust there would also be an exit charge as they are no longer a long-term resident.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Hannah, again so Annie has brilliantly set out the detail with that. I think it would be really useful to go into some of the impact, I can also just for people online I can see that we’ve got a lot of questions, we’ll be answering questions at the end if that’s okay but we are monitoring them as they come in. But Hannah do you want to have a look at sort of the impact, how that might, what Annie’s talked about, how that’s going to impact on individuals?
Hannah Dart
Of Counsel
Private Wealth and Tax
Absolutely, so when we’ve been discussing this internally we sort of divided the categories of people into three pots, there are sort of three categories of clients and how they would take best advantage of these rules. We’ve got the people coming in to the UK, the new arrivers, we’ve got people who are already here and will be switching from the current non-dom rules into the new regime and then the people who perhaps as a result of these changes or for other reasons, are already in the UK and how it impacts them. Before going into details of each category though it’s worth emphasising the statutory residence test is really, really critical in working out how these rules apply. Annie and Charlie have already mentioned we’re shifting from a domicile based system to a residency based system that is simpler. We have a very definite statutory residence test that sets out clear rules so we can advise our clients with absolute certainty, are you UK resident or are you not. That’s not to say that it is a completely simple test, we don’t have a straight day counting test in the UK. The statutory residence test looks at a whole range of factors, it looks at where you have homes, it looks at where you work and it pulls out a different number of days depending on all those factors so I quite often get clients saying, ‘as long as I am not in the UK for more than 90 days I won’t be resident right?’ and the answer to that is maybe. We need a lot more information to advise on that. So clients are going to have to be very careful in thinking am I resident, when I think I’ve got ten priors of non-residence was that actually correct and making sure that they’ve got all the records necessary to evidence that. So the sort of overriding practical point for all of these clients, think about your residence status, make sure you’re counting your days, keeping your records.
Starting with our first pot so these are people moving to the UK, they can take advantage of the FIG regime which as Annie has already said, is really generous, it’s a complete exemption on the non-UK income and gains without the restrictions of the remittance basis and in contrast to some of the other jurisdictions equivalent regimes there’s no fee payable for it so it is very generous. Timing is going to be really critical to people taking full advantage of it and there isn’t a straight answer to when you should realise income and gains. There will be certain categories of people who are moving to the UK to take advantage of this regime in which case they want to be, may want to be deferring for example the sale of business until they are in the UK when they can sell their non-UK business free of UK tax but they want to ensure that they’ve lost their tax residency in a prior jurisdiction and that of course is going to require advice from the other jurisdiction to understand when they are outside that tax net. But it’s also important to note that although there is this four year period in which FIG is exempt from UK taxation, that isn’t an exemption from reporting. The relief much be claimed and as part of that claim it’s necessary to identify the income and gains which is subject to the claim. For some clients there might be privacy concerns so they would prefer not to disclose it in which case it could be worth doing it before moving to the UK. So there’s no straight answer on timing but it is worth considering before making the move.
The next point is thinking about residency, not just of the individual but also of any structures, any family businesses, any Trusts they’re connected with. The FIG regime applies to individuals, that’s natural persons only. If an individual moves to the UK and they are director of a company, they’re even not the director of the company but they are managing the company, they are a trustee of a Trust, that can cause the company or the Trust to become UK resident. There is no FIG regime for companies and Trusts so that sort of accidental residency of companies, Trusts, structures is going to be really important to monitor even if they are only coming for the four year regime and in factoring that in, it’s important to note that what we in the UK say, well that’s a company, that’s a Trust, it doesn’t necessarily match up with the foreign categorisation. So a classic example is a US LLC, we don’t have LLC’s in the UK but our starting point in the analysis is that it’s probably a company for UK tax purposes so you could have a US person thinking well that’s an LLC that’s fine I don’t need to worry about it, there’s a little bit more analysis that needs to be done in understanding the risk there.
