Response of STEP to the policy paper and draft legislation published for consultation on
5 February 2016
Domicile: Income Tax and Capital Gains Tax
Introduction
STEP is the worldwide professional association for those advising families across generations. We help people understand the issues families face in this area and promote best practice, professional integrity and education to our members.
Today we have over 20,000 members across 95 countries, with over 7,000 members in the UK. Our membership is drawn from a range of professions, including lawyers, accountants and other specialists. Our members help families plan for their futures: from drafting a will or advising family businesses, to helping international families and protecting vulnerable family members.
We take a leading role in explaining our members’ views and expertise to governments, tax authorities, regulators and the public. We work with governments and regulatory authorities to examine the likely impact of any proposed changes, providing technical advice and support and responding to consultations.
STEP welcomes this opportunity to comment on the policy document and draft legislation published on 5 February 2016.
Response
We understand that this legislation, together with the deemed domicile rules for inheritance tax purposes, will be introduced in Finance Bill 2016. However, the legislation providing that long-term resident non-UK domiciliaries who set up offshore trusts before becoming deemed domiciled will not be taxed on trust income and gains retained in the trust, will be contained in Finance Bill 2017.
We have concerns with the statements made and the impact that they will have on individuals, households and families and feel it is overly simplistic to state that the main impact will be the need to assess whether an individual falls within Condition A or Condition B. The main costs for a lot of non-UK domiciliaries will result from the need to report on a UK basis non-UK income and gains from investments and structures which may have been set up and operated for many years on the basis that there would never be a need to do this because the remittance basis would be available.
We understand that the intention is to align the income and capital gains tax rules as far as possible with the inheritance tax rules but that for inheritance tax purposes only, formerly domiciled resident status will not kick in during the first year of tax residence whereas for income and capital gains tax purposes the individual will be deemed domiciled in the first year. Although we welcome this difference in treatment, we hope that the guidance issued in due course will clearly highlight this to taxpayers so as to avoid confusion.
The proposed income tax and capital gain tax legislation takes the form of a definition of ‘deemed domicile’ which is only to apply where particular substantive sections provide that it is to do so. That means that in order to determine its effect, one must identify any provisions to which domicile is relevant and then determine whether they have been amended specifically to apply the new deemed domicile rules. The inheritance tax legislation has always taken the opposite approach by providing that a person who meets the conditions is deemed to be domiciled for all purposes of inheritance tax subject to the exceptions in sub-sections 267(2) and (3). We request clarity on any specific reasons for this difference of approach.
Our comments on the draft legislation are set out below.
1. Paragraph 4 - Section 86 TCGA 1992
This indicates that section 86, which taxes the settlor on trust gains as they arise if the settlor is UK domiciled and resident in the tax year, will apply to those who are deemed domiciled under the new section 835BA ITA 2007. We agree that section 86 will need to be amended so that it applies where the settlor is deemed domiciled when the settlement is created. However, the amendment as drafted directly conflicts with the statement in the policy paper regarding the tax treatment of trusts established before becoming deemed domiciled and requires amendment. We suggest that any amendments to section 86 should be dealt with at the same time as the other trust provisions in Finance Bill 2017.
2. Paragraph 9 - Section 718 ITA 2007
It is not clear what is intended by the proposed amendment to section 718(1)(b) which provides that a person abroad includes an individual who is domiciled outside the UK. Section 835BA is written in terms of being regarded as deemed domiciled in the UK, whereas section 718(1)(b) concerns a person domiciled outside the UK, so we consider that the wording would need to reflect this difference.
3. Paragraph 11 – Section 10A - temporary non-residence
The amendments in paragraph 11 have the effect of allowing the remittance basis to be available to a temporary non-resident in the year of return if they left the UK before the date of the Summer Budget (8 July 2015). However, the way that it does this is to say that the deemed domicile rules do not apply to the year of return in respect of "foreign chargeable gains which accrue to the individual" during one of the years of temporary non-residence.
Section 10A(3) deals not only with gains which accrue directly to the individual but also to gains which would accrue under section 13 and section 86 TCGA had the individual been UK resident. Subject to what is said above regarding section 86, as neither section 86 nor section 13 gains are foreign chargeable gains accruing to the individual during the period of non-residence, the remittance basis will not be available in respect of those gains in the year of return. We suggest that an amendment therefore needs to be made to paragraph 11(3) and paragraph 11(6) so that they simply refer to any foreign chargeable gains treated as accruing to the taxpayer in the period of return under section 10A(2).
4. Paragraph 12 - personal representatives
Under section 834 ITA 2007, personal representatives are treated as UK resident if at least one of the personal representatives is UK resident and the deceased was either resident or domiciled in the UK. The deemed domicile rule is specifically applied for this purpose. This will be an area where the differences between the inheritance tax definition of deemed domicile and the income and gains tax definition will need to be highlighted to personal representatives.
In addition, HMRC's practice (which appears to be concessionary) is that, where the deceased was not domiciled in the UK at the date of death, the personal representatives would only have to pay income tax on UK source income (see the notes to form SA906). There is no direct correlation between section 834 and HMRC's practice as, if all of the personal representatives are UK resident, they will collectively be treated as UK resident whether or not the deceased was domiciled in the UK.
Could HMRC please clarify whether or not the intention is that personal representatives should only pay tax on UK source income where the deceased was not domiciled in the UK but was deemed domiciled in the UK under the new rules. If so, this would require a change to the SA906 notes.
5. Losses
The legislation does not deal with how losses should be treated once an individual is deemed domiciled in the UK under the new rules - i.e. there is no amendment to section 16ZA TCGA 1992 - not even to apply the deemed domicile rule.
The effect of this, as a result of section 16ZA(3), is that unless a foreign loss election has been made, foreign losses are not allowable losses, even after the individual has become deemed domiciled. We consider that at the very least, the deemed domicile rules should apply for the purposes of section 16ZA(3).
Once an individual is deemed domiciled under these rules they should be able to claim foreign and UK losses in the same way as a UK domiciliary.
We feel that past foreign losses should be available even if a section 16ZA loss election has not been made, except to the extent that those foreign losses would have been used if a loss election had in fact been in place. If the suggestion is not conceded, there ought to be a new opportunity for a section 16ZA election to be made in relation to losses thereafter.
Submitted by STEP UK Practice Committee and STEP UK Technical Committee on 2 March 2016
PERSONAL/LXK-EU-19462810/1 / 3