April 2017 changes to the UK’s taxation of long-term resident, non-domiciled individuals

Update on discussions relating to the treatment of trusts

Following the consultation paper issued on 19 August 2016, members of STEP’s UK Technical Committee have been closely involved in discussions with HM Treasury and HM Revenue & Customs in relation to the latest proposals.

The most difficult area is the treatment of offshore trusts set up by non-domiciliaries who become deemed domiciled in the UK as a result of having lived there for 15 years in a 20 year period.

When the changes were announced in the July 2015 budget, much was made of the fact that assets held in trust would be protected from inheritance tax, capital gains tax and income tax (other than in relation to UK source income which would continue to be taxed as it arises). A deemed domiciled settlor would only be taxable on benefits received from the structure or conferred on close family members.

One significant surprise in the August consultation paper therefore was a proposal that a deemed domiciled settlor would be taxed on all of the gains of an offshore trust once the settlor or a close family member has received any benefit from the trust – ie the receipt of the benefit would mean that the capital gains tax protections would be lost for the future.

As part of the consultation discussions, a paper has been prepared by a barrister with input from colleagues from various representative bodies including STEP. The paper is very much in draft form but sets out a potential alternative approach to legislating the trust protections. A copy of the paper can be found below.

We have been asked to make it absolutely clear that the paper was not commissioned by HMRC or HMT. Nor does it represent an approach to trusts preferred either by HMT, HMRC or the government. The paper was prepared to facilitate discussion at a consultation meeting between HMRC/HMT and various representative bodies to consider alternative approaches to how it is best to legislate the protections and it should be read in that context.

Having said this, it is important that STEP members are aware that alternative proposals are being put forward and discussed and that the final proposals may well be different to those made in the 19 August 2016 consultation paper.

We are expecting the government’s position to be announced as part of the Autumn Statement on 23 November 2016 with draft legislation being available by 5 December as part of the draft Finance Bill.

 

STEP UK Technical Committee

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