Tax Planning for UK Resident Non-Domiciles
Advance thinking will save you tax.
We started the 2020/21 tax year with the UK in lock down as the COVID-19 pandemic spread throughout the globe. This is affecting all aspects of our lives and how we manage our affairs. For some, the disruption to international travel and illness and death of close relatives has meant the best laid plans have been derailed. However, time does not stand still, and this is the moment to look forward and reassess matters for the current tax year to secure tax efficiency.
Planning ideas for 2020/21 for UK resident Non-Domiciles (Non-doms)
The following is a list of planning ideas for UK resident Non-doms for 2020/21:
Stuck in the UK due to COVID-19
For resident Non-doms who are not yet deemed domiciled (resident in the UK for 15 out of the previous 20 years) keeping an accurate count of tax years of UK residence is vital. This is because a Non-dom claiming the remittance basis will pay the £30,000 levy after being resident for seven out of the previous nine years and £60,000 once resident for twelve out of the previous fourteen years. Some Non-doms plan their affairs to leave the UK and become non-resident before paying the remittance levy or becoming deemed domiciled.
If you are a resident Non-dom and had planned to leave the UK before 5 April 2020 to avoid either the £30,000, £60,000 or becoming deemed domiciled in 2020/21 your plans may have been derailed if you were unable to leave the UK as planned. However, all may not be lost as it may still be possible to achieve non-UK residence under the Statutory Residence Test (SRT) for the entire 2020/21 tax year. Much will depend on your own circumstances and almost certainly you will need to leave the UK at the earliest opportunity when travel restrictions are lifted. Some of the days spent in the UK from 6 April 2020 may count as exceptional days and not be included in your 2020/21 day count following HMRC’s March announcement (now in HMRC manual RDRM11005):
The coronavirus (COVID-19) pandemic may impact your ability to move freely to and from the UK or, require you to remain unexpectedly in the UK. Whether days spent in the UK can be disregarded due to exceptional circumstances will always depend on the facts and circumstances of each individual case.
However, if you:
- are quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus,
- find yourself advised by official Government advice not to travel from the UK as a result of the virus,
- are unable to leave the UK as a result of the closure of international borders, or
- are asked by your employer to return to the UK temporarily as a result of the virus,
the circumstances are considered as exceptional.
Exceptional circumstances do not apply to every part of the SRT and an early review of your circumstances this tax year is crucial to establish the next steps to achieve tax minimisation.
Working on COVID-19 related activities in the UK
Some people have come to the UK to help with the fight against COVID-19. This potentially has an impact on their own UK residence status. The government have recognised this and given the extraordinary circumstances The Chancellor, Rishi Sunak, wrote to Rt Hon Mel Stride, Chair Treasury Committee on 9 April 2020 as follows:
“We welcome the expertise and resource from those who wish to come to the UK to combat COVID-19, from anaesthetists through to engineers working on ventilator design and production. Under normal circumstances, the actions and presence of these individuals in the UK could affect their own tax residence status, potentially bringing their global earnings within the purview of UK taxation.
We will amend the Statutory Residence Test (SRT) to ensure that any period(s) between 1 March and 1 June 2020 spent in the UK by individuals working on COVID-19 related activities will not count towards the residence tests. It is right that these changes are time limited and only support those people whose skillsets are currently required. The qualifying criteria will therefore be designed so that the relaxation of the rules is tightly targeted, minimising the risk of abuse. We will also keep the duration of this measure under review as the situation develops, in line with the other support already provided.”
The above change is to be legislated in the forthcoming Finance Bill to take effect from 1 March 2020.
IHT- Death of a UK domicile or deemed domicile spouse/civil partner where you are non-UK domicile
Tragically there have been many deaths globally due to COVID-19. The scenario of a UK domicile or deemed domicile spouse/civil partner leaving their estate to their Non-dom spouse/civil partner creates particular inheritance tax (IHT) difficulties. This is because in these circumstances the IHT spouse/civil partner exemption is restricted to £325,000 rather than being unlimited in amount. This restriction in the exemption may create an untimely and expensive IHT charge. There are also complex issues if lifetime gifts have been made by the deceased to the surviving spouse or others within seven years of death.
