Where are we now?

14 / 03 / 2017

Emma Loveday provides a snapshot of the status of consultations affecting the private client practitioner.

Looking back, 2016 has been a year of change for many reasons, and the private client world has been no different with a number of new policy announcements on trust, tax and probate issues, which could potentially have wide-reaching consequences for all of our clients. Consultation after consultation has been published, some with responses, some with responses pending. Below is a summary of where we are with the major policy announcements of 2016.

Reforms to the taxation of non-domiciliaries

The proposed reforms to the taxation of non-domiciliaries (non-doms), originally announced in the Summer Budget 2015, has been a key area of interest for private client practitioners over the last 18 months, not least so that we can understand the full extent of the reforms in order to advise our international clients on how they will be impacted. We are now less than three months away from the reforms becoming effective on 6 April 2017, and there still remains uncertainty in many areas.

However, we are at least further forward as, following the publication on 18 August 2016 of the government’s second consultation document on the topic, the government published a response on 5 December 2016 (the response document) together with further draft legislation.

The general focus of the reforms remains unchanged, as does the timescale for implementation, with the reforms to come into force on 6 April 2017 (although the actual legislation will not be passed until Royal Assent is received in the summer of 2017, and amendments could be made between now and then). The article by Deborah Pennington and James Bromley in TELTJ 181 (Nov 16) provides a summary of the reforms as proposed in the second consultation, and this article provides a general overview of the changes to those proposals as set out in the response document.

Inheritance tax and residential property

As previously announced, inheritance tax (IHT) will be extended to UK residential properties held through off shore structures as from 6 April 2017, as an interest in an underlying close company or partnership which derives its value from UK residential property will no longer be excluded property for IHT purposes. As a result, if the shares or partnership interest are held by an off shore trust (as is typically the case), they will be subject to the IHT relevant property regime and ten-year charges.

The draft legislation published on 5 December 2016 largely gives eff ect to the proposals as set out in the second consultation. However, there are new provisions on how loans taken out to purchase UK residential property will be treated for IHT purposes. An IHT charge will be imposed on the benefit of an off shore loan made to enable an individual, trustees or a partnership to acquire, maintain or improve a UK residential property, or to invest in a close company or a partnership for the same purpose. However, the loan itself will be deductible from the value of the property or interest in the close company or partnership for IHT purposes. This represents a significant shift in approach and is sure to discourage the use of such loans directly or indirectly by nondoms. There remain questions around how these rules will work in practice, including whether there will be any limit imposed on the amount of the loan that can be deducted, and it is hoped that these issues will be cleared up in the final legislation (although this does not help non-dom clients who need clarity now).

Also newly announced was that if an affected UK residential property is sold, the proceeds of sale will remain within the IHT net for two years following the disposal. This was not hinted at in previous announcements, and will make it diffi cult for non-doms to gift the proceeds or carry out any tax planning for two years without IHT consequences.

The response document confirmed that there will be no de-enveloping relief for those non-doms who want to liquidate the underlying company and transfer the property into absolute ownership; the potential capital gains tax (CGT) and stamp duty land tax costs will need to be borne in full.

Deemed domicile rules

As previously announced, the government will introduce new rules to deem a non-dom individual domiciled in the UK for tax purposes in certain circumstances. Two categories of individual will be deemed domiciled under these new rules from 6 April 2017:

  • those who have been resident in the UK for at least 15 out of the prior 20 tax years (replacing the current 17 out of 20 year rule for IHT purposes); and
  • those who were born in the UK with a UK domicile of origin, but who have since left the UK to acquire a domicile of choice elsewhere, and who return to the UK after 6 April 2017. The latt er category (returning UK domiciliaries) will be deemed domiciled on their return to the UK despite their non-dom status under general law. The general form and eff ect of these proposals remains unchanged. However, amendments have been made to some reliefs that the government is off ering long-term resident non-domiciliaries who will be caught by the new regime from 6 April 2017.

