What about the impact of the Finance Act 2017 on offshore trusts?
All clauses referring to non-UK domiciled individuals were temporarily dropped from the Financial Bill 2017 after the General Election was announced – primarily to ensure swift passing of the Finance Act 2017 before the election took place.
The second Finance Bill 2017, announced in July 2017, reinstated provisions that revised the definition of excluded property in relation to non-UK domiciled where the underlying assets in a structure is of UK residential property (and associated loans and collateral).
This means that where a non-UK domiciled individual held UK residential property and relied on the ‘excluded property’ rules (because it was held through a non-UK structure) then that property is brought in to their estate for inheritance tax purposes and subject to tax.
Where one is effected by this structure, or you are non-UK domiciled individual looking to structure such property, then one should look at holding the assets through a different vehicle.
The non-dom rules also introduced other changes for non-UK trusts that were established by persons that are effected by the new deemed domiciled rules – see below.
Protected status for trusts – Finance Bill 2017 changes for non-doms
Protected status is only available for an offshore trust created before a settlor becomes ‘deemed domiciled’.
Under the new Finance Bill provisions, the status of ‘deemed domicile’ is to be applied for tax purposes to individuals who have been resident in the UK for 15 out of the previous 20 years, providing protection from income tax, capital gains tax and inheritance tax for offshore trusts established before deemed domicile, unless those trusts are ‘tainted’ by additions.
‘Tainting’ will occur if an addition is made to the trust after the settlor has become deemed domiciled in the UK with some limited exceptions.
An addition by someone other than the deemed domiciled settlor will not taint the trust, but an addition from another trust (from which the settlor can benefit) will taint the trust.
Care must be taken with regard to making loans or appointments between trusts, as these may taint the trust and cause protected status to be lost. Protected status will be lost permanently where property or income is paid into the trust although property added as part of an arms-length transaction will not cause protected status to be lost.
Protected status only applies to offshore trusts and not to directly held offshore companies or directly held investments. Accordingly, those non-domiciled individuals who hold investments, whether personally or in offshore companies, and who become deemed domiciled on 6 April 2017, should consider whether assets will also form part of their estates for IHT purposes.
These provisions will apply in a number of cases and, in addition to reviewing existing corporate ownership of residential properties, individuals and trustees will also need to consider whether any existing loan arrangements may need to be examined.