Louvre Group Update on UK Tax Rules

UK DOMICILE, INHERITANCE TAX, CAPITAL GAINS TAX AND TRUSTS

Readers may well be aware that big changes to UK legislation regarding individuals’ domicile positions are due to become law shortly.

Whilst some of the provisions of the new Finance Bill have been made known not all are available as yet and will probably not be available until the Finance Bill 2017 which will be issued on budget day on 8th March 2017.

Many people outside of the profession might not be aware that this legislation will also affect some trusts.

UK Residential Property – UK Inheritance Tax

A major change will be regarding offshore structures that own UK residential property. The typical structure (but not the only variation) was an offshore discretionary trust owning an offshore close company that in turn owned a UK residential property.

The rationale for the structure lay in the fact that if the trust owned the property directly it owned a UK-sited asset and then had exposure to UK inheritance tax on every ten-year anniversary of the trust formation date.

Having the offshore company in between meant that the trust owned shares in a non-UK situs asset thus eliminating the exposure to inheritance tax. A very neat and simple idea that has been used by tax advisors for many years.

The new legislation effectively allows HMRC to look through the company as if it didn’t exist for inheritance tax purposes.

From an inheritance tax planning perspective, the offshore company is superfluous and clients who are paying fees for maintenance and administration of such companies may feel this is a cost too much as a consequence. However, there several other considerations to be considered before instructing to wind up the intermediary corporate entity.

1. Will liquidation of the company have any other adverse affect for UK tax purposes? The answer is invariably ‘yes’, and unfortunately, HMRC does not feel it is necessary to provide incentives to encourage people to de-envelope (collapse) such structures.

Consequently with effect from 6 April 2017 UK situs residential property held in such structures will be taxable on the trustees every ten years (the tax point in a life interest trust will be the death of the life tenant) or in the case of an individual owning shares in the offshore close company inheritance tax will apply on a gift of those shares or on death.

1. Does the company own other assets so that a liquidation might not be advantageous?

For example, it owns UK quoted stocks and shares that will continue to be sheltered from UK inheritance tax through the use of the offshore close company.

1. Is there any point in maintaining the trust? Generally speaking the answer to this will be ‘yes’ as the rationale for the trust was probably to effect a succession plan rather than for any other purpose.
2. There may be some concern as to liquidity in the structure to provide for tax going forward which may require a sale of the property. In addition to UK residential property, any loans made or security provided in respect of UK residential property will also be treated as UK situs assets and brought into the UK inheritance tax regime.

Anti-avoidance measures

The new legislation will include anti-avoidance measures enabling HMRC to disregard actions taken where it can be proved that the main purpose of the action is to avoid or mitigate a charge to inheritance tax on UK residential property.

Every case will be different and have its considerations, so a review is essential as the date for the implementation of these changes approaches and time is running short. The difficulty for advisers, of course, is that they do not have a complete picture of what the legislation will say which makes planning difficult. Nonetheless, settlors and beneficiaries should take proper tax advice if they have not already done so

Capital gains tax - Trusts

Do the new proposals relate solely to inheritance tax?  Sadly the answer is ‘no’. Other changes relating to capital gains tax are also proposed.

The application of S86 Taxation of Chargeable Gains Act 1992 (TCGA) may catch foreign settlors who become UK-deemed domiciled under the new 15/20 year rule.

The trust may become tainted by additions of capital to the settlement by such deemed domiciled persons. Contributions to the trust to cover trustee expenses are exempted.

S87 TCGA may also come into play taxing the settlor if resident in the UK where payments are made to a spouse or minor child who may be non-resident or UK resident claiming the remittance basis of taxation.

If you have been in the UK for 15 years but were not born in the UK, this proposed change will affect you.

Capital Gains Tax Pooling

The matching provisions relating to capital gains pools maintained by trustees whereby distributions to non-resident beneficiaries effectively “washed out” those historic gains are being changed.

With effect from 6th April 2017 distributions to non-resident beneficiaries will no longer be matched with the capital gains pool within the trust. This may have consequences for some trusts.

Settlors and beneficiaries may want clarity on the historic pooling from their trustee. Louvre would look to work with our client’s chosen tax advisors to bring clarity for settlors and beneficiaries alike.

Changes which apply to individuals

There are of course a whole host of changes that apply to individuals in the context of the changes to inheritance tax and capital gains tax laws coming in on 5th April 2017.

So non-residents intending to become UK resident, non-domiciled UK resident individuals and non-residents owning UK situs assets should all seek professional tax advice to see how the new tax rules may affect them.

Louvre Group is looking to work with its clients and their tax advisers to help them understand the changes proposed so that they can take informed decisions as to how best organise their affairs. Get in touch to find out more.