In a consultation paper released on Wednesday, the Treasury said it wanted to continue offering protection from British taxes for individuals who set up an offshore trust before they were granted UK-domicile status.
“Wealthy families […] will find it very punitive and administratively burdensome to have to recreate sufficient history of the transactions that may have taken place in the trust,” the paper reads.
However, the Treasury said once an individual gains UK domicile status, they will have to pay tax on benefits they receive from an offshore trust, as well as any underlying entities.
Taxable regardless
“It will no longer be relevant whether a benefit is received in the UK or overseas, because the value of that benefit will be treated as taxable regardless,” it said.
In the Summer Budget, Chancellor George Osborne revealed the government’s plans to axe permanent non-dom status in a bid to raise £1.5bn in tax.
Abolishing this status means an individual who is resident in the UK for 15 out of 20 years – as opposed to the current 17 years – will be subject to UK tax on their income and capital gains.
IHT tail
The government also plans to double the amount of time it takes for a individual to be classed as non-domiciled after leaving the country, increasing the three-year inheritance tax tail to at least six years.
This means a UK-domicile individual will be liable to pay IHT on their worldwide assets up to six years after leaving the UK.
The new rules are set to come into force in 2017.
Tougher stance
These proposals also target UK-born citizens who emigrate overseas and then return to the UK, meaning UK-domiciles who puts money into an excluded property trust will be liable to British tax on their assets if they return to the British Isles.
“The new proposals demonstrate the government is taking a tougher stance both on non-domiciles and on UK expats returning to the UK,” said Gordon Andrews, financial planning expert at Old Mutual Wealth.
“Those born in the UK, but have been domiciled in another country, need to ensure they seek financial advice before they return to the UK.”
“Trusts, such as discounted gift trusts and loan trusts, could now be much more effective than excluded property trusts.”
Unhelpfully brief
Partner at accountancy firm Moore Stephens, Gill Smith, suggested the consultation paper is “unhelpfully short on detail”.
“This lack of clarity does not do enough to reassure high net worth individuals who may be considering leaving the UK. There are very complex issues to be addressed that are simply not covered, or painted in extremely broad brush strokes.
“The proposed changes impact on numerous areas of the non-dom rules and it is clear these have not all been considered,” she said, before suggesting there is a risk that an “already extremely complicated area of tax legislation” will get worse.
