Tax Treatment of Non-UK Domiciled Persons
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Reforms to the tax treatment of non-UK domiciled persons The use of overseas Trusts for non-UK domiciled persons The use of non-Trust solutions for former UK domiciles and UK persons Reforms to IHT on UK residential property held through overseas companies London 23 rd February 2017, The Grange Wellington Hotel CONFIDENTIAL | Copyright @ 2016 Sovereign Group All Rights Reserved By Simon Denton, Managing Director and Laurence Lancaster, Director and Tax Counsel of Sovereign Group Sovereign (UK) Limited 1
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Transcript of Tax Treatment of Non-UK Domiciled Persons
Reforms to the tax treatment of non-UK domiciled persons
The use of overseas Trusts for non-UK domiciled persons
The use of non-Trust solutions for former UK domiciles and UK persons
Reforms to IHT on UK residential property held through overseas companies
London 23rd February 2017, The Grange Wellington Hotel
CONFIDENTIAL | Copyright @ 2016 Sovereign Group All Rights Reserved
By Simon Denton, Managing Director and
Laurence Lancaster, Director and Tax Counsel of Sovereign Group
Sovereign (UK) Limited
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Part 1 - Reforms to the tax treatment of non-UK domiciles and the new deemed domicile rules. Compliant strategies for non-UK domiciles and those exposed to the new domicile rules.
Part 2 - The use of overseas trusts for non-UK domiciled persons. Presenting case studies and practical solutions relevant to this "new era”.
Part 3 - The use of non-trust solutions including international pension arrangements for type 2 non-UK doms who are likely to return to the UK.
Part 4 - Reforms to IHT on UK residential property held through overseas companies. Also featuring case studies for the purchase of a main residence, a buy-to-let acquisition, a commercial property purchase and development property in the UK.
Contents
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Part 1 - Reforms to the tax treatment of non-UK domiciles and
new deemed domicile rules
Foreign domicile of origin – Type 1
• IHT deemed domiciled rules have been extended to cover Income Tax and
Capital Gains Tax
• The 17 out of 20 years of UK residence rule has been replaced by a 15 out of 20
year rule, effective from April 6th 2017
• Remittance basis will no longer be available from 16th year of tax residence
onwards.
Foreign domicile of choice but born in the UK – Type 2
• Persons returning to the UK will be deemed UK domiciled after 1 UK fiscal year
• For Income Tax and Capital Gains Tax they will be deemed domiciled in the tax year of return; therefore worldwide income and gains will be subject to UK taxation.
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Non-UK domicile reforms
Period of UK
residence
Taxation
0-7 years No UK tax on overseas income and gains not remitted to the UK and no UK IHT on overseas assets. The taxpayer should still claim the Remittance Basis on their tax return.
8-12 years Option to pay annual Remittance Basis Tax Charge (RBC) of £30,000 to prevent overseas income and gains being subject to UK taxation, unless remitted. No IHT on worldwide assets.
13-17 years – soon to become 15 years
RBC increases to £60,000 and then £90,000 for persons residing in the UK for +17 years but only relevant for this UK fiscal year.
15 years – from April2017
From 2017 non-UK doms will not be able to claim the remittance basis. Worldwide income and gains will be subject to UK taxation.
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Part 2 - The use of overseas trusts for non-UK domiciled persons.
Gross Roll-Up Trust (GRUT)
A GRUT can be established whilst the non-UK domiciled person is UK
resident (up to and including 15 years out of 20) provided that the settlor is
claiming the remittance basis in the year of overseas trust establishment
• Overseas assets to be settled to the overseas trust
• The settlor should establish a discretionary trust
• The settlor can be a beneficiary
Tax treatment
• Upon establishment, no Capital Gains Tax (CGT) should be on point come the settlement of assets
• No lifetime Inheritance Tax (IHT) and no IHT should be payable come the settlor demise
Ongoing benefits
• Overseas income arising will not be taxed on the settlor (assuming not distributed)
• Overseas gains arising will not be taxed on the settlor (assuming not distributed)
• No IHT will be liable on the settlor’s death even if the settlor is a beneficiary
• For major benefits to continue, the settlor, if possible, should not receive a trustee distribution whilst UK resident
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Gross Roll - Up Trust (GRUT) – Illustration 1
Overseas Discretionary Trust
Sovereign - Trustees
Settlor Settles non-UK
cash at bank and other assets
• Settlor• Spouse • Children • Other
Beneficiaries
Cash at bank
Funds
Portfolio; Investments
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FX
Optional overseas company
• Potential for succession planning and asset protection
Extraction Trust
Basic elements
• An overseas Interest in Possession Trust under which the settlor can be a main beneficiary, however, income will be taxed on the settlor on an arising basis
• Highly relevant to establish underlying UK corporate start-ups and assets of a UK situs that could be owned by a UK company
• All underlying assets, as well as assets owned by a UK company will not be subject to UK IHT on settlor’s demise
• Distribution of dividends from a UK company and through to the beneficiaries of the Trust will only be subject to UK Income Tax at UK dividend tax rates
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Extraction trust – Illustration 28
Overseas Interest in
Possession Trust
Settlor settles non UK assets into an overseas IIPT. UK assets must be transferred into an offshore company before settled into a trust
Sovereign - Trustees
• Settlor • Family• Other
Beneficiaries
Share capital contribution
Overseas Holding Company
Dividend payment
Share capital contribution
UK Company
Dividend payment and no dividend taxation
ConsultancyTrading in goods and services Commission receiving
Part 3 - The use of non-trust solutions including international pension
arrangements for type 2 non-UK doms who are likely to return to the UK
Qualifying Non-UK Pension Schemes (QNUPS) planning
• Establish a QNUPS in the preceding UK fiscal year by using foreign assets and cash to purchase a
pension.
