Wednesday, 3 August, 2016

Planning for the Unknown

The UK Government announced in Budget 2016 that the changes to the taxation of non-doms, which were originally due to be introduced in stages over 2016 and 2017, would now be legislated for in one go, in the Finance Bill 2017. Two of the key reforms are:

  1. Those domiciled outside of the UK will be deemed-domiciled for income, capital gains and inheritance tax purposes from 6 April 2017 if they have been resident in the UK for at least 15 of the last 20 years or if they were born in the UK with a UK domicile of origin and are resident in the UK in a particular tax year.
  2. Non-dom settlors who settle non-UK resident trusts before becoming deemed-domiciled will not be taxed on trust income and gains that are retained in the trust which suggests non-UK resident trusts could still offer considerable planning opportunities.

The 2016 Budget indicated that non-doms who become deemed-domiciled from 6 April 2017 will be able to rebase non-UK assets to their market value at that date and transitional provisions will be introduced to provide certainty on how amounts remitted to the UK will be taxed.

The entire industry has been waiting for further details on how non-UK resident trusts will be taxed. 

Since the UK people voted to leave the EU the UK Government is likely to have other priorities.  It is not clear when details of the reforms to the taxation of non-UK resident trusts will be published or whether the changes will be postponed. On the other hand, there is significant concern that the legislation may be rushed through towards the year end, which would place advisors, clients and trustees under considerable time pressure to put in place the appropriate structures for their clients. 

A Potential Solution - A Pilot Trust

A Pilot Trust is usually set up during the lifetime of an individual and it remains “dormant” until such time as it received funds and/or property upon their death. A Pilot Trust could be used in a similar way to plan for the unexpected and unknown, such as the uncertainty of any UK legislation in the wake of Brexit. A key step in creating a Pilot Trust is setting up a bank account and ensuring that all the necessary compliance is completed so that the trust can receive funds at short notice.

We are all aware of the time it can take to complete due diligence and take on processes when forming a new offshore structure. With the uncertainties outlined above, there is a real concern that any final announcement in relation to the details and implementation of the proposed legislation could leave advisors and their clients with insufficient time to implement any appropriate solutions before the year end.

It may prove to be a useful insurance for high net worth clients wishing to plan in advance to settle a Pilot Trust with a nominal sum, which would then be in place to receive the client’s property, immediately, once the implications and timings of the proposed new rules are known. Should the client’s advisors recommend that underlying SPVs are formed beneath the trust, this can also be implemented quickly as the due diligence and take on process has already been completed.

Please contact Steve or Paul for further information.

 

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