The commentary below applies to individuals who are domiciled outside the UK under general law and were not born in the UK with a UK domicile of origin.
It has been well publicised that since 6 April 2017, if you have been resident in the UK for 15 out of 20 tax years you will be ‘deemed UK domiciled’. This means that you will be subject to UK income, capital gains and inheritance tax on all assets you hold personally.
Notwithstanding this new rule, we are still seeing HMRC questioning whether an individual has acquired a domicile of choice in the UK before 15 years of residence. Therefore, we recommend that individuals make their intentions clear throughout their time in the UK.
Prior to becoming deemed domicile
Where private equity fund returns are classed as disguised investment management fees (DIMF), including income based carried interest, in most circumstances they will be fully taxable in the UK at marginal income tax and national insurance rates (up to 47% in total) on an arising basis.
Even when the DIMF rules do not apply, the basis on which you can claim the remittance basis of taxation has been restricted. While for most co-investment returns you continue to look at the situs of the relevant underlying fund income and assets, the situs of carried interest returns depends on where you perform your personal investment management duties. You will be able to claim not to be taxed on non-UK income and gains as long as they are not ‘remitted’ (brought directly or indirectly) to the UK. If you think you may wish to make a claim for the remittance basis, we recommend you obtain advice well before the carried interest arises. Ideally, you will need to:
- Keep detailed records of your UK and non-UK working days
- Set up segregated offshore bank accounts.
In addition, the fund should make two payments (into the segregated accounts) to reflect the UK and non-UK element of each distribution.
This approach should help optimise your access to clean capital (see also ‘Bank accounts’ below) to the extent that funds are remitted to the UK at a later date.
We recommend you review the time you have spent in the UK carefully. When applying the 15 out of 20 years test, you must include any year in which you were tax resident in the UK (even if it was only for one day) including periods in the UK for schooling or education. If you have not done so already, you should review the assets you hold directly and any Trust arrangements to establish your position prior to becoming UK deemed domicile.
Rebasing of assets
Transitional provisions include the rebasing of foreign assets to their market value at 5 April 2017 – but this valuable provision is only available to individuals who meet very strict criteria. Broadly, an individual needs to have become deemed UK domiciled on 6 April 2017 and paid the remittance basis charge at least once whilst being a UK resident non-UK domiciliary. In particular, this relief will not apply to individuals becoming deemed domiciled in later years.
Rebasing should not be relevant for carried interest, nor should it apply to assets held via a trust or corporate vehicle. It may, however, be applicable to private equity fund co-investments and the result of rebasing is that you should only pay tax on the growth in foreign assets from April 2017.
When you sell an asset that has benefited from rebasing, you will need to declare the source and basis of the valuation on your tax return. Therefore, with complex or unlisted assets it would be wise to get the valuation, or the information that will form the basis of the valuation, sooner rather than later. For co-investments, fund investor reports and accounts are a good place to start. It should be noted that this could be a costly exercise if third party valuation are used or, alternatively, time consuming when you do it yourself.
Rebasing operates on an asset-by-asset basis and applies automatically unless it is disclaimed. For example, disclaimers would be needed to ensure you benefit from capital losses on any assets worth less than cost on 5 April 2017.
Where non-domiciled individuals have historically claimed the remittance basis they often have at least one non-UK bank account that contains a mix of unremitted, untaxed non-UK income, capital gains and clean / UK tax paid funds. With the exception of the latter category these are potentially subject to UK taxes at different rates.
When funds are remitted to the UK from the bank account, UK tax legislation normally prescribes the order in which each element is deemed to be brought to the UK. For a limited concessionary period, up to 5 April 2019, you can ‘un-mix’ a mixed account to access and remit the clean capital without triggering an incremental UK tax charge. This concession applies to all non-UK domiciliaries who have claimed the remittance basis since 2008 regardless of how long they have been in the UK.
Advice should be sought on how to ‘un-mix’ as failure to meet the various prescribed requirements will mean that the concession will not apply.
UK deemed domiciliary
Once an executive becomes UK deemed domiciled, the structure of offshore bank accounts and segregation of funds can be simplified somewhat although care will still be needed to avoid inadvertently remitting funds that have been previously untaxed. Recordkeeping is key - you may be asked to demonstrate compliance to HMRC in years to come.
The first ‘deemed UK domciliaries’ are due to file their UK personal tax returns by 31 January 2019 – reporting on (and paying UK tax on) their worldwide income and gains for the first time. Becoming deemed domiciled will mean that, going forward, you should be fully liable to UK tax on any assets you hold personally.
Non-UK trusts may remain outside of UK taxation so long as they do not hold UK assets. However, care is required not to lose this protected status, for example:
- No additions should be made to the trust from the date you become UK deemed domiciled
- All transactions, whether the provision of services to the Trustees or the sale of assets, must be at market value
- Any loans or guarantees to Trust structures should be reviewed annually as, in some circumstances, interest has to paid each year to maintain the tax protections of holding assets in trust.
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