Compared to recent UK Budgets, Autumn Budget 2018 contained few new measures of concern for private clients, although non-doms with excluded property trusts will be interested in the proposed ‘clarification’ of certain inheritance tax (IHT) rules for such trusts.
Excluded property trusts
A trust set up by a non-UK domiciled and not deemed domiciled individual (non-dom) which only holds non-UK assets will not, generally, be subject to UK inheritance tax (IHT). This is the case even if the individual (the settlor) subsequently becomes domiciled or deemed domiciled in the UK. Trusts of this type are often referred to as “excluded property trusts” as the non-UK assets held by the trust are excluded from the charge to IHT – that is, they are not subject to IHT on a 10 year anniversary of the trust, or on a distribution of the assets to beneficiaries.
However, any property added to an excluded property trust by the settlor once he has become UK domiciled or deemed domiciled will not be “excluded property” and so will not be protected from IHT. This has long been the case. However, the Court of Appeal decision in Barclays Wealth (Jersey) Limited v HMRC (2017), which considered these provisions, could be seen to have opened up the possibility of a settlor who has become UK deemed domiciled settling further property on an existing trust (set up before he became deemed domiciled) and that property being treated as excluded property. As a result legislation will be introduced to confirm that additions of property by UK domiciled (or deemed domiciled) individuals to trusts made when they were non-UK domiciled are not excluded property. The legislation will be introduced in Finance Bill 2019-2020 not the current Finance Bill.
Transfers of assets between trusts
Legislative amendments will also be made (in Finance Bill 2019-2020) to ensure that transfers between trusts will be subject to additional conditions for the transferred assets to qualify as excluded property. Barclays Wealth (Jersey) Limited v HMRC involved the transfer of assets between two trusts set up by the same settlor. The first trust had been set up at a time when the settlor was non-dom but the second trust was made at a time when the settlor had become UK deemed domiciled.
Currently, if non-UK assets are transferred from an excluded property trust (Trust 1) to another trust (Trust 2) the transferred assets will remain outside the charge to IHT in Trust 2 provided that the settlor of Trust 2 was also non-dom at the time Trust 2 was made and funded. This will be the case even if the settlor of either of the trusts has become domiciled or deemed domiciled in the UK by the time of the transfer of assets between the two trusts.
It is possible that new rules will provide that assets transferred between trusts will only be excluded property if:
- the settlor of the transferor trust was non-dom both at the time the trust was made and when the assets were transferred; and
- the settlor of the transferee trust was non-dom both at the time the trust was made and when the assets were transferred.
The details of the proposed changes will not be clear for some time – in the meantime:
- non-UK assets held in a trust established by a non-dom continue to be excluded property for IHT, even if the settlor subsequently becomes domiciled in the UK or deemed domiciled in the UK (there is no suggestion at this stage that this key benefit will be changed)
- once a non-dom has become UK deemed domiciled he should not make additions to any trust set up by him before he became UK deemed domiciled
- you should avoid transferring assets between trusts if the settlor of either of the trusts has become domiciled or deemed domiciled in the UK.
Taxation of property
Stamp duty land tax (SDLT)
Non-UK resident buyers of UK residential property will in future pay an additional 1% SDLT surcharge under proposals to be consulted on in January 2019. If introduced the surcharge will result in a maximum rate of SDLT of 16% for non-UK resident buyers of £1.5m+ residential properties.
Principal private residence relief (PPR relief)
Gains realised on the disposal of an individual’s house are, generally, exempt from CGT if the property has been his only or main residence throughout his period of ownership. Where a house has been an individual's only or main residence for only part of his period of ownership only a proportion of the gain will be exempt from CGT. However, currently, if a house has qualified as an individual’s only or main residence at some point during his period of ownership, the last 18 months of his period of ownership will always qualify for PPR relief such that the gain treated as arising during that period will be exempt from CGT. From April 2020 this final exempt period will be reduced from 18 months to 9 months.
Where PPR relief is restricted in relation to a house because the property has been rented out during an individual’s period of ownership an additional relief - ‘letting relief’ - may be available. Letting relief is available, provided that the property qualifies for PPR at some point during the individual's ownership.
The amount of the relief is the lower of:
- the amount of PPR available on the disposal of the property (i.e. the amount of PPR available, ignoring letting relief)
- the gain relating to the letting period
Letting relief will be restricted so that it will only be available where the owner is in shared occupation with the tenant.
Despite certain rumours no upper limit for the amount of gain that can be relieved under PPR relief was proposed.
It should be remembered that PPR relief may also be available if a house has been occupied as his only or main residence by a beneficiary under the terms of a settlement.
Annual Tax on Enveloped Dwellings (ATED)
ATED charges will rise by 2.4% from 1 April 2019.
The ATED is an annual charge on residential properties owned by companies, partnerships (with a corporate member) or collective investment schemes (UK or non-UK).
Previously announced measures
Budget 2018 also confirmed the measures set out below, which were announced last year.
Non-UK investors to pay capital gains tax on disposals of all UK property – including commercial property - and interests in property rich companies/entities
From April 2019, non-UK residents will be taxed on gains arising from the disposal of:
- an interest in UK land – residential or commercial; and
- a right or interest in a company where more than 75% of the gross market value of the company’s assets derives from interests in UK land, if the non-resident making the disposal has held at least a 25% interest in the entity at any point in the 2 years ending on the date of disposal.
Widely-held non-UK companies will be subject to tax on gains arising on disposals of all UK property (such companies are not currently subject to non-resident capital gains tax (NRCGT) on disposals of UK residential property). Details of how the rules will apply to funds are to be published on 7 November 2018.
The rules will only apply to gains arising from April 2019 onwards – that is, rebasing will apply so that pre-April 2019 gains should not be subject to charge (unless the non-UK resident chooses to use the original acquisition cost in calculating the gain which may be beneficial if a loss has been made over the entire ownership period but a gain would accrue if the property was rebased to April 2019). Note, for disposals of directly held residential property that are already subject to NRCGT gains arising from April 2015 will continue to be subject to tax.
Individuals (and trustees) will be taxed at 28% where the gain relates to residential property and 20% where the gain relates in non-residential property; companies will be taxed at corporation tax rates – currently 19%, but falling to 17% in April 2020.
Corporation tax on rental income of non-UK resident companies from UK real estate
From April 2020, non-UK resident companies will be subject to UK corporation tax (rather than income tax) on their income from UK property. By April 2020 the rate of corporation tax should be 17%, in contrast to an income tax rate of 20%, however the new corporate interest restriction (which restricts interest deductibility) will apply.
Where an individual (or the trustees of a trust) disposes of certain business assets – such as an interest in a trading business or shares in a trading company - entrepreneurs’ relief may apply to reduce the capital gains tax (CGT) payable on any gain. Where entrepreneurs’ relief applies the first £10 million of gains which arise are subject to CGT at 10%. Gains in excess of £10 million are charged to CGT at the taxpayer’s marginal rate of CGT (currently 18% or 28%). Currently , in order for entrepreneurs’ relief to apply the qualifying conditions must have been met for one year. This will increase to two years in relation to disposals on or after 6 April 2019.
Extension of offshore time limits
As previously announced, the extension of time limits for assessment of non-deliberate under-declaration of income tax, CGT and IHT liabilities arising from offshore matters or offshore transfers will be extended from the current four or six-year periods to 12 years. The existing 20-year time limit for deliberate loss of tax will remain.
Taxation of trusts
The government has re-iterated its intention to consult on the taxation of trusts “to make the taxation of trusts simpler, fairer and more transparent” – we can but hope!