It is important to understand exactly which income and gains are eligible, as Annie said, it’s not all foreign income and gains so a review of investments and income sources is worthwhile. At the risk of stating the really obvious, the F in FIG stands for Foreign so non-UK income and gains is still – sorry UK income and gains are still subject to tax in the normal way and that is slightly contrary to something that was announced prior to getting the draft legislation they were investigating whether it could also extend to UK investments. Unfortunately that didn’t come to fruition so that’s something to be aware of.
The ex-pat windfall that’s referred to there on the slide. This is a sort of unexpected outcome of these rules which is really beneficial for Brits who’ve maybe been living outside the UK for many, many years and under the current rules we often have to give them quite caveated advice because it’s so hard to shift a UK domicile of origin even if they have been outside the UK for many, many years we might be saying, look we don’t know if you’ve actually lost your domicile status, if you’ve lost the tax consequences that come with that and it can be a deterrent coming back to the UK whereas now that we’re looking solely at a residency regime it is purely a question of have you had ten years of consecutive non-UK residence. Anyone who ticks that box can come back and benefit from the FIG regime. So that’s a real positive. I think we’ll be seeing more of those, definitely already had some enquiries about that and a final point to note is assets held within structures the UK has a very complex anti-avoidance rules which are subject to a separate consultation and we might be seeing changes in due course but it is possible for someone who’s UK resident to be taxed on income within structures but there is also what’s known as the ‘Motive Defence’ which can protect those. That will be something that’s important really for not just client’s moving to the UK but those remaining them whether those pre-existing structures might benefit from the motive defence and it can be useful to get advice before moving to the UK to kind of understand those pre-existing structures, whether they fall within that category.
So now if we move on to our remainers, those who are already in the UK and they are staying here and there are sort of two categories because there’s the ones who will benefit from the FIG regime so they are still within that original four year window, as Annie said, they can still perhaps get one, two maybe even three more years of that regime. For the clients who are currently on the remittance basis they are the ones with the most planning opportunities available to them. The first thing is claiming the remittance basis if they haven’t already done so might be necessary. Both of the reliefs, so the temporary rebasing facil… sorry the temporary repatriation facility and rebasing are only available to individuals who are not just eligible for the remittance basis but who actually claimed it. The current tax year is the last year in which you can claim it so anyone who hasn’t claimed it yet, it might be worth considering doing that if they want to benefit from the two reliefs. Timing is going to be a real sensitivity here and there’s not a straight answer to whether, again whether it should be before or after the new rules take effect. The one argument is to do it before the tax deadline if you can claim the remittance basis and then you can realise it free of tax and you might be able to use the temporary repatriation facility if you do wish to bring it into the UK and pay the reduced rate of tax. However, if you are thinking of eligibility for rebasing the asset needs to be held beyond April 2025 so there is not a straight answer again to whether client’s should be realising gains for example before April or after April, it’s a question of analysing in each case how long has the asset been held, to what extent is it standing at a capital gain, to what extent was that gain generated before 2017 when the rebasing takes effect from and to what extent was it generated, does it relate to the period after 2017 and which is going to be the most favourable outcome and now, between now and April is our period when we should be getting those valuations, compiling all our evidence and the like so that clients can make an informed decision on that.
Continued segregation is going to be really important so even though the remittance space is being abolished and it won’t be available going forwards it is still the case that any foreign income and gains on which the remittance basis was claimed historically will trigger a tax charge if they are remitted. So all those tax payers who have got their segregated income account, their gains account, their clean capital, all those accounts need to be kept segregated so that we can understand the tax consequences if they do make a remittance or they can use clean capital and avoid a remittance and also so they can make an informed decision about whether they want to claim the temporary repatriation facility and which pots they’ve got available.
Gifts should be something which are considered by people who are not yet deemed domiciled. If any gift is made before April of a non-UK asset then there won’t be a IHT run off on that so the seven year run off on a gift before it’s outside the donor’s estate. There also won’t be the dry CGT charge so in the UK a gift is a disposal of an asset for capital gains tax purposes and if someone is not within the four year FIG regime under the new regime they would have to pay CGT at the time of the gift so considering making a gift before April might be a good way to get it outside of your estate and not worry about the application of the new rules.
