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Oct 10, 2017 - domiciliaries) through a foreign company or partnership;. - relevant loans .... transitional issues due t
ICAEW REPRESENTATION 109/17 TAX REPRESENTATION

FINANCE BILL 2017-19, CLAUSE 15, CLAUSES 29,30,31,33 & SCHEDULES 8 - 10 DOMICILE, OFFSHORE TRUSTS, OVERSEAS PROPERTY ETC

Text of submission by ICAEW Tax Faculty on 10 October 2017 to House of Commons Public Bill Committee in response to invitation dated 14 September 2017 to “have your say”

Contents Paragraphs Who we are

1

Summary of the measures

2-3

Introduction

4 - 12

Executive summary

13

Comments on Finance Bill 2017-19 Clause 15

14 - 16

Clause 29 and schedule 8

17 - 149

Clause 30

150 -153

Clause 31 and schedule 9

154 - 158

Clause 33 and schedule 10

159 - 186

Who we are

Appendix 1

The ICAEW Tax Faculty Ten Tenets

Appendix 2

Cleansing and foreign exchange example

Appendix 3

Explanatory notes for finance act 2008 changes to the remittance basis

Appendix 4

The Institute of Chartered Accountants in England and Wales Chartered Accountants’ Hall Moorgate Place London EC2R 6EA UK icaew.com/taxfac

T F E

+44 (0)20 7920 8646 +44 (0)20 7920 0547 [email protected]

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

FINANCE BILL 2017-19, CLAUSE 15 & CLAUSES 29,30,31,33 & SCHEDULES 8 -10 DOMICILE, OFFSHORE TRUSTS, OVERSEAS PROPERTY ETC

WHO WE ARE 1. Please see Appendix 1. SUMMARY OF THE MEASURES 2. The main changes, which will be effective from 6 April 2017, are as follows: 





Anyone born in the UK with a UK domicile of origin who is UK resident in a tax year will be deemed domiciled in the UK for all tax purposes. This is subject to a period of grace for Inheritance Tax (IHT) purposes if the individual was not UK resident in either of the preceding two tax years. A long term resident foreign domiciliary – one who has been UK resident in at least 15 of the immediately preceding 20 tax years – will be deemed domiciled in the UK. Provided they are not also a formerly domiciled resident such individuals can benefit from reliefs/transitional provisions and offshore trust protections. The scope of IHT will be extended so as to apply to: - UK residential property owned by foreign domiciliaries (or trusts settled by foreign domiciliaries) through a foreign company or partnership; - relevant loans (broadly a loan where the funds are used for the acquisition, maintenance or enhancement of an interest in UK residential property); and - security, collateral or guarantees given on such a relevant loan.

3. Also effective from 6 April 2017, a limited number of relaxations to Business Investment Relief (BIR) are introduced to encourage greater take up of the relief. The opportunity is also taken to legislate for HMRC’s view that for BIR purposes corporate partners are not treated as carrying on a trade by virtue of the partnership carrying on a trade. HMRC has always interpreted the legislation in that way but until this change it was not shared generally. INTRODUCTION 4. By way of background, and in the interest of having links to all of the HM Treasury/HMRC material and all our responses in one place, we have charted the course of these proposals below. 5. As will become evident, various versions of draft legislation have been published in the course of getting to The Finance Bill 2017-19 clauses. One of the minor issues from draft to draft has been identifying the changes made. In the interests of speed and efficiency for all concerned parties, we encourage both HMRC and HMT to either publish tracked changes (redline) versions of new legislation alongside the clean versions or to publish WORD copies so that a quick track changes comparison can be carried out using the standard Microsoft WORD 2010 features rather than having to have more expensive software to convert the PDF versions into WORD and then carrying out the comparison. 6. Timeline 

At Summer Budget 2015 the reforms were announced.

 

A consultation document was published on 30 September 2015. The ICAEW set out its comments in TaxRep 59/15.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc



Draft clauses were published on 9 December 2015.



The ICAEW set out its comments in TaxRep 23/16.



Further draft clauses were published on 2 February 2016.



