Non-dom reforms: protected trusts and non-reporting funds - a survey for completion by offshore trustees
UPDATE (2 November 2018)
Thank you to all those who completed the survey or passed on the details. The survey findings were presented to HMRC.
However there were no changes announced at the Budget and HMRC have provided this statement:
“A decision has been made not to amend the current legislation to include income arising in offshore non-reporting funds in the foreign trust exemptions at this time.
The current demands placed on Parliamentary resource make it difficult for the government to justify returning to the legislation at this time to add to the generous package of protections which the government has already legislated for in the extensive reform of the non-dom rules last year.
Going forward, HMRC will continue to monitor this situation and engage with stakeholders."
In the Summer Budget 2015 the government proposed a series of changes to the regime for the taxation of foreign domiciliaries. Long term resident foreign domiciliaries were to be taxed as deemed UK domiciliaries but special trust protections were promised with it being stated that: “Non doms who have set up an offshore trust before they become deemed domiciled here under the 15 year rule will not be taxed on trust income and gains that are retained in the trust…”
However, a change to regulation 19 of the Offshore Funds (Tax) Regulations 2009 has not been made so gains realised on nonreporting funds held within otherwise protected trusts are not protected (see the technical detail below). If the change is not made (retrospective to 6 April 2017), contrary to the government’s policy intent long term resident foreign domiciliaries will be taxed on offshore income gains even though such gains are retained in the trust.
Evidence is required as to the scale of the problem.
Offshore trustees are, therefore, asked to complete a brief survey to indicate approximately how many Protected Trusts that have investment portfolios hold non-reporting funds. Please pass on the link to the survey to affected offshore trustees and other relevant contacts so that the maximum possible number of professional trustees complete the survey.
Responding to the survey
Only offshore trustees should respond to the survey and each professional trustee should only respond once. The survey will allow the professional bodies to provide figures demonstrating the scale of the problem. It should not take long to complete.
Finance (No 2) Act 2017, Sch 8, Part 1 introduced the concept of deemed domicile for the purposes of the Remittance Basis. There are two categories of deemed domiciliary:
- UK resident foreign domiciliaries who were born in the UK with a UK domicile of origin - referred to as formerly domiciled residents (FDRs); and
- a UK resident foreign domiciliary who has been UK resident in at least 15 of the immediately preceding 20 tax years – referred to as long-term residents (LTRs).
Provided the specified conditions are met a LTR (who is not also an FDR) can benefit from the trust protections introduced in Finance (No 2) Act 2017, Sch 8, Part 2. The trust protections extend the ITA 2007, s 731 benefits charge to protected foreign source income (PFSI).
The PFSI definition
ITA 2007 section 721A(3(a) defines ‘protected foreign-source income’ as income that would be relevant foreign income if it were the individual’s.
The current offshore income gains problem
The problem is that Regulation 19 of the Offshore Funds (Tax) Regulations 2009 states that offshore income gains (gains on the disposal on non-reporting funds) will only qualify as relevant foreign income of the individual if:
- the remittance basis applies to an individual for a tax year; and
- the individual is not domiciled in the UK in that year.
An LTR cannot access the remittance basis so offshore income gains are not relevant foreign income for LTRs. As such, they also do not come within the PFSI definition in section 721A. As discussed, this means the trust protections do not apply to these offshore income gains. As a corollary of this, the normal transfer of assets abroad rules in section 720, ITA 2007 will apply to offshore income gains so that LTR settlors who can benefit from their trusts will be taxable on offshore income gains as they arise even in cases where the settlor does not receive any distributions or benefits In kind from the trust.