The first is rebasing. Affected individuals will be able to rebase their non-UK assets as at 6 April 2017 for CGT purposes. The conditions are tightly drawn, in that the relief is only available for those who become deemed domiciled on 6 April 2017 (not later) and have paid the remittance basis charge at least once. The asset must have been held on 6 April 2016 and not have been a UK asset between 16 March 2016 and 5 April 2017. There are exemptions for assets (works of art for public display in an approved gallery or museum) brought to the UK, which benefi t from relief from the remitt ance rules such as personal use, public access, repairs, temporary importation and notional remitted amount. Where the asset was acquired using unremitt ed income or gains, the mixed fund rules will apply as normal when there is a remittance of

the proceeds. It has also been clarified that the relief will apply automatically, without the need for an election (unless the individual wishes to dis-apply rebasing). The second relief is in respect of mixed funds, and allows affected individuals a window of opportunity in which they can ‘cleanse’ their off shore mixed funds with the aim of establishing a ‘clean capital’ account to finance UK expenditure without triggering a taxable remittance. The response document extends this window of opportunity from one to two years from 6 April 2017. Neither of these reliefs will apply to those deemed domiciled under the ‘returning UK domiciliary’ rule.

Offshore trust protections

Prior to the response document, it had been made clear that a measure of protection would be granted to settlors of off shore trusts who become deemed domiciled on or after 6 April 2017 and have set up the trust prior to becoming deemed domiciled, so that the trust’s income and gains would not be taxed on the sett lor on an arising basis (which would otherwise be the case for a UK domiciled sett lor). This was welcomed, but concerns were raised about how this protection would work in practice, and the frequency of situations in which the sett lement could become ‘tainted’ and the protection taken away.

The response document provides welcome clarification and makes the ‘tainting’ rules less restrictive.

For CGT purposes, the settlement will only become tainted if property or income is added to it by the settlor or (in certain circumstances) by the trustees of any other trust of which the settlor is sett lor or beneficiary. Contrary to the second consultation document, the settlement will not become tainted if the trustees make a distribution to a family member of the settlor. Certain additions to the settlement are excluded from having a ‘tainting’ effect; and these include those made under an arm’s length transaction or to pay trust tax or expenses. There is currently doubt over the status of interest-free loans owed to a deemed domiciled settlor and whether these could constitute additions for tainting purposes.

Where a trust is protected such that gains are not subject to CGT in the hands of a UK resident deemed domiciled settlor as they arise, the gains will be brought into charge if a capital payment is made to a close family member of the settlor and ‘matched’ to logged gains within the trust, unless the beneficiary is taxed on the payment under s87 Taxation of Chargeable Gains Act 1992 (as would be the case if the beneficiary is UK resident, or claims the remittance basis and remits during that tax year). The settlor is entitled to reclaim the tax paid from the trustees or the recipient benefi ciary. In effect, the payment will always be taxed in this situation: either on the beneficiary, or on the sett lor. The effect of s87 is also to be amended quite significantly. With effect from 6 April 2017, a s87 payment to a non-UK resident beneficiary will no longer ‘wash out’ matched stockpiled gains. There are also new ‘recycling’ rules to prevent capital payments made to non-UK resident or non-dom beneficiaries fi nding their way back to UK residents through an onward gift.

For income tax, we do not yet have draft legislation. It could be that this is not published until close to 6 April 2017, which is unsatisfactory and frustrating for all non-doms and advisers involved. However, the response document explains that the provisions att ributing trust income to a UK resident sett lor will no longer apply, except in relation to UK source income, and this will be so regardless of the sett lor’s domicile. Instead, as with CGT, from 6 April 2017 benefits received by close family members of a sett lor will be taxable on a UK resident settlor according to their UK tax status unless taxable in the hands of the beneficiary. This will provide a deemed domiciled sett lor with protection from the income tax att ribution charge in the same manner as for CGT; although the sett lement can still lose this protection and become tainted by certain additions to the sett lement as for CGT. There is also expected to be similar ‘recycling’ anti-avoidance rules. Although we will need to see the draft legislation to understand the finer detail, this looks to be a welcome simplifi cation of the current rules, establishing a single regime for settlors for income tax purposes regardless of their domicile status.