The ICAEW set out its comments in TaxRep 48/16.



March Budget 2016 – announcement of transitional provisions such as rebasing (little detail given).



Post EU Referendum, a further consultation document was published on 18 August 2016.



The ICAEW set out its comments in TaxRep 159/16.



Draft clauses were subsequently published on 5 December 2016.



The ICAEW set out its comments in TaxRep 13/17.



Further draft clauses were published on 26 January 2017.



The ICAEW set out its comments in TaxRep 26/17.



The Finance Bill was published on 20 March 2017.



The ICAEW set out its comments in TaxRep 50/17.



The provisions in connection with foreign domiciliaries were all dropped from the Finance Bill on 24 April 2017.



On 21 June the ICAEW Tax Faculty wrote to HMT and HMRC regarding the proposed changes to the taxation of foreign domiciliaries.



On 13 July 2017, the new FST announced that the Finance Bill would be published after summer recess and that the intention was for the proposed changes to the taxation of foreign domiciliaries to apply retroactively to 6 April 2017.



On 13 July 2017, HMT and HMRC published revised draft legislation for inclusion in the next Finance Bill.



On 8 September 2017 The Finance Bill 2017-19 (which will be enacted as Finance (No 2) Act 2017) was published.

7. At all stages of the above process, the ICAEW has met with both HM Treasury and HMRC and has engaged in regular correspondence to try and help design legislation that is fit for purpose and delivers the Government’s stated policy objectives. 8. It is therefore with some regret that, despite the lengthy consultation process, and despite the input of both the ICAEW and other professional bodies, most of the concerns we raised in the TaxReps above remain unaddressed. Furthermore, the July 2017 changes have raised additional concerns over and above those in our previous TaxReps. 9. Our key concerns are set down in the Executive Summary. 10. Additional draft legislation relating to offshore trusts was published on 13 September 2017 for inclusion in what is referred to in the documentation as Finance Bill 2017-18 (which will be enacted as Finance Act 2018). Comments have been requested on this and we will be submitting 2

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

comments as well as participating in any meeting arranged. We will also pick up on any concerns with respect to the interaction of the Finance Bill 2017-19 provisions and the draft Finance Bill 2017-18 in the representation commenting on the draft provisions. 11. We are not asking for changes to the policy at this stage, our comments below are confined to areas where we are concerned that the Finance Bill 2017-19 legislation either does not work as intended or is insufficiently clear. We also appreciate that there may be little appetite to put through amendments to Finance Bill 2017-19. Since there is further legislation going through Finance Bill 2017-18 (that is the next Finance Bill) we would ask that changes rejected for this current Finance Bill are considered for the next one. 12. Whilst it does not relate to the legislation itself we feel we should comment on the quality of the Explanatory Notes which are supposed to inform readers. Rather than explaining or providing guidance on the legislation, the Explanatory Notes just seem to repeat the legislation in slightly different words. To illustrate the point we attach as Appendix 4 the Explanatory Notes to the changes to the remittance basis in Finance Bill 2008; the quality of these is markedly higher. We appreciate that this is likely to be down to a resources issue but the Explanatory Notes produced now are not worth having and the time could be better spent improving the quality of the legislation, that said, such complex legislation does require clear explanatory notes to enable the legislators to understand the legislation they are enacting and to enable those potentially affected by the legislation to work out if and how it impacts on them. EXECUTIVE SUMMARY 13. The following is a list of the main issues with the Finance Bill 2017-19 legislation that concern us: a) Protected trusts – Protected trusts were a key policy objective when the changes were announced; the idea being that trusts settled by foreign domiciliaries before certain dates would offer some measure of protection against the upcoming curtailment of the remittance basis of taxation. The legislation, quite rightly, contains measures that are designed to remove the protections from a trust should further property be added by the settlor (tainting). And it also includes safe harbours, stating explicitly which common transactions will not constitute tainting. These safe harbours are vitally important in practice. Without them the delivery of the policy objective would be greatly diminished. The unresolved issues are as follows: i.