And then finally if we move on to the category of people who are leaving the UK. Here the statutory residence test again is going to be really crucial in ensuring that they genuinely do leave the UK for tax purposes even if they are keeping a footprint, to what extent can they keep spending time here. If they decided they want to come back which would be delightful, bearing in mind that to benefit from the FIG regime again they are going to need to have a ten year period of non-residence. It’s also about making sure that they preserve that bank account segregation even whilst they are non-UK resident if they might come back in the future and still have those funds on which they previously claimed the remittance basis.
On inheritance tax, Annie’s already mentioned there’s the tail although there’s transitional rules for clients who cease residence this year or who have already ceased residence so they might get a shorter tail than they might otherwise have benefited from. Whether the ongoing inheritance tax exposure the usual thoughts about how to account for that possibly life insurance are at play. And then finally there’s a potential exit tax to the extent that they have set up Trusts even if they set up that Trust whilst they were non-domiciled and Annie is now going to move on and talk about the changes on Trusts in a bit more detail so she’ll go on to that.
Annie Bouch
Managing Associate
Private Wealth and Tax
If we could go to the next slide.
Hannah Dart
Of Counsel
Private Wealth and Tax
Yeah sorry.
Annie Bouch
Managing Associate
Private Wealth and Tax
Great thank you. So moving on to Trusts, so from 6 April 2025 the tax treatment of Trusts if changing significantly and this slide show shows the position where the settler is UK tax resident. For income tax and capital gains tax as Charlie mentioned, currently Trusts created by UK resident settlers who are domiciled or who are not domiciled sorry, or deemed domiciled benefit from the protected Trust status with the effect that foreign income and gains arising within the Trust are not taxable on the settler or the beneficiary unless or until a distribution is made to a UK resident beneficiary. The FIG regime is removing these protections so this means for settlers on the FIG regime there is no tax for them on the incoming gains arising in the Trust or on Trust distributions for their first four years on the FIG regime. If the settler is not claiming the FIG regime or after the four years then the settler will pay capital gains tax on all gains arising within the Trust if either the settler, their spouse, civil partner, children, grandchildren or their spouses, civil partners can benefit from the Trust. But if there are gains in an underlying holding company within the Trust structure they may not pay capital gains tax on those it depends on the circumstances which they were set up. The settler will also pay income tax on any income arising within the Trust if the settler or their spouse or civil partner can benefit from the Trust and they will also likely pay income tax on the underlying company income too within the structure. So that’s the income tax and capital gains tax situation for a UK resident settler if they or their family members can benefit whereas if the Trust is not settler interested so the settler and the family members cannot benefit then a UK resident beneficiary is subject to income tax and capital gains tax on the benefits they received from the Trust. If the beneficiary is claiming the FIG regime they will not pay tax on distributions for their first four years. If they are not claiming the regime or after the four years they’ll be taxed on distributions wherever the benefit is received. Also any Trust distributions to beneficiaries on the FIG regime will not match the Trust tax pools and so do not reduce the Trusts pools of incoming gains. As mentioned, this diagram is about Trusts set up by a UK resident settler. The Trusts where the settler is non-resident there is no material change to how beneficiaries are taxed for income tax and capital gains, the main difference is they cannot shelter offshore Trust distributions with their remittance basis anymore but they can receive distributions tax free in the UK for their first four years of UK residence if they claim the FIG regime which is more generous than the current regime.
