The non-dom tax reforms: transitional reliefs
On 5 December 2016 the Government published draft legislation for two transitional reliefs which it proposes to include in the Finance Act 2017, and which are intended to ease the transition for long-term UK resident non-UK domiciliaries to deemed domiciled status.
These reliefs deal with:
(1) capital gains tax (CGT) rebasing of non-UK assets held by non-doms and
(2) cleansing of mixed funds held by non-doms.
They are set to be introduced in broadly the same form as originally proposed in the August 2016 consultation document but, as explained below, some new details of these reliefs have now emerged.
Capital gains rebasing relief
By virtue of this relief, non-UK situated assets held by certain non-doms on 6 April 2017 will be treated for CGT purposes as if the non-dom had acquired them for their market value on that date. Where the relief applies, its effect will be that, if there is a disposal of the asset after 6 April 2017, the non-dom will only be subject to an immediate CGT charge on any growth in the value of the asset from that date.
As regards the detail of the relief, it will only apply in the following circumstances:
- on a disposal of an asset by the non-dom personally, on or after 6 April 2017;
- where the asset has been non-UK situated throughout the period running from 16 March 2016 or, if later, the date of its acquisition by the non-dom, to 5 April 2017 (this is different from what has been previously stated, which was that the period would run from 8 July 2015);
- where the non-dom has paid the remittance basis charge in respect of at least one tax year since 6 April 2008; and
- where the non-dom will become deemed domiciled under the new “15 out of 20 tax years” rule on 6 April 2017.
It will not be available in any of the following circumstances:
- to disposals made by a company or trust structure, even if the disposal gives rise to a gain on which the non-dom is taxed under anti-avoidance rules;
- if the non-dom was born in the UK and had a UK domicile of origin;
- if at any point during the period beginning with 16 March 2016 or, if later, the date on which the non-dom acquired the asset and ending with 5 April 2017, the asset in question was situated in the UK;
- if the non-dom elects for rebasing not to apply in respect of a particular disposal (any such election will be irrevocable, but may be desirable where the asset is standing at a loss on 5 April 2017); or
- where the gain realised on the disposal is within the income tax regime rather than the CGT regime (discussed below).
Disappointingly, the Government have rejected calls to widen the class of non-doms who may benefit from this rebasing. It will only apply to those who become deemed domiciled under the new “15 out of 20 tax years” rule on 6 April 2017 (and who have paid the remittance basis charge in a previous tax year). However, it is important to remember that this includes not just those non-doms whose 16th tax year of residency begins on 6 April 2017 but also to longer-term resident non-doms who might already be deemed domiciled for inheritance tax purposes, as they will similarly first become deemed domiciled under the new “15 out of 20 tax years” rule on 6 April 2017. The exclusion from this relief of non-doms becoming deemed domiciled for all tax purposes in tax years after 2017/18 is arguably irrational, and undoubtedly creates an uneven playing field.
The Government have also indicated that rebasing relief will not apply to gains made on offshore funds with non-reporting status. Such gains are calculated using CGT principles (so logically should benefit from rebasing), but are subject to income tax rather than CGT. The stated justification for the Government’s stance on these funds is that the rebasing is intended to avoid problems for non-doms whose assets may not be easy to sell or monetise, whereas interests in funds can typically be redeemed at fairly short notice. However, there are of course plenty of assets that are easy to monetise but which will, nevertheless, benefit from the rebasing relief. The Government’s rationale for excluding interests in non-reporting funds from the relief does not, therefore, really stand up to scrutiny. It is regrettable, in any event, that this important carve-out from the relief has been announced so late in the day.
Whilst rebasing relief will protect the pre-6 April 2017 growth in value of an asset from CGT, if the asset was originally acquired by the non-dom using unremitted income or gains, the proceeds of sale will still be tainted by those income or gains, which may be taxable if remitted to the UK. However, the “cleansing of mixed funds” relief discussed below may allow the non-dom to separate the taxable base cost element of the sale proceeds from the part of the proceeds which can be brought into the UK without tax by virtue of the rebasing relief.