• A contribution to the trustees of a QNUPS should be tax neutral.
• Gross roll-up to be enjoyed in respect of foreign income and gains upon resumption of UK residence
• Maltese QNUPS benefit from being established in an EU member State and therefore potentially fall
within EU treaty protection.
• The minimum retirement age is age 50 in Malta and the pension must be crystallised before age 75
• Contributions to QNUPS are not tested against the annual allowance, benefits are not tested against
the lifetime allowance.
• QNUPS benefit from relief from inheritance tax (IHT). Despite being a trust, a QNUPS is not subject to
the 10 yearly charge; the fund should not fall within the member's estate on death, provided the
QNUPS has been set up and managed prudently. QNUPS are outside the scope of the Annual Tax On
Enveloped Dwellings (ATED), so potential for residential property investment.
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QNUPS planning - Illustration 3
Maltese QNUPSClient transfer overseas cash and other non-UK investments to QNUPS
CLIENT - QNUPS MEMBER
SpouseChildrenOthers
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Sovereign - Malta - Trustees
QNUPS Beneficiaries
Cash at bank
Investment management
Financial instruments
UK and overseas real estate
Underlying overseas investment and trading companies
Part 4 + Reforms to IHT on UK property held through overseas companies
Background• From 6 April 2017 new legislation will be introduced in the UK which is targeted at non-UK domiciled
individuals holding UK property through offshore structures.
• At present, a non-UK domiciled client is able to easily avoid UK IHT on their UK property by holding it through an overseas company.
Impact of the new measures• From 6 April 2017 all non UK domiciles holding UK residential property in overseas companies in
which they hold the shares or a beneficial interest will be subject to IHT at 40% on the value of the UK property on their death.
• It does not matter whether the company shares are held In an overseas Trust or Foundation. The property will be treated as belonging to the settlor/founder on death in most cases.
• Property held directly in overseas Trusts will also be affected where the IHT charge has been reduced by debt.
Options• There are various re-structuring options for company shares which, if taken before April, will mitigate
the effects of the new measures. Options include gifting the shares to children, or using the issued
shares to purchase a pension scheme.
• For properties held in trust consider carving up the Trust arrangement and excluding the settlor from the Trust to offer protection from IHT
• Planning options still exist for new property purchases, both investment properties and properties to be used by the client / family).
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Solutions - The Carve Out Trust - for a new acquisition
• Capital contributions settled by a non-UK domiciled settlor into an Interest in Possession Trust of which the settlor can be a lifetime beneficiary but excluded as a capital beneficiary.
• Spouse and children can be income and capital beneficiaries.
• The Settlor can contribute for example 50% of the purchase price and costs, with the balance provided by an international bank in terms of mortgage finance.
Tax analysis
• SDLT and the 3% surcharge will apply
• Main residence relief can be claimed and spread across different beneficiaries and in different tax years dependent on which beneficiary uses the property.
• The 10 yearly anniversary charge can be mitigated by finance used to fund the purchase and avoided completely if the property is sold before the 10th
year.
• No IHT on settlor’s death.
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The Carve Out Trust for a lifestyle/main UK residence purchase -
Illustration 4
Overseas Interest In Possession Trust
Sovereign Trust - Trustees
Non-UK domiciled Settlor (client) settles/transfers property deposit and costs, + £1M
• No lifetime inheritance tax (IHT)• No ATED• No CGT if main residence relief can be claimed• 10 yearly anniversary charge • No IHT come settlor or beneficiary demise
Bank funding, circa £1M
Beneficiaries• Client – Lifetime but
not a capital beneficiary
• Spouse
• Children• Others
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International Pension solutions for a buy-to-let residential real estate
investment
• Buy-to-let property or a portfolio of investment property to be acquired by an overseas company created by a non-UK domiciled person.