There is, fortunately, a solution to this problem. An election can be made within two years of the death by the Non-dom spouse/civil partner to treat the surviving spouse/civil partner as UK domiciled for IHT purposes so that a full spouse exemption is available. IHT on the death is then avoided where the estate is left to the surviving spouse. The election can be made from the date of death or up to seven years before the death. However, such an election is irrevocable and brings the (Non-dom) person’s worldwide estate into the scope of IHT. The election also has an impact on gifts of foreign assets by the surviving spouse after the election has been made. Such gifts become potentially exempt transfers and may be liable to IHT if the donor dies within seven years of the gift. Additionally, depending on the election date chosen, it may also have an impact on excluded asset trusts previously having been settled by the Non-dom.
The election only ceases once the person who elected has been non-resident for four successive tax years after the tax year of the election.
Given these complexities it is essential that a full review of all relevant IHT matters is undertaken in advance of making the election and specialist professional advice is taken.
Wills and powers of attorney
COVID-19 has highlighted the need for everyone to have wills and that these are reviewed regularly. The importance of having powers of attorney in place has also been brought into sharp focus.
With the turmoil in the financial markets, listed companies cancelling or reducing dividend payments, and falling interest rates it may be that the level of income and gains generated in the UK which you rely on for your living costs will be much reduced in 2020/21. Your capital in the UK may also be running low. You may therefore need to make remittances to the UK to supplement your UK income. Non-doms need to carefully consider their overseas funds and plan from which sources to remit. Remittances from clean capital will not give rise to a UK tax charge but remittances from sources of untaxed income and gains will give rise to UK tax charges.
If you are a remittance basis user looking to invest by way of shares or a loan to a UK unquoted trading company from mixed funds overseas, then Business Investment Relief (BIR) should be considered to avoid remittances being taxable. There are various rules to be met so professional advice should always be taken before relying on BIR. A claim must be made in your self-assessment tax return by the first anniversary of 31 January following the tax year that the investment is made. BIR is available if the investment is in Enterprise Investment Scheme or Seed Enterprise Investment Scheme qualifying companies which gives the investor valuable UK income tax and capital gains tax relief.
Planning tax payments – 31 July 2020 payment and tax credits
If you are due to make a second payment on account of tax under self-assessment for 2019/20 on 31 July 2020, HMRC have announced that because of COVID-19 this can be deferred to 31 January 2021. If payment is deferred it will mean a larger payment than normal is due as at 31 January 2021. However, interest and penalties should not apply.
Some Non-dom remittance basis users, such as US citizens, have to declare their worldwide income and gains, and continue to pay tax in another tax jurisdiction. If you are in this position, remittances and UK tax payments should be managed throughout 2020/21. The timing of tax payments in the UK will be important to ensure tax credits are available at the earliest opportunity to minimise double taxation.
Nominated income or gains
Non-doms paying the remittance basis levy of £30,000 or £60,000 will be familiar with the requirement to nominate overseas income or gains and give these details on their Tax Return. Due to the complexity of the rules surrounding nominated accounts many Non-doms have a ring-fenced overseas bank account just for this purpose which earns interest on an annual basis. With a fall in interest rates due to the COVID-19 pandemic many accounts no longer pay interest or only a nominal rate. This needs to be reviewed with your bankers to generate interest on the account or an alternative nominated source needs to be earmarked for 2020/21.
IHT- Excluded asset trusts
A non-resident offshore trust can be tax advantageous when settled by a person who is neither UK domiciled nor deemed UK domiciled (ie has not been UK resident for fifteen out of the past twenty years) and holds foreign assets. These trusts are generally known as excluded asset trusts. One of the principal advantages of an excluded asset trust is that once assets are in the offshore trust they are generally outside of IHT even if the settlor becomes UK domiciled or deemed domiciled at a later date. There is also IHT protection after the Non-domiciled settlor’s death. There are many UK and overseas tax and non-tax considerations to be thought about before an excluded asset trust is set up and the timing is important. COVID-19 has shown how deaths can happen unexpectedly and protection through excluded asset trusts has been thrown into the spotlight. Specialist tax and legal advice should always be taken in relation to all aspects of setting up and maintaining excluded asset trusts.
De-enveloping residential property from offshore companies
There are still many UK residential properties held in offshore structures which were set up originally by Non-doms as an IHT shelter. Changes in legislation have meant that the IHT benefits of holding UK residential property through an offshore company or offshore company/offshore trust structure no longer apply. Annual Tax on Enveloped Dwellings (ATED) tax is also payable if the property is worth more than £500,000, is not let commercially to third parties and is used or available to the beneficial owners/connected parties. A review now is worthwhile especially if you have occupied the property as a UK resident Non-dom and expect to be non-UK resident for 2020/21 and future years.
What happens next?
If you would like to discuss any of the above points in further detail, please speak with your usual Baldwins contact.