We, like others, are concerned about the implication that can be drawn from the provisions relating to property provided pursuant to a pre-6 April 2017 liability such as a loan repayment. It appears to indicate that HMRC holds a view on when property is added which is contrary to what we consider to be the general view. While normally this would be a minor technical issue, here it is fundamental to how the tainting provisions work.

ii.

The measures specifying what constitutes “arm’s length terms” do not mesh with the new rules on valuing benefits. If this is not resolved, foreign domiciliaries may find themselves trapped between a rock and a hard place (that is either forfeiting trust protection or being subject to a benefits charge). In such a situation the foreign domiciliary may decide that, contrary to the policy intent, the more attractive option is to leave the UK.

iii.

The changes to the Transfer of Assets Abroad (ToAA) code are defective in how they attempt to scope out the income which should be protected. As drafted, there is a serious risk that income which should be protected will not be and so will fall to be taxed on the arising basis contrary to the stated policy objective.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

b) Remittances by trustees – Inherent in the policy pledge regarding protected trusts, record keeping and how beneficiaries were to be taxed, was the corollary that trustees would be free to invest and spend both pre- and post-6 April 2017 money in the UK without triggering a taxable remittance. This would in turn benefit the UK economy (the current legislation deters vast sums of money from entering the UK) whilst not decreasing the tax take (as currently the funds are just retained offshore, so no tax is due). The unresolved issues are as follows: i.

ii.

iii.

As drafted, the changes to the “settlements legislation” will not be effective in delivering the policy objective in practice. They are not broad enough to protect pre6 April 2017 income in many day-to-day scenarios. Put another way, while the changes technically deliver the pledge, in practice the drafting is so narrow it is unlikely to be useable. Furthermore, while some attempt (see (b)(i) above) has been made to deliver the policy objective for the main charging provision in the settlements legislation, no effort has been made for the more minor charging provisions. However, as these minor charging provisions sit in the background and may come into play at a later date, the risk is such that trustees are unlikely to spend or invest funds in the UK without further changes. Due to the way the transfer of assets abroad (ToAA) benefits charge operates, trustees will not risk bringing any funds to the UK where there is the possibility of a benefit being provided to either the settlor or a close family member of the settlor (in a situation where the settlor will be taxed on the benefit). The problem is the interaction of the relevant person definition (the trustees being relevant persons in connection with the settlor) and the matching rules for foreign domiciliaries that currently deem the “relevant income” (that is the foreign income actually received by the trustees) to derive from the foreign deemed income (that is the income deemed to arise to the foreign domiciled beneficiary receiving the benefit). A change needs to be made to bring the income tax provisions in line with the capital gains tax (CGT) anti-avoidance provisions for the attribution of gains to the foreign domiciled beneficiaries of offshore settlements. For the avoidance of doubt, the settlement legislation and the ToAA code run in tandem (or overlap). As such, all these changes need to be made to deliver the policy.

c) Transfer of Assets Abroad (ToAA) Benefits Charge – The policy pledge was that beneficiaries of protected trusts would be taxed on benefits received from the trust. i.

The amendments that the legislation makes to the ToAA code are highly convoluted and it is questionable whether they work as intended (assuming we understand correctly what the changes are actually trying to achieve). As an indication of how complicated this is, the analogous changes to the settlements legislation were deferred until Finance Bill 2017-18 to allow more time to work on them (draft clauses were published on 13 September 2018 as mentioned in paragraph 10 above).

ii.

We believe consistency of approach is crucial. As such, we would have preferred for the changes to ToAA to be deferred until Finance Bill 2017-18 when the analogous settlements legislation and extended CGT provisions are to be introduced. As this is not going to happen we hope that the opportunity will be taken in Finance Bill 201718 to correct the issues with the ToAA amendments passed in Finance (No 2) Act 2017 and that the draft settlements legislation is adjusted so that a consistent approach is taken.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

d) Cleansing – This again was a key policy objective – to allow foreign domiciliaries to segregate their funds and so free up trapped capital and income and gains that can be remitted at a low tax cost (where for example there are significant foreign tax credits). The objective was to increase inward investment and spending in the UK and minimise transitional issues due to a lack of data. There is no actual cost to the Exchequer as a result of cleansing as, without it, the funds would remain outside of the UK. Indeed cleansing will if anything increase the overall tax take as there may be taxable remittances at a rate the foreign domiciliary considers acceptable and funds brought in will often be used to acquire goods and services which are subject to VAT. In other cases the funds may be invested and could directly or indirectly lead to job creation and PAYE and national insurance. We are very supportive of the objective behind cleansing. Unfortunately, we have significant concerns with the legislation: i.