The trust protection rules generally will mean that off shore trusts will remain attractive for those who can organise their aff airs so that income and gains can be rolled up within the trust for as long as possible.

Probate fees

On 18 February 2016, the government published a consultation proposing to increase dramatically the costs of applying for a grant of probate. Currently, the maximum fee payable to obtain probate is £215, but under the proposals, the maximum fee would rise to £20,000 for estates exceeding £2m. A detailed review of the proposals and analysis are set out in Alexander Learmonth’s article ‘Fee reign’ in TELTJ 176 (May 2016).

The proposals were met with disbelief and opposition within the industry, and by all accounts this was fed back through the consultation process, which period closed on 1 April 2016. However, there has so far been no response from the government, with their webpage on the subject informing us that they are ‘analysing feedback’. My firm was given the same response when we followed up on the response we submitted.

It therefore remains to be seen whether the proposals are carried through; however, if recent  developments are anything to go by, the outlook does not look positive. On 17 March 2016, the Ministry of Justice announced that it was increasing the fee for divorce applications by 34%, from £410 to £550. Further, on 9 November 2016, the Ministry of Justice confirmed that it plans to go ahead with further court and tribunal fee increases, despite the Justice Select Committee’s report recommending that the proposals be reconsidered until the effect of earlier rises in fees, and the impact on access to justice, had been fully assessed. The chair of the Justice Select Committee has said that he intends to explore ‘possible further steps’, which does provide hope, but one does get the sense that, as money needs to raised to fill the funding gap across the courts and tribunals service, the government’s mind may be made up. We await further developments.


The disclosure of tax avoidance schemes (DOTAS) regime was originally introduced by Part 7 of the Finance Act 2004. The regime requires certain tax planning arrangements to be notified to HMRC if the arrangement falls within the particular ‘hallmark’ for the tax in question.

The government is keen to extend the scope of the IHT hallmark and originally published proposals in a consultation document in July 2014 and draft amending regulations in July 2015. The draft regulations were criticised throughout the industry as being too widely drawn and this prompted the government to publish an amended version, the draft Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2016, for further consultation on 20 April 2016 (the second consultation).

It is proposed that the revised IHT hallmark will apply to arrangements it would be reasonable to expect an informed observer (having studied the arrangements and having regard to all relevant circumstances) to conclude that the main purpose, or one of the main purposes, of the arrangements is to enable a person to obtain an advantage in relation to IHT (condition one), and the arrangements are contrived or abnormal or involve one or more contrived or abnormal steps without which a tax advantage could not be obtained (condition two). Loan trusts, discounted gift schemes, flexible reversionary trusts, split or retained interest trusts are excepted from the hallmark.

The second consultation explains that one of the government’s aims in revising their original proposals is to ensure that ‘ordinary tax planning arrangements will not need to be disclosed’ and the revised hallmark is drafted ‘to avoid non-abusive situations’; however, we would query whether the revised hallmark meets this objective. The two conditions outlined above produce a very broad test which is more akin to an anti-avoidance rule than a hallmark targeted at abusive IHT planning.

The words ‘contrived or abnormal’ are central to this test, yet there is no definition of the words in the draft legislation. Virtually all IHT planning could be deemed to be ‘contrived or abnormal’ given that it involves planning that one would not ordinarily undertake unless legitimately trying to minimise IHT exposure. Without a clear understanding of the words, advisers may opt to err on the side of caution and notify HMRC of virtually all IHT planning, which will have obvious time and cost implications for the client.

The lack of clarity could also potentially deter clients from fairly carrying out IHT planning, due to confusion and
embarrassment over what types of planning are ‘plain vanilla’ and what constitutes avoidance. Clients have a right to minimise legitimately their exposure to IHT so as to be able to pass on as much of their estates as possible to their families and future generations.

My firm’s view is that the hallmark should be drafted so as to target specifi c areas of IHT planning that the government considers to be abusive, so as to ensure promoters and users have a clear understanding of what they can and cannot do.

