Professional advisors have been left in a state of confusion by the government's decision to withdraw its much-debated non-dom taxation reforms from the Finance (No.2) Bill 2017.
The new rules, which concern inheritance tax for deemed domiciles and overseas property held in offshore structures, have been the subject of much comment and discussion over the past six months. Non-doms have been uncertain how to restructure their holdings to minimise the effects of the changes.
Many have already done so, having taken professional advice that assumed that the rules would take effect on 6 April 2017, as the government has always said they would. Jane Ellison, Financial Secretary to the Treasury, has stressed that there has been no policy change in respect of any of the clauses that have been cut from the Bill, and that the government would legislate for the remaining provisions at the earliest opportunity, assuming that it is re-elected. However, it is no longer clear whether that commencement date will remain unchanged, or whether it will be postponed for a year, throwing non-dom estate planning into chaos. Furthermore, now that a general election campaign is in progress, government departments are in a 'purdah' condition, and cannot comment on that or any other policy matters.
'This came as a surprise to many of us and will create unwelcome uncertainty among many non-domiciled individuals in particular', said Andrew Robins, private client tax partner at RSM UK. 'It might be thought that this would be good news for non-doms, but in many cases this will not be true.' In two areas in particular, actions have already been taken that could have significant tax implications if the draft proposals are not reintroduced later with the original start date of 6 April 2017: asset rebasing for CGT purposes, and cleansing of foreign bank accounts.
Many non-doms will have sold rebased assets shortly after 5 April to ensure that the sales price and the rebased cost of the asset were the same, said Robins. 'If the rebasing does not go ahead, these individuals will have realised a capital gain unnecessarily, and may suffer significant tax charges as a result.'
Similarly, all non-doms were due to be able to 'cleanse' foreign bank accounts, separating out untaxed foreign income and gains from tax paid and tax free money. 'For non-doms who have already undertaken this cleansing, and who have brought what they thought were non-taxable funds into the UK, the removal of the cleansing provisions could again give rise to large tax liabilities', said Robins.
'The government's decision to halt many of the provisions of the Bill after the date that they were due to take effect is shambolic', commented non-dom tax expert Mark Davies. 'Many non-doms would have taken advice and either left the UK, restructured, or accepted the additional tax. Now those who were most prepared may find that their planning is now defunct', he said.
For instance, some may have retained assets in their personal name and sold them after 6 April 2017, expecting to be able to claim the rebasing election. 'This would mean that only the gains after 6 April 2017 would become taxable, and the proceeds would be a source of funding in the UK', he said. 'But now this does not work [if the commencement date is postponed until 2018].'
But will it? 'As far as we can tell, there are three possible outcomes to the current hiatus', said Sebastian Prichard Jones of Macfarlanes:
The existing legislation could be worked on over the summer, and reintroduced into parliament with effect as intended from 6 April 2017 with no fundamental changes.
Events during the election could result in reintroduced legislation that is fundamentally different to the legislation withdrawn from the current Bill proceedings. This could happen if non-dom becomes a hot political issue in the campaign. 'Under such circumstances one would hope that the new legislation would have prospective effect from 6 April 2018, and non-domiciliaries who had undertaken planning on 6 April 2017 (for example) in the expectation that their assets had been rebased would be able to benefit from the remittance basis', said Jones.
There could be a change of government, in which case Jones expects more radical changes to the taxation of non-UK domiciliaries – perhaps including a significant foreshortening, or even elimination, of the benefits of the existing regime.
The view of law firm Withers, however, is that it is extremely unlikely that the proposals will be dropped, whatever the makeup of the next government. 'We expect that the rules will be backdated to 6 April 2017 when they are finally introduced, and it is unlikely that there will be any substantive changes', said Withers. 'However, it is sensible, pending any further clarification, that long term non-doms who are anticipating being taxed on a worldwide basis do not remit foreign income/gains from the current tax year yet, just in case the delay in implementation of the rules provides you with another year under the remittance basis. Likewise, decisions regarding the sale of assets which would have benefitted from rebasing in April 2017 should be put on hold if possible.'
Describing the course of events as 'unseemly and highly irritating', Stephenson Harwood partner James Quarmby advised non-doms to act quickly. 'Even if the changes do eventually take effect from 6 April 2017, the way the IHT exit charge on property leaving trusts is calculated means that acting sooner rather than later is beneficial', he said. 'If the change does not come in until 2018, acting now could avoid the IHT exit charge altogether. In any case, we hope that the government will introduce transitional rules to protect those who have already acted in good faith based on the draft provisions – such as anyone who has rebased their assets and/or used mixed fund cleansing.'
Gowling WLG commented: 'While it is not impossible that the start date for the new non-dom legislation could be 6 April 2018, it is quite likely that the provisions that were to have been included in the Finance Bill will be introduced with retrospective effect to 6 April 2017. While retrospective legislation is generally frowned upon, it may be considered that it is justifiable in this case as, until today, everyone has been proceeding on the basis that they are already in effect.'
'Even if the Conservatives win the election', says Robin Vos TEP, a solicitor at Macfarlanes LLP and Chair of STEP's UK Technical Committee, 'there is now a good case for implementing all of the changes with effect from 6 April 2018 so that the anti-avoidance rules that were left out of the current Bill can be included at the same time.' Vos warns, however, that there will need to be transitional rules to protect those who have already acted in good faith on what they believed would be the law from 6 April 2017 – for example, action taken on rebasing and mixed fund cleansing.
But many non-doms will have cause for complaint if the reliefs are not then reintroduced. 'It would be interesting to hear from STEP members who have clients who have already relied on these reliefs and made remittances to the UK on the strength of them', said Vos. 'They would clearly be adversely affected if the reliefs are not reintroduced.'