As noted above, it was originally proposed that rebasing relief would only apply to non-UK situated assets held by a non-dom on 8 July 2015 and disposed of after 5 April 2017. In the draft legislation, it is now simply required that the asset is held by the non-dom on 5 April 2017 and disposed of thereafter. Furthermore, the asset must only have been non-UK situated since 16 March 2016 or when the non-dom acquired the asset if later. This presents a possible planning opportunity in appropriate circumstances, e.g. where gifts of assets can be made between a married couple on a no gain / no loss basis, which may be desirable where for example only one spouse will benefit from rebasing relief, or where the gain on a transfer between individuals or from a trust to an individual can be deferred by virtue of business asset holdover relief.
Cleansing of mixed funds
The second relief is intended to give non-doms who have been taxed on the remittance basis a window of opportunity to rearrange their overseas bank accounts, to enable them to remit amounts representing capital in priority to amounts representing income or capital gains, in circumstances where such funds have become “mixed”.
As regards the detail of this relief:
- it is wider in scope than the rebasing relief, as it will apply to all non-doms who have been remittance basis users since 6 April 2008 (not just those who have paid the remittance basis charge); but
- (as with the rebasing relief) it will not apply to non-doms who were born in the UK and who had a UK domicile of origin
Whilst the stated aim of the relief is clear, the draft legislation does not seem to achieve what is intended. The intention, as we understand it, is for a non-dom with a non-UK bank account comprising a mixture of capital, income and gains to be able to calculate the amount of each element and then transfer an amount equal to each element into a separate non-UK bank account, so that the individual can then choose which element to remit to the UK separately and independently from the others.
Under current law, generally a transfer of a sum from a non-UK bank account comprising a “mixed fund” to a second non-UK bank account results in a pro-rata share of the mixed elements being carried into the second non-UK bank account. The draft legislation dis-applies this provision where the conditions for the relief are met. However, that is all the draft legislation does, in its current published form. It does not state how the transfer should then be treated instead, and which elements are therefore deemed to move across into the second account. Presumably these provisions will be remedied in the coming months to achieve the desired result, but it is concerning that, with only four months to go before this legislation “goes live”, the Government has not got further with the required drafting.
The good news is that the window of opportunity for use of this relief will now run for two tax years (from 6 April 2017 to 5 April 2019): not just one, as originally proposed. This is important, as it is likely to take some time for non-doms, their bankers or their accountants to undertake the necessary calculations (where possible) to quantify the constituent elements of mixed funds in order to benefit from the relief.
Indeed, for many this will still prove to be an impossible task. Therefore, this relief may not be as wide or beneficial as it may appear at first sight.
Action to be taken
Non-doms wishing to take advantage of these transitional reliefs should take specialist tax advice as a matter of priority to establish whether they will fulfil the qualifying criteria and to ascertain the benefits for them of these reliefs.
Where a non-dom is contemplating making a disposal of a non-UK asset in the near future, consideration should be given to whether it is feasible to defer this until after 6 April 2017.
Non-doms should also start to liaise with their bankers in order to ascertain whether there are sufficient records to enable them to calculate the constituent elements of their “mixed fund” non-UK bank accounts, with a view to “un-mixing” them over the next two tax years.
Finally, it should be emphasised that both reliefs only apply where the non-dom owns the asset or non-UK bank account personally on or after 6 April 2017. For certain non-doms, this creates a tension between the desire to take advantage of these reliefs and the desirability of transferring non-UK cash or assets into a trust, before 6 April 2017, to secure a deferral of tax on income and gains and (in many cases) to obtain long-term protection from inheritance tax. Any non-doms who transfer non-UK assets or amounts held in non-UK bank accounts to a trust before 6 April 2017 will forego the opportunity to benefit from the rebasing relief and the relief for the “cleansing of mixed funds”. Specialist advice should be sought on the pros and cons of these options.
For the latest information on the post-5 April 2017 treatment of non-resident trusts, please see our note on Non-resident trusts and entities.
We have seen that there remain significant gaps in the detail of how the new rules will operate. We will continue to monitor the position and update or provide new briefings as necessary. However, it would not be wise for affected individuals to wait until the form of the new regime is completely settled before taking action, particularly as the implementation of any significant plan of action will take time, which is in short supply before the new rules come into effect. If you believe you are or will be affected by the Government’s proposals, we strongly recommend that you contact the author of this briefing or your usual Charles Russell Speechlys contact.
These articles were written by our International Private Client lawyers. For more information please get in touch with Dominic Lawrance on +44 (0)20 7427 6749 or via Dominic.Lawrance@crsblaw.com.