However, as matters stand, we still await the government’s full response. A response document was published alongside the Finance Bill 2017 on 5 December 2016 but this was substantially related to VAT, with the announcement that the government’s full response on the IHT aspects is delayed and will be published alongside the regulations themselves. There was no word on timing.

We therefore remain in the dark as to what stance the government will take on the IHT hallmark; although given the direction that consultations have taken to date, and the tougher position the government is taking on tax avoidance, it is perhaps unlikely that there will be much movement; however, greater clarity in respect of ordinary tax planning arrangements is essential for the industry and clients alike.

Fourth Money Laundering Directive

In an att empt to counteract money laundering, terrorist financing, tax evasion and other fi nancial crime, one of many provisions set out in the EU’s Fourth Money Laundering Directive (the Directive), passed in May 2015, is that member states are required to establish a central register of trusts (the Trusts Register).

It is proposed that each member state’s Trusts Register should list the ‘beneficial owners’ of trusts governed under that jurisdiction, including the names and addresses of trustees, settlors, beneficiaries and protectors. Despite Brexit, the UK government has made clear that it plans to proceed with the transposition of the Directive into UK law, and published a consultation on 15 September 2016 seeking feedback.

The Trusts Register is seen by many in the trusts industry as a disproportionate reaction to the role UK trusts play, or not, in the global problems of money laundering, terrorist fi nancing and tax evasion. However, some positive news is that the Directive as currently drafted (although amendments have been proposed at EU level – please see below) does not require the Trusts Register to be accessible to the public, as is the case for ‘people with signifi cant control’ of UK companies. Instead, the data will only be accessible to competent EU tax authorities and fi nancial investigation units. This means that, assuming the data is held and dealt with securely, the Trusts Register is more of an administrative than a privacy problem for trustees.

The transposition of this element of the Directive comes at a time when trustees are already grappling with the compliance burdens of the US’s Foreign Account Tax Compliance Act (FATCA) and the OECD’s ‘Common Reporting Standard’ (CRS). The introduction of a Trusts Register could add an additional layer of bureaucracy for trustees and in our view, should be introduced in a way that minimises the extra work required of trustees (the cost of which will inevitably be borne by the trust). HMRC announced in its December 2016 Trusts and Estates newsletter that the information for the register will be collected via a new online service which will replace the current paper form 41G.

As mentioned above, EU member states have agreed to revisit the provisions of the Directive in light of terrorist attacks during 2016 and amendments were proposed in July. The proposals include the requirement for ‘business-type’ trusts (‘trusts which consist of any property held by or on behalf of a person carrying on a business which consists of or includes the management of trusts, and acting as trustee of a trust in the course of that business with a view to gain profit’) to be named on a public register in the same manner as corporate entities. It is also proposed that a beneficial ownership register of all other express trusts will need to be established, available not only to competent authorities but also any parties with a ‘legitimate interest’. The definition of ‘business-type’ trusts is not clear, but within the trusts industry it has been discussed that this could affect any trust with a corporate trustee.

If these proposals are adopted, it will mean trustees, sett lors, beneficiaries and protectors will be named on a central register and accessible to non-governmental organisations and investigative journalists; with the details of those connected to ‘business-type’ trusts being available to the general public.

The plans have been met with concern by the profession and trustees. The identities of the benefi ciaries, the values involved, and the background and rationale behind the trust, has always been private information, for very good reasons; not least to allow settlors to benefit family members unequally should they want to, and to protect minor and vulnerable benefi ciaries from the obvious safety risks. It is very much to be hoped that these proposals are not adopted by the EU, and if they are, the UK (bearing in mind Brexit) has some lee-way in transposing them.

For now, we await a response to the consultation published on 15 September 2016, the closing date for which was 10 November 2016. The formal transposition date for the Directive is 26 June 2017, unless this is brought forward as part of the July 2016 proposals, so we should expect to see a response in the first half of this year.

Various matt ers therefore hang in the balance for trust and probate practitioners in 2017, and it is clear that there will be change of some sort in all of the above areas. It is likely to be a busy year.

This article was first published in Trusts and Estates Law & Tax Journal 184, March 2017.