Mixed funds are one of the most complex aspects of the remittance basis. Since cleansing is a relief from mixed funds situations the legislation, therefore, needs to be very carefully drafted. Unfortunately, the draft legislation we have is far too short and covers nowhere near enough ground to constitute good law; apparently the gap is to be filled by HMRC guidance.

ii.

It is trite to say that taxpayers should be taxed by law not guidance. However, where the law is unclear, guidance that cannot be relied upon undermines taxpayer trust and makes the position of advisers virtually impossible. The approach being suggested of filling legislative gaps by the provision of HMRC guidance is, therefore, a significant cause for concern since HMRC has spent significant time in court arguing (successfully to date) that their guidance cannot be relied upon.

iii.

For cleansing to work, if the legislation will not be changed to include greater detail, then HMRC’s guidance must be given a standing such that taxpayers can rely on it and so that HMRC cannot retrospectively change its opinion. Not only should taxpayers have a legitimate expectation as a result of the guidance they should not have to go to court to prove this. A new provision should be introduced (possibly through Finance Bill 2017-18 if it is not felt possible to amend Finance Bill 2017-19) to give HMRC guidance binding force such that changes are only effective going forward.

iv.

There remain material uncertainties about how cleansing will operate in practice. Foreign exchange is a key issue as foreign domiciliaries so often have multiple foreign currency bank accounts.

v.

Where mixed fund accounts are in foreign currency it is necessary to carry out an analysis to determine the figures for cleansing. The legislation is silent on how such an analysis should be carried out. There are two different approaches: one being to carry out the analysis in sterling (our favoured approach since it enables extremely complex analysis work with hundreds or possibly thousands of transactions, movements between multiple currency accounts, share portfolios with acquisitions in one denomination and sales in another etc to be processed) and the other to carry out the analysis in the foreign currency. The foreign currency option is HMRC’s preference but not an option that will work well in all scenarios and not an option that is supported in law. Given where we find ourselves, we do not feel that technical debate now is profitable and our preferred solution is that it is accepted by HMRC that either approach can be adopted provided this is done consistently. We would like specific 5

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

legislation enacted to this effect. If this is not possible then it should feature in HMRC guidance (see comments above re HMRC guidance). vi.

In the current Finance Bill 2017-19 the window for cleansing is 2 years (6 April 2017 to 5 April 2019).The Finance (No 2) Act 2017 will not be enacted until November 2017 and HMRC guidance will not be published until December. Nine months of the cleansing period will have elapsed with taxpayers in a state of complete uncertainty. This is not fair and we believe the cleansing window should be extended for an additional year (to 5 April 2020) to make up for the lost time in 2017.

vii.

We appreciate that HMRC has specifically checked the point with its specialists but we are still concerned that the reference in the legislation to “offshore transfer” could technically remain an issue since the scope of the remittance basis offshore transfer definition has not been restricted. To clarify the point we would ask that the amendment suggested in paragraph 138 below is incorporated. To be clear on the consequences, if we are correct on this point cleansing cannot occur in 99.9% of cases.

viii.

The current legislation means that an inadvertent overnomination will invalidate the whole cleansing process, in which case, any funds brought to the UK will trigger a tax liability. In theory, taxpayers can correct any errors before remittance but this is impracticable as it assumes that taxpayers will realise there are errors. Inadvertent overnominations are entirely possible; the greater the number of transactions, the higher the risk (mistakes have a cumulative effect due to how the law works). We think the better approach would be to adjust the legislation to invalidate only the overnominated part, not the whole cleansing transfer. The amendment required is straightforward as shown in paragraph 136 below.

ix.