And then on inheritance tax for Trusts, again as Charlie mentioned previously Trusts settled by non-doms for excluded property Trusts this meant that even when the settler became deemed domiciled there was no ongoing IHT for the settler or the Trust in respect of its non-UK assets. From the 6 April 2025 this will all change. The IHT position for the Trust will be determined by the settler’s residence not their domicile so whilst the settler is not a long-term resident, so before ten years of UK residence the position remains the same mainly that non-UK assets will remain outside of IHT for the Trust and for the settler but once the settler has been here ten years under the long-term residence test the Trust becomes subject to IHT and this has IHT implications for the Trust and also for the settler depending on whether the Trust was set up before 30 October 2024. So for the Trust there are three IHT charges to be aware of. There will be an IHT charge at 6% on Trust assets including any non-UK assets every ten years from the date the Trust was created. So for example, if the Trust was created in 2017 the first ten year charge would fall in 2027 but you’d expect the IHT rate will only, well it would only be a portion of the 6% as the Trust would have not been a scope for the whole ten years so you’d expect it to be much smaller as the charge will only be for the two years but then in 2037 there will be the full 6% charge. There will also be proportional exit charges where the Trust makes capital distributions between the ten year periods and if the settler goes non-resident as we mentioned in the time line, the Trust will remain subject to IHT charges until the settler loses their IHT tail and is no longer a long-term resident at which point the IHT charge as an exit charge will be a proportion of the 6% depending on how far through the ten year charge the Trust is and it is on the value of the Trust assets. And then finally the IHT for the settler. If the Trust was created and funded before the 30 October 2024 the Trust assets will not form part of the settler’s IHT estate on death even if they are a long-term resident on death and even if they are a beneficiary which is an advantage for change retained to the pre-budget Trust but for all Trusts created on or after 1 October 2024 the non-UK assets will now fall within the settler’s IHT estate if they are a long-term resident on their death and have not been excluded from the Trust at that time. So overall for Trusts the new charging mechanism means non-UK property in Trust can eventually fall in and out of the charge to IHT as it will be tied to the resident status of the settler and where a Trust is funded on or after 30 October 2024 it can create a double inheritance tax charge for long-term residence who settle Trusts.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Thanks Annie. Again Hannah can you take us through how that detail is going to really impact on Trusts trustees especially?
Hannah Dart
Of Counsel
Private Wealth and Tax
Yeah absolutely. So picking up on that very final point that Annie made about how Trusts can sort of go in and out of charge under the new regime we are used to in the UK the tax status of a Trust almost being fixed at the time of settlement, if they were, if the settler was not domiciled or deemed domiciled at that time that determines a couple of caveats the inheritance tax, income tax and capital gains tax treatment of the Trust indefinitely. Instead the big change for trustees is having to constantly monitor what is the status of my settler and has this Trust gone into the regime, come out the regime because both can have charges and again we can divide this here into three categories so our UK resident settlers, our non UK resident settlers and our deceased settlers. The UK resident settlers really this is where the, the big changes are and where a lot of action is going to be needed. So the huge change that there won’t be the Trust protections all that income and gains within the Trust will be taxable on a UK resident settler assuming that the settler isn’t within the four year FIG regime. There are possibilities of take advantage of for example the temporary remittance facility to mitigate some of that. There are some small allowances like the gains attributed to the settler are no longer treated as the highest part of their income so they can get basic rate bands, those sort of things. A really poor question is going to be, is the Trust settler interested because if the Trust is not settler interested then that can be a preferable position to be in when you’ve got a UK resident settler to avoid that automatic attribution. The test of whether a Trust is settler interested unfortunately is not the same for income and capital gains. It’s a lot easier to make a Trust not settler interested for income tax purposes which would generally involve excluding the settler, their spouse and their minor children. For capital gains tax purposes for the majority of Trusts we come across it’s just not going to be a feasible possibility given the Trusts are so often set up for the family, for the children, their future grandchildren and the next generations and to make it not settler interested for capital gains tax purposes it’s necessary not just to exclude children including adult children but also grandchildren and all of their spouses. That often just completely defeats the purpose of a Trust. So when we have got the settler interested Trusts with UK resident settlers we do need to be very careful and be aware that they are potentially going to have full taxation. If we’ve got a Trust which is settle interested for capital gains tax purposes but not for income tax purposes it might be possible to manage that via the investment policy prioritising income over capital gain – of course that should be driven by much wide decisions than purely UK tax but it’s something to think of as a possibility. If there is a desire to take advantage of the TRF then obviously designating the assets has to be done within the periods and so thinking about that is something to address over the coming years and it will be matched with income and gains before April, so again generating that income and gains that’s available to designate. From an IHT perspective if your settler leaves the UK, you’ve got to be aware that of course there will be the exit charge that Annie mentioned so planning for those IHT charges is going to be really important. The ten year anniversaries can all be diarised now and a reminder that when we work out the ten year anniversary of a Trust it runs from the date the Trust was created. I get a lot of calls from people saying, okay so the first ten year charge is going to be in 2035, sort of ten years after these changes come in. No it’s ten years from when the Trust was created so some of these could be coming up in relatively short order but also planning for that exit charge and it’s not just of course diarising and knowing when they are coming up, it’s having the liquidity available and the rough rule of thumb is you need about 0.6% each year even though the charge isn’t payable annually, so having that liquidity available within the Trust. So planning for those charges and considering exclusion of beneficiaries are going to be really poor considerations wherever you’ve got a UK resident settler.
