This bulletin focuses on some of the issues in the UK Autumn Budget 2017 affecting taxation of foreign domiciliaries and their advisers, offshore and cross-border structures.
Anti-avoidance rules applying to offshore trusts
The Finance Bill 2018 will include a number of anti-avoidance rules to increase the tax due on UK resident settlors and beneficiaries of offshore trusts. Separate rules exist for income tax and capital gains tax.
The anti-avoidance rules identify two areas.
(1) Where trustees make distributions or give benefits to the settlor’s close family; from 6th April 2018 onwards such payments or benefits will be taxed on a UK resident settlor. Close family for this purpose means the settlor’s spouse, civil partner, cohabitee or minor child. This is the case even if the child is taxed in his/her own right. The settlor can recover the tax from the beneficiary.
(2) Trust distributions made to beneficiaries who do not pay tax on the distribution, because they are either non-resident individuals or remittance basis users, who later make a direct or indirect gift on or after 6th April 2018 to a UK resident individual. If at the time the distribution is made by the trustees there were arrangements, or an intention, as regards the direct or indirect passing-on of the whole or part of the original distribution then the UK resident individual is treated as receiving the distribution directly and taxed accordingly.
Generally, the close family members rules apply in priority to the onwards gift rules. The rules apply to all gifts made on or after 6 April 2018, even where the original distribution was made before the rules came into force. The indirect gift rules apply to all UK resident individuals, even those who are not beneficiaries of the trust or are excluded from benefitting from the trust.
Offshore trustees should seek UK tax advice as soon as possible to ascertain what actions they should be taking before the commencement of the rules on 6 April 2018. Although in many cases trustees and beneficiaries will be inclined to make distributions and gifts before 6 April 2018 there are hidden dangers.
Non-resident companies – Extending the Scope of Corporation Tax
To consolidate the manner in which tax applies to property income for UK and non-UK residents alike, income received by non-resident companies in respect of UK property interest(s) will be chargeable to UK corporation tax rather than income tax.
Two particular areas that will change as a result of this relate to the deduction of interest/finance expenses and the way in which losses are treated differently between the income tax and corporation tax regimes.
Interest expenses: As of April 2017 a worldwide group, or single entity with no associates, within the scope of corporation tax may only offset up to £2 million net interest expense, without restriction. These rules will now apply to non-resident companies affected by the changes. Certain companies may qualify for exemption from the £2million limit in respect of third party debt under the public infrastructure rules, which apply where the UK property business consists of the provision of UK property to a third party.
Losses: For corporation tax purposes, only 50% of the profits made by a company in any given period are available to offset against carried forward losses. However, this remains subject to an annual allowance per group (or single entity) of £5 million worth of profits, which can be relieved in full.
Non-resident investors – UK Land Transactions
The Government has announced that, from April 2019, corporation tax or capital gains tax will be charged on gains made by non-residents on the disposal of UK land, creating a single regime for disposals of any UK situated land.
Capital gains tax currently applies to non-residents that dispose of UK located residential property. This is charged on: individuals, trusts, personal representatives and close companies. Two further extensions to the rules will see the introduction of:
(1) The concept of an “indirect” disposal. Broadly, this is where the shares in a company, or interest in a partnership, holding UK land are disposed of and where 75% or more of the value of the entity is attributable to UK land (so called “property rich”). The indirect rules will cover both commercial and residential interests in land.
(2) The extension of the charge to widely held companies and other investment vehicles.
The new rules will only apply to gains arising and accruing on or after 1 April 2019 (for companies) or 6 April 2019 (for other persons). Thus, there will be rebasing to April 2019 for non-residents now caught by the new regime.
The rules will include a targeted anti-avoidance rule (“TAAR”) which will apply to all arrangements entered into after the 22 November 2017, with the main purpose (or one of the main purposes) of securing that gains are not subject to the new rules, including under the terms of a double taxation treaty.
Taxpayers who make a chargeable disposal, be it direct or indirect, will have 30 days in which to report the disposal to HMRC. This is with the exception of corporation taxpayers, who must register for corporation tax and make returns in line with the corporation tax regime
Additionally, the concept of third party reporting is being introduced in relation to indirect disposals. This measure is to ensure that indirect disposals are reported to HMRC which puts the emphasis on UK based advisers who are aware that a transaction is taking place.
A common theme over the Government’s last few Budgets has been tackling “disguised remuneration” arrangements involving Employee Benefit Trusts (”EBTs”) and similar schemes. This Budget continued that theme with the Government announcing what it intends as the final measures towards ending such arrangements.
There is to a “close company gateway” into the legislation, aimed at preventing small companies setting up arrangements to benefit their shareholders and key employees.
The Government also announced the requirement for all outstanding arrangements post 5 April 2019 to be notified to HMRC to ensure compliance. The final measure will see the implementation of new rules allowing the collection of tax charges from UK employees where the employer is located offshore.
Time limits for discovery of offshore non-compliance
In line with recent moves towards hardening the Government’s stance on the use of offshore jurisdictions to avoid UK tax, HMRC will consult (in Spring 2018) on extending the minimum time limit in which they are able to assess underpaid tax from offshore arrangements.
It is proposed that where a taxpayer has an “offshore connection” that has led to the avoidance of UK tax, the time limit within which HMRC can recover underpaid tax will extend to 12 years. The justification for such a proposal is that HMRC believe that it often takes longer to establish the facts in offshore cases.
Currently HMRC is, in most cases, only able to raise an assessment for underpaid tax up to 4 years from the end of the tax year in question. The exceptions to this rule are where an underpayment can be demonstrated to arise from careless or deliberate behaviour, in which case the limit is increased to 6 and 20 years, respectively.
Requirement to notify HMRC of offshore structures
On 1 December 2017, the Government will publish a response to its consultation into the proposed requirement to notify HMRC of the creation of offshore tax structures and complex financial arrangements. The proposals could require intermediaries such as tax advisors, lawyers and accountants to provide HMRC with the names of clients using such structures, even where they are used for perfectly legitimate reasons. The Government has committed to engage with international partners such as the EU and OECD who are considering similar proposals.
This bulletin is intended to provide general information only and is not intended to constitute legal, accounting, tax, investment, consulting, or other professional advice or services. Before making any decision or taking any action which may affect your tax or financial position, you should consult a qualified professional adviser.
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