• The non-UK domiciled person purchases a Pension being a QNUPS that acquires the share capital of the overseas company.
Tax analysis
• No lifetime inheritance tax
• No ATED as the company will apply for the letting exemption
• No 10 yearly anniversary charge
• 20% tax on net rental income
• 20% CGT if real estate is sold for a profit
• No IHT on the demise of the settlor and member
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QNUPS and overseas company planning for a buy-to-let investment - Illustration 5
QNUPSQualifying Non-UK Pension Scheme
Offshore entity
Buy to let UK residential properties
Optional QNUPS for future IHT and retirement planning. Contribution of moderate capital from client to provide adequate cash at bank
• No lifetime IHT• ATED letting exemption• IHT planning if QNUPS is deployed• 20% tax on net rental income • Any gains from the sale of any property will be subject to tax at 20% and
indexation relief • No 10 yearly anniversary charge• Full deductibility of mortgage interest against income
Mortgage finance, circa 65% LTP
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Sovereign - Malta - Trustees
CLIENT, QNUPS MEMBER
SpouseChildrenOthers
QNUPS Beneficiaries
Emergency planning pre-April 6th 2017
• A non-UK domiciled person could establish an overseas discretionary
trust to acquire the share capital of a new overseas company for the
purposes of purchasing a buy-to-let property or portfolio but the
settlor will have to be an excluded beneficiary.
• Buy-to-let property will first be owned by the company with the issued
shared capital registered to the non-UK domicile person.
• The non-UK domiciled person settles the shares of the overseas
company into a discretionary Trust and prior to April 2017 but the
settlor would have to be an excluded beneficiary.
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Pre-April 6th 2017 planning for a buy-to-let investment
– Illustration 6
BVI or Isle of Man Company
Property deposit and costs, +35%
Mortgage finance, circa 65% LTP
Buy-to-let UK real estate
• No lifetime IHT • ATED exemption• 20% tax on net rental income • Any gains made from a property sale will be subject to tax at 20% • Deductibility of mortgage interest• 10 yearly anniversary charge applies from 6th April 2017• No IHT on the demise of the settlor and/or beneficiaries
Non-UK domiciled Settlor (client), an excluded beneficiary settles/transfers property deposit and costs
Beneficiaries (not the settlor) • Spouse • Children• Others
Sovereign Trust - Trustees
Overseas Discretionary Trust
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UK commercial property investment for a non-UK domiciled
client or a UK domiciled client – Illustration 7
IOM Co.
VAT
registered
• IOM VAT registration within 2 weeks
• An IOM company purchases commercial UK
property as a Transfer of Going Concern and
should NOT be exposed to VAT
• SDLT, progressive rates but maximum will be 5%
• Net rental income taxed at 20%
• Deductibility of mortgage finance permitted
• No ATED
• No 10 yearly anniversary charge
• No UK CGT on future sale
• No UK IHT
Client*
* Non-UK dom and non-UK res should set up a Trust and UK-dom could establish a QNUPS
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Mortgage finance, circa 65% LTP
The purchase of land for UK property development and sale
- Illustration 8
Optional overseas holding Company
UK Company
Investor/client
Contribution of capital
[Land purchase with planning, development and sale of all property units]
Optional Maltese or Cypriot Company
Loan Finance at circa 11% p.a.
Unsecured finance, circa 12% p.a.
• Loan interest paid by UK Company should be deductible against income• UK loan interest should NOT be subject to UK WHT but claim required• No ATED• Maltese company effective Corporation Tax (CT) 5%, Cypriot company CT at 12.5%• No Maltese or Cypriot withholding tax on loan interest and dividend payments• UK Company pays 20% CT on its net profits, reducing to 17% in 2020/21
Property deposit (35%) and costs
Mortgage finance,
circa 65% LTP
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Property Grid – A useful reference aid
Investment type Status of investor
Non-UK domiciledTax rate and advantages
Status of investor
UK domiciledTax rates and advantages
UK main residence,
Non main residence but not
rented
Personal ownership with
mortgage finance but review life
insurance. IIP trust with
mortgage finance
• 0% - 12% SDLT (+ 3% on second
property)
• No ATED but letting exemption
required
• Potential to mitigate UK IHT.
• No UK CGT if trust is used since
beneficiary with trustees might
be able to claim main
residence relief
• 10 Yearly charge if Trust is used
Personal ownership • 0% - 12% SDLT (+ 3% on
second property)
• No ATED
• No UK CGT on primary
residence
• Main residence nil rate
band
Buy-to-let
residential property
Offshore company owned by a
QNUPS conditional to other
investments held within the
structure, or by a Trust.