There is a misalignment between who is excluded from benefitting from cleansing of post-5 April 2008 funds and who is excluded from benefiting from cleansing of pre-6 April 2008 funds. We assume there has been a mistake as the draft legislation excludes individuals who were either born in the UK or have a UK domicile of origin from benefiting from cleansing of pre-6 April 2008 funds rather than only excluding those who were both born in the UK and have a UK domicile of origin. The issue is the use of “or” in the legislation rather than the use of “and”.

e) IHT and residential property, relevant loans and collateral – The stated policy objective was to ensure UK IHT was paid on UK residential property even when owned via an “envelope” (e.g. a “close” company). Implicit in the policy was that there was no intention to charge to IHT residential property owned by investors in retail collective investment schemes. As with cleansing, we are concerned by the current position: i.

The legislation appears to be defective in that while the draftsman has attempted to restrict the changes to “close” companies, they do not appear to have been successful in all cases where there is a chain of companies (one of which is open) between the individual and the property. As such, non-resident retail fund investors could well be caught by the changes.

ii.

There is no attempt to restrict the changes to “close” partnerships – all retail investors in funds structured as partnerships will be caught (all partners in a partnership will be connected under the anti-fragmentation rule so all will fail the 5% test irrespective of how small their partnership interest actually is – hopefully this is an oversight in the drafting of the anti-fragmentation rule). There are also a significant issues for : - banks structured as partnerships as a result of the relevant debt rules; and 6

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

- hedge funds (or funds generally structured as partnerships) who are in the market to purchase mortgage backed securities, collaterised debt obligations (CDO) etc etc. iii.

There appears to be no overall cap on the value that can be charged to IHT or how many people can be simultaneously charged on the same property value. We consider this grossly unfair. The proposals work by making various other assets (which would not otherwise be within the scope of IHT) chargeable to IHT in certain scenarios. It is therefore possible that the property value could be charged once on the company owner (say), and again on a family member who has loaned money to the company. We believe the legislation should set out an overall cap on the amount charged and an order or priority for charging IHT.

iv.

Fundamentally the scope of the new legislation will make an enormous number of foreign residents non-compliant with UK law. We are not talking about people in specialised professions or undertaking highly complex transactions. We are talking about situations such as where foreign resident parents make unsecured loans to children in the UK or provides collateral for a bank loan. It is highly unlikely that such individuals will be aware that the loan or the collateral is within the scope of UK IHT. Serious consideration has to be given as to whether it is possible to educate such individuals. Legislation should not be passed where there is likely to be significant non-compliance as individuals are too detached from the UK to understand their positions.

v.

For an idea of the potential consequences of pressing ahead with this approach please see the Court’s comments on HMRC’s attempt to impose penalties for a late Non-Resident CGT Return in the case of R McGreevy v HMRC [2017] UKFTT 690 . For the avoidance of doubt we suggest that particular attention is paid to the Court’s opinion at paras 155 onwards. In this case at least the taxpayer sold UK property and so had some tentative relationship to the UK and yet the Court is unimpressed. In the proposed IHT amendments, individuals (and/or their estates) will be brought within the scope of UK IHT who have no particular links to the UK, no UK assets, and potentially no way of knowing. As McGreevy makes clear, if this change is pushed through, there will be no end of difficulties.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