For your non-UK resident settlers there’s actually fewer changes. The settler is not subject to tax in all income and gains, that’s exactly the same as before. We still have taxation of distributions and benefits provided to UK resident beneficiaries with all the variants that that entails but the message here is really that these are really valuable planning techniques for where you’ve got a family with UK connections but the actual settler of the Trust is non-UK resident. Those Trusts could be a really useful vehicle for avoiding a rising basis taxation on the assets within the Trust.
And then the deceased settler again, it’s quite a similar situation really and it depends really on the settler status at the time of death. But the general overriding points that apply to all Trusts and therefore all Trustees are thinking about the reporting. There needs to be a lot of communication between the trustees and the settlor and the beneficiaries to understand how these changes are going to impact on any given Trust, diarising all those IHT charges to make sure that there’s a plan made for those and thinking about distributions, whether they might qualify for FIG relief, TRF or anything else like that. So a lot of changes for Trustees and a lot of things to think about.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Thanks Hannah. Charlie bringing you back in, I was just wondering you know, all of this new information that Trustees are going to have to get their heads round. Is it, is it, are people still going to be using Trusts going forward?
Charlie Sosna
Partner
Head of Private Wealth and Tax
In short yes. Look I think most people on this webinar will know that Trusts are a useful vehicle for way more than just tax, global tax planning. I’m going to fly through this slide quite quickly just because I’m wary that we have got an incredible amount of questions and I want to get through as many of those or for us to get through as many of those as we can. Look yeah Trusts are still going to be used. I think we will see them even more used where we have non-residents settlors who now want to structure for next generation that might be in the UK even more so than we did before. Trusts will still be very beneficial where they are already in existence but the settlor is non-resident or to be blunt, dead because they will be incredibly useful vehicles going forward. There will be some Trusts I think that, that are less UK tax efficient going forward and they may need to make a view before April and I think the one thing that is going to, like Hannah and Annie were sort of referring to, trustees of these Trusts, it is going to be their liability these IHT exposures, they are the ones in the firing line, not the beneficiaries, not the settlors and there will be a lot, we were talking about this, coming up very shortly because a lot of people set up Trusts just before 2017 when the rules changed then and they will be coming up to their ten year charges not long after these rules come in. There’s always a tension I think between trustees and settlors, beneficiaries because trustees want to go and spend money on legal advice and the settlors and beneficiaries are like, no don’t waste the money. As I say it’s the trustees liability and they’ve got to get their head around these rules pretty quickly because if they miss a ten year charge or an exit charge it’s going to be them that HMRC come after and I would think there is probably a practical thing maybe for the Trust companies and trustees to be looking at their CRS reporting and where they’ve got reporting in the UK and, and doing a check balance there. But yeah and as on the slide you know, there are lots of other reasons people continue to use Trusts so I don’t think this is going to be the end of them by any stretch of the imagination.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Yeah thanks Charlie, I guess the changes that come with the BPR rules and the IHT release changing limiting to a million pound cap for BPR, that’s another facture that trustees are going to be having to think about that they’ve not had to think about before because they’ve not had to think about IHT at all and maybe they think, well it’s okay because we’ve got business property and actually perhaps that won’t be going forward.
