Major Changes Expected on 9 December 2010

The Government has announced that draft legislation to appear in the Finance Bill 2011 will be published on 9 December next. Any belief that the published clauses will be all that will appear in next year's Finance Act is probably akin to believing in a flat earth; the tax system and the ingenuity of tax planners moves far too quickly these days for the legislation to take such a leisurely place. Undoubtedly many more provisions will be included in the legislation when the Finance Bill is published next Spring.

The coalition Government has been conducting a number of major reviews of the tax system, including corporate tax; in particular the legislation relating to controlled foreign companies, the taxation of smaller businesses, employee trusts and the plethora of tax reliefs and exemptions to be found throughout the legislation including the tax treatment of non domiciliaries.

In terms of tax planning, the last of these items is probably the most important. The Government has given no indication at all as to what aspects of the tax provisions relating to non domiciliaries is under review and one might have thought that all the changes made in 2008 had firmly blocked up all available loopholes. There does not therefore seem to be any need for the detail of the 2008 changes to be reviewed so soon after they are introduced and so the probability that it is not the remittance basis rules as such which are the focus of the current review.

In past years, the Liberal Democrats advocated that the remittance basis rules should not be available to those who have been resident in the United Kingdom for more than seven years. It seems unlikely that this will be adopted, as it was no part of the proposals previously put forward by the Conservatives. There has been some speculation that the remittance basis might be withdrawn for those who are long term UK residents, for example the rule might be aligned with that for inheritance tax purposes which has deemed UK domicile after 17 out of 20 years of residence. Or indeed this rather lengthy period may be reduced at the same time.

Since all high earners in the United Kingdom are facing substantial increases in the rates of income tax and capital gains tax, there must be a possibility that the remittance basis charge will equally be increased from its current £30,000 level. However any such increase could not be effective until 2011/12.

One aspect of the tax treatment of non domiciliaries which was completely untouched in 2008 is the inheritance tax rules, particularly the deemed domicile rules and the provisions relating to excluded property trusts. It could be the case therefore that these are being examined critically as part of the Government's review. The provisions relating to excluded property trusts are particularly generous - a trust set up by a person who is not domiciled in the United Kingdom nor deemed domiciled here may qualify as an excluded property settlement (i.e. not liable to inheritance tax) throughout its existence, notwithstanding any change in the beneficial interests under the trust. So long as the trust assets are foreign assets it will never be liable to UK inheritance tax, and this remains the case even if the domicile of the settlor later changes. An offshore trust also has significant capital gains tax advantages.

Up to now, non domiciliaries may not have been in any particular rush to take advantage of these provisions, since a settlement of foreign assets may be made at any time before becoming deemed domiciled in the seventeenth year of residence in the United Kingdom. This relaxed strategy may not be advisable, given the current uncertainties as to what lies ahead following the Government's review. Accordingly, non domiciliaries should consider taking advantage of the current regime before 9 December, as any changes will probably not affect existing trusts set up before that date. Excluded property trusts may be either UK resident or non UK resident, both have their respective advantages and disadvantages.

Parmentier Arthur advises on all forms of tax planning with trusts and we also deal with the drafting of appropriate documentation.

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