COMMENTS ON FINANCE BILL 2017-19 CLAUSE 15, CLAUSES 29,30,31,33 & SCHEDULES 8 - 10

CLAUSE 15 – BUSINESS INVESTMENT RELIEF Clause 15 Overview 14. Clause 15 sets out several changes to the BIR provisions. Most of the changes are to make the relief more attractive to foreign domiciliaries in the hope that there will be greater uptake leading to additional investment in the UK. One adjustment is, however, to amend the legislation to reflect HMRC’s position that a corporate partner is not to be treated as carrying on the partnership trade. Our concerns 15. We would have preferred the changes to be more extensive (as per the various suggestions submitted in our TaxRep 159/16.) However, we recognise that the timetable made this impossible and hope that the comments in the Response Document about looking into further changes will result in additional legislation. We are disappointed that there is nothing in the draft clauses for Finance Bill 2017-2018 and hope there will be further changes in Finance Bill 2019. 16. The new “hybrid” company category at clause 15 (3)(d) is too narrow only allowing a company that is both trading and stakeholder to qualify. Often there will be companies that are both stakeholder and holding company (possibly also trading but all three is less common). Recommendations The new “hybrid” company category needs to be widened. Suggested legislative amendments Clause 15(3)(d) is amended so a company will qualify if it has:  elements of any two of trading, stakeholder and holding company; or  elements of all three of trading, stakeholder and holding company.

CLAUSE 29 AND SCHEDULE 8 DEEMED DOMICILE: INCOME TAX AND CAPITAL GAINS TAX Clause 29 and Schedule 8 Overview 17. Clause 29 sets out the rules on what constitutes becoming deemed domiciled for income tax and capital gains tax (CGT). 18.

Schedule 8 contains four parts as follows: 

Part 1 deals with the application of deemed domicile;



Part 2 deals with the protection of foreign resident trusts;



Part 3 deals with the CGT rebasing election; and,



Part 4 deals with the cleansing of mixed funds (mixed funds contain one or more of a mixture of different categories of income, gains and capital).

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

Clause 29 19.

No comments.

SCHEDULE 8, PART 1 – APPLICATION OF DEEMED DOMICILE RULE

Schedule 8, Para 1 20.

No comments.

Schedule 8, Paras 2 – 5 Our concerns 21. The deemed TCGA 1992 s16ZA to 16ZD legislation, in relation to the foreign capital losses election, introduced by the 2008 Finance Act is complex enough without further changes to deal with these deemed domicile issues. We think the legislation does achieve the aim of breaking the link when the individual becomes deemed domiciled, so losses can be relieved as normal. We also think that it does achieve the aim of allowing a new election if an individual re-sets the domicile clock and loses deemed domiciled status. However, we do not think the latter position is so clearly achieved and the legislation could be improved. 22. Our main concern is that where the election was made it does not seem to be sufficiently clear how brought forward capital losses will be treated. For example, the position as at the crossover to deemed UK domicile does not seem clear. We assume that brought forward capital losses will be available to set against losses in future deemed domiciled years in the normal way. Recommendations 23. We would welcome confirmation of the position set down in paragraph 22. On the basis that the legislation will not be adjusted to clarify the position we feel that the position should be covered in the guidance.

Schedule 8, Paras 6 – 17 24.

No comments.

SCHEDULE 8, PART 2 – PROTECTION OF OVERSEAS TRUSTS

Schedule 8, Para 18 25.

Para 18 inserts into Schedule 5 of TCGA 1992 new paragraphs 5A and 5B.

New Schedule 5, TCGA 1992, paragraph 5A Our concerns 26. Para 5A sets out four conditions (conditions A to D) which if all met will mean that s86 TCGA does not apply to the settlor even though he has become deemed domiciled under the 15 out of 20 test. Para 5A(5) – (9) deal specifically with what is called “tainting” i.e. actions taken that will cause s86 to apply (s86 provides that the settlor of the trust is taxable on all gains made by the offshore trustees, even if they do not actually receive anything from the trust but these rules can only apply if the settlor is UK resident and domiciled). 27. Para 5A(5) requires that “no property or income is provided directly or indirectly for the purposes of the settlement by the settlor, or by the trustees of another settlement of which the settlor is the settlor or a beneficiary…”. It is not clear whether the direct or indirect limb refers to the provision of the property or income (i.e. direct or indirect provision) or the purpose (e.g. direct or indirect purpose). 28. This is particularly relevant as it may entice some to try to provide property indirectly via a company. Or alternatively it may entice others to try and provide property to a wholly owned subsidiary of a trust.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

