Government delays anti-recycling rules for non doms until 2018
An overhaul of the tax status for non doms with overseas trusts will see the loss of trust protection over certain property transaction into trusts but the government has delayed anti-recycling rules which would have stopped UK resident beneficiaries from receiving trust monies tax free via an indirect distribution and onward gift, reports Sara White
29 Mar 2017
This was one of a number of measures affecting non doms, originally expected to come into force from the new 2017/18 tax year. Now the anti-cycling rules are unlikely to come into force April 2018 at the earliest.
The core measures will go ahead so non doms resident in the UK for 15 out of 20 years (the 15/20 test) will be deemed domiciled for all UK taxes, along with ‘returners’ with a UK domicile of origin, from April 2017.
The government’s technical briefing on overseas trusts in connection with the changes to the taxation of foreign domiciliaries was issued a day after the release of Finance Bill 2017 on 20 March.
The decision offers some respite to non doms as the government has delayed a number of measures expected to come into force from the new tax year on 6 April.
Alison Palmer, director at Mercer & Hole said: ‘The measures being delayed include the prevention of capital gains being “washed out” to non-resident beneficiaries, “anti-recycling rules” which would put stop UK resident beneficiaries from receiving trust monies tax free via an indirect distribution and onward gift, and the attribution of trust level income and capital gains to a settlor in circumstances where a close family member receives benefits without being subject to UK tax.
‘For many this will be a welcome delay as it may not only avoid having to rush through transactions but hopefully will also ensure the eventual legislation is fit for purpose. ‘
The government plans to introduce these measures in a later, but so far unspecified Finance Bill, so arguably this could be firmed up by the Autumn Budget legislation release.
Palmer added: ‘Whilst it remains uncertain which Finance Bill the further provisions will be contained in, it is likely to be next year in which case they will be expected to apply from 6 April 2018.
‘Assurance has been given that it is not the government’s intention to make the rules retrospective as this would be contrary to practice. However, the final say will rest with the Treasury ministers and for this reason some trustees and beneficiaries may decide to press on with pre-emptive planning this side of 6 April 2017 as intended.’
Measures effective 6 April 2017
The following measures will go ahead as planned and will be effective from 6 April 2017.
From April 2017, non doms resident in the UK for 15 out of 20 years under the 15/20 test will be deemed domiciled for all UK taxes, along with ‘returners’ with a UK domicile of origin.
The government has confirmed that there will also be provisions to ensure that income and gains arising in overseas trusts created by foreign domiciled persons before they become deemed domiciled under the 15/20 test will not be taxed if they are retained in the trust or its underlying entities.
The draft legislation on the trust tax changes wasconsulted on after Autumn Statement 2016 but due to the complexity of the proposals, the government has admitted that it will not publish the full legislation in Finance Bill 2017 as originally envisaged.
The following measures will go ahead as planned in Finance Bill 2017.
Amendment to capital gains tax legislation
Changes have been made to the provisions about additions of property to a trust which will lead to a loss of trust protections (tainting rules) as per Taxation of Chargeable Gains Act 1992 (TCGA 1992) Condition D paragraph 5A(5) of Schedule 5.
These provide that tainting will occur when property is added to the trust by the settlor or a settlement connected with the settlor at a time when they are domiciled or deemed domiciled in the UK and that additions of value will be treated in the same way as additions of property.
There are also specific rules dealing with the treatment of on demand loans including a grace period for those outstanding at 6 April 2017.
Amendments to transfer of assets legislation
Where any tax for which the settlor is liable under the close family member rule, the settlor is entitled to recover the amount of tax paid from the individual only and not the settlor. In addition, there are provisions to prevent double charges where the settlor has been taxed on a benefit received by a beneficiary post 6 April 2017.
The HMRC guidance, Non-domicile taxation: technical briefing on overseas trusts, provides information on the provisions for overseas trusts published in the Finance Bill on 20 March 2017. It also includes a summary of the provisions which have been omitted from the Bill but which are intended to be included in a future Bill.
What's been delayed - technical measures in brief
The following aspects of the reforms to non dom rules have been delayed and will be included in a future Finance Bill. These include:
Capital Gains Tax TCGA Schedule 5
- disregard of section 87 capital payments to non-residents
- disregard of s87 capital payments to migrating beneficiaries
- transfer of s87 benefits charge to the settlor where the beneficiary is a close family member of the settlor and is not liable to capital gains tax (CGT) on the payment
- attribution of gains to recipients of onward gifts (recycling rule)
Chapter 5 of Part 5 of ITTOIA (Settlements)
- benefits charge for settlor and close family members of settlor
- benefits charge on settlor when beneficiary is close family member and is not taxable on the benefit
- attribution of deemed income to recipients of onward gifts (recycling rule)
Chapter 2 of Part 13 of ITA 2007 (Transfer of Assets Abroad)
- attribution of deemed income to recipient of onward gift (recycling rule)