Charlie Sosna
Partner
Head of Private Wealth and Tax
Yeah, yeah.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Sorry, I was just going to say we have got a lot of questions. I am just going to say to everybody still online thank you for staying with us. If you want to stay up to date with our insights and more information please do go to our non-dom hub and click on there and subscribe for information but I am going to, and I think there should be a pop up coming up on your screen that might allow you to do that as well. But I am going to whizz to questions and let me just see, there were a couple of them that came up specifically around double tax treaties and there was one, if I can find it, someone’s asked if we can advise around the India double tax treaty and whether that still works for non-UK scius assets where there is a UK resident and what are the criteria to be able to make use of it. I wondered maybe Hannah maybe you could have a look at that one.
Hannah Dart
Of Counsel
Private Wealth and Tax
Yeah absolutely. So the, this is really focussing on the inheritance tax treaties, the UK there’s been a few questions about inheritance tax treaties. The UK only has ten of them but where we do have them they are very useful and there was a bit of this question where shift all of the treaties refer to domicile as the connecting factor and we’re switching to residence as our connecting factor under UK domestic law. What does that mean for the treaties? Well the UK can’t change it’s international obligations unilaterally and it would be a huge exercise to re-negotiate all those treaties so the short answer is, domicile remains the connecting factor for treaty purposes. In the draft legislation there is actually a specific provision that says where they’ve wiped out all the rules on what it is to be deemed domiciled actually the deemed domiciled rules remain for the purposes of interpreting double tax treaties only. So putting that into practice what does it mean? Well, and if we take the India double tax treaty specifically because that was a really favourable one. An Indian client who was living in the UK could rely on the treaty to shelter their non-UK assets from inheritance tax subject to a few caveats provided they remained Indian domiciled as a matter of common law and it didn’t matter if they became deemed domiciled under UK law. That’s going to remain the case. They will be in that favourable position because the treaty stands. So that’s good news for people with an Indian common law domicile as a matter of Indian law. There’s a couple of caveats to rely on the treaty so obviously it is always worth getting specific advice. And if I can, because I do like treaties, jump on, there was another question which was about the US/UK treaty and Trusts settled by a US person and will they get any protection from the ten year charges? Potentially, it depends on a few factors so the US/UK estate tax treaty can give the US sole taxing rights over a Trust but it depends on the tax payer being US treaty domiciled and importantly not a UK citizen so generally we don’t really care about citizenship from a UK tax perspective but looking at the US/UK treaty as one of the instances. So Trusts settled by US citizens or US tax payers potentially get protection but again many, many caveats and we need a bit more to advise.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Great thanks Hannah. There’s another question here that I was going to pose to you, not to you necessarily Hannah, anyone can take it but do we recommend that clients setting up, setting up a new account to hold funds which have borne the TRF, the Temporary Repatriation Facility charge. So do we recommend that clients set up a new account for that?
Charlie Sosna
Partner
Head of Private Wealth and Tax
Yeah, it’s going to be relevant obviously to the bankers out there. Yes in short I think they will need to. This is not going to make it simpler how many bank accounts these clients are going to need if they are someone that has been res non-dom that is staying going forward but absolutely I would recommend when you have nominated assets or, or funds as designated funds for the TRF I would segregate them so you have a clear record of what they are particularly because clients might not be bringing them straight into the UK immediately because they don’t have to under the new rules. There is sort of a connection, another question I think tied to that which is if you are designating something that is still in in invested, it’s not liquid for the TRF, what happens when you realise it and assuming you are someone that is not going to benefit from the TRF by the time you realise it I think what you will have is you will have the gain you realise on it which is going to be taxed on a rising basis under the new rules from April 2025 and then you will have the initial proceeds that have gone into the investment and that is what will be then taxed at the 12% so you will have two separate pots within that, that will, that will need thinking about how that’s going to be segregated and dealt with.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
So unfortunately it sounds like there is going to be more account management than under the current written regime.
Charlie Sosna
Partner
Head of Private Wealth and Tax
Yeah, yeah there will be.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
And another question for you all. If a client leaves and satisfies the temporary non-residence rules, can they remit funds prior to their return as they can do now or, and effectively clean them up?