Recommendations 29. We recommend that the position is put beyond doubt to avoid any potential temptation as follows: “no property or income is provided for the purposes of the settlement (be it to the trustees or otherwise to an underlying person) either directly or indirectly by the settlor, or by the trustees of another settlement of which the settlor is the settlor or a beneficiary…”. 30. We would also add, as we have on several occasions previously, that we cannot see any reason why the provisions are drafted such that a transfer/loan between trusts that both enjoy protected status should be treated as tainting the recipient trust. Likewise we do not see why splitting protected trusts is seen as an issue. We would ask again that this matter is reconsidered. It may be considered too late to amend Finance Bill 2017-19 but given further offshore trust changes are going through Finance Act 2018 adjustments could be added to Finance Bill 2017-18 with retrospective effect to 6 April 2017 (since the changes are beneficial). Suggested legislative amendments 31. See paragraphs 29 and 30 above. New Schedule 5, TCGA 1992, paragraph 5B 32. Para 5B elaborates on what constitutes “tainting”. Our concerns 33. In a manner similar to that mentioned above, Para 5B could be read as focusing on loans to the trustees only and not loans to underlying persons (e.g. a wholly owned company). Paras 5B(2)(c), (d), and (e) for example all have wording along the following lines: “the principal of a loan made to the trustees” (para 5B(2)(c)). Para 5B(3), (5) and (8) all have the same defect. Recommendations 34. We would suggest that Para 5B be amended so that where there is a special treatment for a loan to the trustees (say), the same treatment also applies to loans to underlying persons (e.g. wholly owned companies). Our concerns 35. Para 5B(f) deals with “property or income provided in pursuance of a liability incurred….pre6 April 2017”. It is still not entirely clear what the purpose of this provision is. 36. We believe that it is meant to be helpful to taxpayers but our fear is that its inclusion seems to imply that HMRC considers that property should normally be treated as being provided when property is delivered not when the liability to deliver is incurred. For taxpayers deemed domiciled after 2017/18 this would be an issue if they provided property pursuant to a liability incurred prior to becoming deemed domiciled. Recommendations We would welcome confirmation of HMRC’s general view of when property should be seen to be delivered and why it was felt that para 5B(f) was required. Our concerns 37. Para 5B(8) sets out what constitutes “arm’s length terms” for loans. This works for the tainting provisions. It should align with the new valuation rules for capital payments/benefits for ss87 & 731 purposes (section 31 and Sch 9). 38. There is an inclusion of a definition of what constitutes “arm’s length terms” for loan funds made available, which does align with the Sch 9 Value of Benefits provisions. However, the tainting legislation does not cover the two other benefits dealt with in Sch 9 (these being movable property and land made available). 10

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

39. If a trustee lends an asset to the settlor and the market based commercial fee is (say) 2% of capital value, the settlor will taint the trust if he pays a higher fee under the new benefit valuation rules so as to ensure there is no benefit/capital payment. Recommendations 40. It is not fair for an individual to have to choose between tainting the trust and paying tax on a benefit/capital payment. The rules should be fully aligned, so that the individual can ensure that he does not receive a benefit and does not taint the trust. Suggested legislative amendments 41. Additional provisions should be included in new Sch 5, TCGA 1992, para 5B that align with the provisions at Sch 9, for the use of movable property and the use of land.

Schedule 8, Para 19 42.

No comments.

Schedule 8, Paras 20 – 21 43.

No comments.

Schedule 8, Para 22 44.

Para 22 introduces new s628A and s628B and s628C into ITTOIA 2005.

New section 628A, ITTOIA 2005 Overview 45. The effect of s628A, broadly, is to disapply s624 for protected foreign source income (PFSI) as defined. This means that non-PFSI income (broadly all UK income and some types of foreign income) will remain taxable under the pre-6 April 2017 rules. PFSI income will not be so taxable. 46. S628A(13) disapplies s648(3) – (5) when considering s628A. Broadly this means that in determining what is PFSI, all income is to be treated as arising under the settlement at the time that it arises (s648 says that for settlors on the remittance basis, relevant foreign income (RFI) is not to be treated as arising under the settlement until remitted). 47.

