Updated HMRC Guidance for Australian Expats in the UK
There have been some recent amendments in the UK by the HMRC related to Non-domiciled UK residents of which Australian expats in the UK fall under. The newly enacted legislation received Royal Assent as of 16th November 2017 with the addition of a Finance Bill under the Finance(No. 2) Act 2017.
We will aim to cover some of the main points which we believe will have a lasting impact on Australian Expats in the UK.
The New 15/20 Rule
As of the 6th April 2017 if you have been a resident in the UK in at least 15 of the past 20 tax years (including spilt years) you will have become a ‘deemed’ UK domicile for income, capital gains and inheritance tax purposes. In other words, for the first time, long-term Australian Expats in the UK will be taxed on a worldwide basis.
The new deemed-domicile rules will take effect from the 16th year. For example, an Australian expat who arrived and became a resident in the 2003/04 tax year will become deemed-domiciled under the new rules as of 6th of April 2018. An Australian expat is not required to have continuous 15 years of residency to be caught by the deemed-domicile rule – two or more spells of residence might need to be counted.
However, once deemed-domiciled, Australian expats who leave the UK but who return after 6 tax years can benefit from this rule resetting during which you can be a resident of up to 15 years of which they can be a resident in the UK without being deemed UK domiciled, provided they have not acquired a domicile of choice in the UK.
Rebasing of Offshore Assets
Where an Australian expat in the UK becomes a deemed domicile, a resulting capital gain made on the disposal of assets whether UK or offshore would automatically trigger a capital gains tax charge in the UK. However, those who were deemed-domiciled on 6 April 2017, and no later, can disregard any non-UK capital gain that has accrued before this date.
This would allow that proportion of gain to be brought to the UK with no further tax charge if properly segregated. It is important to add that any tax you pay in a different domicile on capital gains, income, etc you will be able to obtain a foreign tax credit on the UK side as well depending on the ‘Double Taxation Agreement’ in place.
To achieve this rebasing, assets held personally outside the UK will be revalued for capital gains tax purposes as if they were acquired on 6 April 2017 (effectively exempting the earlier gain). This means that a new cost base will be established as at this date.
However, despite there being significant negative feedback assets held within overseas structures such as family trusts (discretionary trusts) or companies will not benefit from this uplift.
Furthermore, the HRMC has also confirmed that from 6 April 2017, capital losses will potentially be available to offset against capital gains for deemed domiciled individuals regardless of whether they previously made an offshore capital loss election.
This new transition rule is a substantial relaxation for those affected deemed-domiciled and is one of the so-called ‘protections’ that the HMRC originally promised. However, to benefit, it is vital that the Australian expat remains outside of the UK under general law principles.
Cleansing of Mixed Funds
The government is allowing expats a one-off opportunity to segregate their ‘mixed’ funds to allow more tax efficient remittances to be made in the future. Mixed funds include items like offshore bank accounts that hold the sale proceeds of shares, managed funds, ETF’s and investment properties as well.
Where an offshore bank account contains a mix of unremitted overseas income, gains and tax-free(clean) capital, the UK tax rules prescribe the order in which each element is deemed to be remitted, with the latest years untaxed income remitted first. This can make it hard for an Australian expat to access their original clean capital without first triggering tax charges.
The rules equally apply to Australian expats who are not yet deemed domiciled(15/20 rule) as well. The government is introducing a 2-year tax transition period as of 6th April 2017 during which individuals can rearrange their mixed funds overseas to separate them into their constituent parts (eg: tax-free capital, income, gains) by moving them into separate offshore accounts.
The idea is that once the funds have been segregated, the owner will be able to bring ‘clean’ capital into the UK without suffering a tax charge, or to bring lower taxable items to the UK (e.g. capital gains) before higher taxed items(dividends). Combining this type of segregation technique with rebasing for deemed domicile individuals will not only tidy accounts up but may be used to generate amounts or clean capital for UK expenditure requirements.
Offshore Trust Reforms
Certain tax protections will be maintained for offshore trusts provided they were set up before the individual became deemed-domiciled under the 15/20 rule. BDO accounting firm has confirmed the following:
Gains and foreign income arising within a trust structure set up by a non-UK domiciled settlor before they were deemed UK domiciled, will not be assessed on the settlor as they arise provided no property has been added to the trust (otherwise than at arm’s length and with certain exceptions) and the settlor is neither UK domiciled under general law nor a formerly domiciled resident. Instead, such foreign income and gains will normally only be taxable when matched to a benefit received albeit full advice will be needed as there are pitfalls. The broad principle will be that income will be matched ahead of capital gains.
It is important to note that if the trust has been tainted by new capital or addition of new property then the current anti-avoidance rules for UK residents and domiciled settlors of overseas trusts will apply, effectively bringing all income and gains within the charge to tax on the settlor.
Inheritance Tax on UK Residential Property
The HMRC has confirmed that it will extend the inheritance tax charge on UK residential property held indirectly by expats (including Australian expats in the UK) through an offshore entity such as a trust, company or partnership.
These new rules will apply to both non-domiciled individuals and deemed-domiciled on all chargeable events such as death, exit charge or a trusts 10 year anniversary. Australian expats in the UK need to be careful when holding assets like this as they may be breaching central management and control rules.
While such rules may lead some Australian expats to unwind such investment vehicles the UK government has confirmed it will not provide any incentive for ‘de-enveloping’ of UK residential properties, as this might give rise to a taxable event.
While this is only a very broad view on the new rules it is important you seek tax advice and financial advice to make sure you are not going to encounter any large tax charges.
All Australian expats in the UK, whether they have become deemed-domiciled on 6th April 2017 or later, should review their current worldwide assets and their ongoing financial needs both in the UK and Australia.
For those individuals who are still able to settle an offshore trust, they may wish to consider doing so to obtain protections going forward and where this meets their broader needs.
Those to be deemed-domiciled who can benefit from rebasing assets for CGT purposes, may want to consider disposing of certain assets sooner than later, so the funds can be accessed for their UK needs on a tax-efficient basis.
Furthermore, the cleansing of funds from 6th April 2017 represents a real opportunity to access previously ‘locked’ clean capital and with appropriate planning may be used in conjunction with the rebasing rules to generate an extra amount of clean capital.
The important dates to be mindful of for preventing trust tainting provisions for deemed-domiciled is 5 April 2018 and for the cleansing of mixed funds the 5th April 2019. With regards to the above it is very important your seek appropriate tax and financial advice from both domiciles to make sure you are doing everything correctly and what is in your best interests.
Disclaimer – The above commentary is general in nature and should not be construed as tax or financial advice. Please consult a licensed tax accountant and financial adviser to determine whether the above information is suitable for you.