Charlie Sosna
Partner
Head of Private Wealth and Tax
Yes I think so. I mean, we, I mean I’ve got a client in this situation so they were someone approaching deemed dom, they went non-resident with a view of being out to then sort of reset their clock and do all of that. I think, and there’s a few questions about this, about timings when you are in this situation when you come back. Yes I think you could be, if you are not caught by the temporary non-residence rules you can realise those offshore income and gains from that period and they will not be taxed when you return because I think that still must be right under the rules as they are coming in. Your, the downside for those people is if they haven’t had ten years of non-consecutive non-UK residence they are not going to benefit from the FIG regime when they come back and they will fall into IHT much quicker depending on how long they were hear before and all of that kind of timings of ten of the last twenty years. So I suppose it is quite client specific and the quick answer is yes you can clean up that stuff and that might be enough for some clients so they say, fine I’ll come back after six, in the six year or after six years and then I don’t need to generate future income and gains because of how things are structured and what I have so actually I won’t have an exposure going forward. It, it’s a tricky one but generally I think we would want people to wait for ten years to be able to reset their clock if they can.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Okay. Thank you Charlie. Another question, so the question is, I’ve got a client who is long-term resident and deemed domiciled. They settled assets on new, sorry, they settled assets on non-UK Trust before they became UK deemed domiciled. What are the things that I should be thinking about for that client?
Annie Bouch
Managing Associate
Private Wealth and Tax
Yeah I could take this or…
Hannah Dart
Of Counsel
Private Wealth and Tax
No go.
Annie Bouch
Managing Associate
Private Wealth and Tax
Okay so for that client you need to think about income tax, capital gains tax and inheritance tax. Inheritance tax they are already deemed dom so they are already subject to a worldwide IHT in their personal estate but assuming they settled they settled their Trust before 30 October their Trust assets and non-UK assets there will not be subject to IHT on their death but that Trust will now be subject to the relevant property regime so a 6% charge every ten years which is effectively a 0.6% yearly charge. If they, if they don’t want to fall within that then they would terminate the Trust before 6 April but then those assets will if they remain in the UK, will form part of their estate so it is probably better to keep them in Trust. The bigger change is probably for a deemed dom having set up Trusts, income tax and capital gains tax position. So they will need to start thinking about who the beneficiaries of that Trust will be and the investment strategies. If the settler and their spouse if they are happy to exclude them then perhaps the Trust could then invest in income generating assets so although the Trust will generate income, the settler won’t be taxed on that income whilst it arises, only on the distribution but in a lot of cases that might not be possible because Trusts are set up by the family members in which case they may want to think about focussing investments that are gains generating and they will be taxed on the arising basis but it will be at a lower rate. And also thinking about the interaction for those Trusts with the TRF, so if they are remaining a beneficiary they might want to request a distribution post 2025 and if they receive it within the TRF period, so the three years, they can benefit at a reduced rate of 12% or 15% but in that case it’s matched to pre-6 April 2025 income and gains so would they really want to be encouraging their trustees to realise assets this, this side of 6 April in order to make the most of that facility.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Thanks Annie. So, so much activity that trustees need to be taking care of. I think this might be a simple one but let’s do it anyway so, are there any changes in pre-existing SRT, so the pre-existing Statutory Residence Test that we should be aware of?
Hannah Dart
Of Counsel
Private Wealth and Tax
Nope it’s the same test which is good, that’s the one thing that we don’t have to learn.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Great. Let’s see, I can’t see any more questions, well I can but I’m leaving them on my screen. Does anyone, can anyone else see them and want to answer one while I get…
Charlie Sosna
Partner
Head of Private Wealth and Tax
Yeah, so there’s a question, is the time line relevant for existing non-doms in the UK for more than four years or does the timeline start at the point after subtracting part years, past years. No, effectively your years already, I think, I think the question is, if you’ve already been here have your years blocking up and yes they are. So if you’ve been for four years already once you hit April 2025 you are not going to benefit from the new regime and when you’re counting your ten out of the last twenty years for IHT it will, it will also include time already spent here. It’s not a clock restarting on April 2025. I think that’s what the questions asking and I hope I’ve answered it.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Okay. There are some more treaty questions, I don’t know if you want to cover those, Hannah, gosh.
