Where are we with Protected Trust Status for United Kingdom Resident “Non-Doms”?
From April 2017 the tax law changed for non-UK domiciled individuals which meant that if they had been UK resident for more than 15 years (out of the previous 20) they took on a deemed domicile status for all tax purposes.
Clearly this would have been an unwelcome turn of events for many who had established trust structures outside the UK based on the ‘old law’ and therefore certain safeguards were put in the legislation that were planned to protect the settlors from unwelcome UK tax situations which would have applied if they had, let us say, acquired a UK domicile of choice.
Since 2017 there have been law changes to the Inheritance Tax regime as well which came into effect in July 2020 which mean that ‘additions’ to existing excluded property trusts may give rise to unwelcome IHT exposure. The IHT changes are clear in certain respects but in others it is not 100% apparent how and to what extent you will prejudice the IHT position for either the whole or part of the ‘excluded property trust’.
With the above IHT changes in mind, it is suggested that because of the definition of ‘addition’ individuals should take detailed tax advice if they are UK deemed domiciled and it is contemplated that additional funds may become comprised in the settlement. Commercial arrangements should be outside the regime, at least for now.
Returning to the headline of this note, it looks as if we are as we were when the changes were announced. Trustees need to be able to identify income, and in certain instances deemed income that arises in the trust and underlying structure and this income will be matched to distributions to the now deemed domiciled individuals in priority to capital gains. As readers will be aware, where the trust or underlying company contains certain types of investment (what HMRC call non-reporting funds) then a disposal by the trust structure of these assets that yields a profit is taxable on the settlor, notwithstanding the Protected Trust Status.
The position has, however, now become more complex. The UK tax law provides that the settlor can seek reimbursement from the trust for certain taxes that he/she suffers. In situations where he does not seek reimbursement there is an argument that this ‘omission’ has added value to the trust and thereby potentially compromised the IHT and Protected Trust Status.
The mechanism for obtaining reimbursement can be complicated.
Whilst it is not the place of the tax adviser to give investment advice, it should be noted that a decision to make certain types of investment may have long-term consequences for the trustees and the UK resident settlor.