Offshore trusts, domicile status and remittances basis

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Video transcript:

A whole slew of new legislation came into effect on the 6th April last year which affects many of our non-dom clients. In particularly, the remittance basis of taxation for those who have been resident here for 15 out of the last 20 tax years will no longer apply. This is a big change.

Previously, those non-doms were only taxable on their UK source income and capital gains and any remittances obviously. Going forward, they will be taxable on their worldwide income and capital gains.

However, it’s not all bad news. Two new reliefs have been introduced into the legislation, known as rebasing and cleansing. Broadly speaking, rebasing refers to the way we’re going to calculate the capital gain on assets that were held on 5th April 2017. Instead of calculating the gain on the original date of acquisition and the original cost, we’re going to take the date of acquisition as being 5th April 2017 and the market value at that time.

Separately, cleansing refers to the unbundling or untangling of different elements of funds within a bank account. Often, non-doms will have a bank account which contains income, capital gains, clean capital etc. Under the existing rules up to last year, those elements were purely combined and could not just be unbundled and untangled for whatever purpose. Under cleansing, we can do this and therefore we can access the valuable clean capital which can be remitted tax free.

If  you think about it, we can combine the rebasing and the cleansing. So if I have an asset that has been rebased, I then sell that asset to create the cash and that will be a mixed fund in itself. I can then apply the cleansing rules to that cash to access that clean tax-free uplift that the rebasing has given me.

For those who are beneficiaries of offshore trusts the new rules have broadly simplified how I’m going to be taxed on a distribution, which is good news. The bad news is that residential property interests held by offshore structures are now within that charge to inheritance tax, where previously they could have been excluded. So there are some issues to watch out with there.

Trusts remain an appropriate vehicle for many of our non-dom clients, but for others they will need to look at alternative options to find the most suitable vehicle for them for their long term needs.

We at RSM are experienced in advising non-doms, whether deemed dom or not. We can help you navigate through the legislation and make sure you do not fall into any inadvertent traps, but also take advantage of those many reliefs that I have talked about. If you would like to take advice, please feel free to contact us.