Hannah Dart
Of Counsel
Private Wealth and Tax
Someone asked if we have a Turkey/UK IHT treaty.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Yes.
Hannah Dart
Of Counsel
Private Wealth and Tax
I don’t think we do but someone else in the team will tell me if I am wrong.
Charlie Sosna
Partner
Head of Private Wealth and Tax
I don’t think so either.
Hannah Dart
Of Counsel
Private Wealth and Tax
I’m afraid not.
Charlie Sosna
Partner
Head of Private Wealth and Tax
And I can see there’s a question about the position about renegotiating them and I think this comes from at some point during all of this process the previous Government announced these new rules, there was I don’t say in Governments I can only say it was a rumour or hearsay that the treaty team within HMRC had been engaged to look at the treaties and start to talk about renegotiating them. That is an incredibly difficult task, it’s not something they can do unilaterally, they are going to have to go to each of those relevant countries to renegotiate the estate treaties. It seems from what, what is in the papers and where it currently lies, that doesn’t seem to be the intention or, or is certainly not going to be something that happens in the immediate future so, so for the time being we are expecting those treaty benefits to remain which are really significantly valuable if you can fall within them.
Annie Bouch
Managing Associate
Private Wealth and Tax
I can see someone else has asked the TRF is only available for income distribution from Trusts…
Charlie Sosna
Partner
Head of Private Wealth and Tax
Yeah.
Annie Bouch
Managing Associate
Private Wealth and Tax
…before April 2025 or for the three years also post 2025 so yeah, that’s correct so post 2025, April 2025 income distributions you can’t rely on the TRF. Pre-2025 income distributions you can but you need to be claiming the remittance basis this tax year so it helps people who are currently on the remittance basis but if you’re deemed dom, if you receive an income distribution before April 2025 then you’ll pay the normal income tax rate of up to 45% so it doesn’t help you there.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Okay.
Charlie Sosna
Partner
Head of Private Wealth and Tax
And the thing what is classed as income or capital within that and that is the nature of the distribution that is made. Are you, are the trustees declaring their distributing income and making an income payment out to the trustees or is, or is it a capital payment so that, that’s an interaction between the tax and the trust law of how that works is the trustees need to be very careful about what they are distributing and how they are classifying it.
Carol Katz
Partner, Knowledge Lawyer
Private Wealth and Tax
Yeah and that, that’s really important because you know you’ve got your bank accounts set up but also your accounting within the Trust really needs to be spot on because you really need to know from the accounts perspective, am I distributing at this point income or am I distributing capital so that’s really key there. I want to defeat the stereotype that lawyers are often late and wrap up on time so bearing that in mind I’m sorry if you haven’t had your question answered, we will try to come to you direct and answer those questions for you. I just wanted to say thank you to everyone for joining us this morning and for raising such excellent questions. I am sorry if we weren’t able to get to yours in the time that we had available. I also want to thank our technical team for their support especially Jade Churchill and Lucky Murdoch so thank you both and of course to Annie, Hannah and Charlie for sharing your expertise and your thoughts so clearly today. It seems that the abolition of the non-dom regime will provide additional clarity but there’s quite a lot of disruption that this new regime is going to bring to our day to day and what we know so far and what sort of remittance basis is so well embedded for so many of us although it will be clearer under this new FIG regime, there’s a lot to get to through and there’s a lot for us to, to understand as well as some nasty traps even for those who have left the UK already before these rules came in perhaps. So there are some action points particularly for remittance basis users remaining in the UK as well as for those coming in and we would be delighted to work with you to get through those. As I’ve said already, to stay up to date with all of our insights, please sign up to our non-dom hub and use the pop up QR code. If you have any additional questions following today’s sessions, please do speak to or use your Mishcon contact or any of Annie, Hannah or Charlie. Thank you all again for joining us today and we wish you all a great day. Thank you.
Mishcon de Reya
It’s business. But it’s personal