• 0% - 12% SDLT (+ 3% on second
property)
• No ATED but letting exemption
required
• Potential relief from UK IHT
• 20% Tax on net rental income
• Full deductibility of mortgage
interest
• 10 yearly anniversary charge if
Trust owns Company
Overseas company owned
by a QNUPS especially if
other assets are going to
be contributed into QNUPS
• 0% - 12% SDLT (+ 3% on
second property)
• No ATED but letting
exemption required
• Relief from UK IHT if QNUPS
is used
• 20% tax on net rental
income
• Full deductibility of
mortgage interest
Property development
with sole intention
to sell property units
UK company and CT at 20% will
apply
• No ATED
• Potential relief from UK IHT if
offshore entity with an optional
trust, or QNUPS is used
• 20% CT on net profits
UK company and CT at
20% will apply
• No ATED
UK commercial
property
Isle of Man company with
optional trust or other
arrangements.
• Maximum 5% SDLT
• No ATED but letting exemption
required
• No UK CGT
• No UK IHT
• 20% tax on net rental income
Isle of Man company
owned by QNUPS
especially if other assets
are to owned by QNUPS
• Maximum 5% SDLT
• No ATED
• No UK IHT if QNUPS is used
• 20% tax on net rental
income
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What you need to know about Sovereign
• Established in 1987, represented by over 450 employees located in 27 subsidiaries,having acquired 33 licences from international recognised regulators resulting inSovereign being one of the worlds largest and independent professional TrustCompanies and Corporate Services organisations.
• Head quartered in Hong Kong and fully active subsidiaries in Bahrain, Bahamas, BVI,China, Cyprus, Dubai, Gibraltar, Guernsey, Isle of Man, Malta, Mauritius, Portugal,Seychelles, Singapore, South Africa, Switzerland, TCI and the United Kingdom
• Trust establishment and professional Trustee services in Cyprus, Gibraltar, Grand Turk,Guernsey, Hong Kong, IOM, Malta, Mauritius and Singapore
• Private Trust Companies
• Onshore, mid-shore and offshore companies and full fiduciary services
• Experienced Investor Fund formation
• Maritime and aviation solutions
• Specialist insurance to include kidnap and ransom, emergency and evacuation,maritime, aviation and single insurance policies for multiple international homes
• International Pension Trustee Services
• Solutions for international market entry, corporate migration and the relocation ofcorporates to other countries and regions of the world namely China and otherSouth Asian countries, the UAE, the Gulf, the UK, other nations of the EU and Africa
• Structures and solutions for UK and overseas property investment
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For further information contact
Simon Denton, Managing Director
Laurence Lancaster, Group Tax Counsel
Ian Le Breton, Corporate Services Director
John Blake, Business Development Manager
Sovereign (UK) Limited
40 Craven Street
London
WC2N 5NG
T: 0207 389 0555
30 years servicing international clients made possible through 26 offices worldwide
The information contained in this presentation is not intended and does not constitute advice and Sovereign disclaims any liability or responsibility for the accuracy thereof.
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Bahamas
Tel: +1 242 322 5444
Bahrain
Tel: +973 17 1515 71
British Virgin Islands
Tel: +1 284 495 3232
Cayman Islands
Tel: +1 949 7555
China, Beijing
Tel: +86 10 6582 0268
China, Shanghai
Tel: +86 21 5211 0068
Curaçao
Tel: +599 9 465 2698
Cyprus
Tel: +357 25 733 440
DubaiTel: +971 4 270 [email protected]
GibraltarTel: +350 200 [email protected]
RegisterAnAircraft.comTel: +350 200 [email protected]
RegisterAYacht.comTel: +350 200 [email protected]
Sovereign Accounting Services (Gibraltar) LimitedTel: +350 200 [email protected]
Sovereign Asset Management LimitedTel: +350 200 [email protected]
Sovereign Insurance Services LimitedTel: +350 200 [email protected]
GuernseyTel: +44 1481 729 [email protected]
Hong KongTel: +852 2542 [email protected]
Isle of ManTel: +44 1624 699 [email protected]
MaltaTel: +356 21 228 [email protected]
MauritiusTel: +230 244 [email protected]
PortugalTel: +351 282 340 [email protected]
SeychellesTel: +248 4321 [email protected]
SingaporeTel: +65 6222 [email protected]
South Africa, Cape Town Tel: +27 21 418 [email protected]
South Africa, JohannesburgTel: +27 11 305 [email protected]
SwitzerlandTel: +41 21 971 [email protected]
Turks & Caicos IslandsTel: +1 649 946 [email protected]
United KingdomTel: +44 20 7389 [email protected]
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