This amendment is required due to how PFSI is defined in s628A(2).

48. For a non-deemed domiciled settlor, this means that RFI is treated as PFSI. And s624 does not apply to PFSI. A non-deemed domiciled settlor cannot taint a trust so this treatment applies until he becomes deemed domiciled. 49.

For a deemed domiciled settlor who does not taint a trust, the above treatment continues.

50. For a deemed domiciled settlor who taints a trust, there is no PFSI. Nor can s648 apply as the settlor is no longer able to claim the remittance basis. All income is taxed on the arising basis, as if it arose to the settlor directly. 51. S628A(13) is therefore designed to ensure that the PFSI rules apply in the case of a nondeemed domiciled settlor. Without the amendment, foreign income would not fall into the definition of PFSI until remitted. 52. A consequence of this amendment is that in 2017/18 PFSI can be remitted to the UK by anyone without triggering a taxable remittance for the settlor (under this set of provisions at least – see later comments explaining the issues with the ToAA provisions).

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

Concern over definition of PFSI income 53. PFSI income is defined as being, inter alia, relevant foreign income RFI. The ambit of RFI is narrower than foreign source income. There are 24 categories of RFI altogether. Some types of foreign income are not included in this definition, the main category being chargeable event gains. Holding investments through insurance wrappers is a relatively common way of managing investments. Recommendation 54. Amending the legislation to include chargeable event gains within the PFSI definition will be attractive to settlors and may be important in decisions taken about whether to leave the UK prior to becoming deemed domiciled here. Suggested legislative amendments 55. As a minimum, the PFSI definition should be extended to include chargeable event gains. Ideally it should be extended to include all forms of foreign income. Forfeiting protection by tainting the trust 56. S628A(7) – (12) and s628B deal primarily with tainting and draws on the CGT clauses so similar comments as those in paragraphs 25 to 31 above apply here. New section 628B, ITTOIA 2005 57. This section deals with tainting drawing on the CGT clauses so the comments in paragraphs 32 to 40 above apply here. New section 628C, ITTOIA 2005 Our concerns 58. S628C deals with foreign income arising before 6 April 2017 but remitted thereafter. 59. The mechanism employed is to remove the trustees from the definition of a relevant person in relation to “transitional trust income”. This means that the trustees cannot trigger a taxable remittance for the settlor by remitting that income. 60. Unfortunately this does not go far enough. The problem lies in the fact that something as simple as lending the income down to a wholly owned subsidiary to invest in the UK would trigger a taxable remittance (as the subsidiary is a relevant person in connection with the settlor and has not been removed from the definition). It is not unusual to use companies to ring-fence investments, so this is a significant practical issue. 61. In practice, (as a result of the limitations in this carve-out and see also our comments on the ToAA provisions in paragraphs 120 to 125) trustees are likely to continue to maintain their current practice of not bringing funds to the UK. This will defeat the stated policy intention of freeing funds so they can be spent and invested in the UK. 62. We would also question why s628C(2) does not deal with pre-2008/09 income. Presumably (see RDRM 31490) it is due to how s624 operated before 2008 but if that is the case there is no harm in removing the reference to 2008/09 entirely. Including references to 2008/09 in s628C which, upon examination, do not constitute a limitation is only likely to confuse trustees and make them think they need to be able to segregate the income into years. Recommendations 63. In addition to excluding trustees from the definition of a relevant person in relation to “transitional trust income” all underlying companies should be excluded. 64.

The reference to 2008/09 in s628C(2) should be removed.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

Suggested legislative amendments 65. See paragraphs 63 and 64.

Schedule 8, Para 23 Our concerns 66. Para 23 introduces a carve-out for PFSI from s629 by inserting a new s630A. 67.

The new s630A uses the new s628A to define PFSI so the same comments apply.

68. We note that there is no transitional relief from s629 for pre-6 April 2017 income (i.e. no equivalent of the new s628C). We assume this is an oversight so should be remedied. Recommendation 69. Transitional relief from s629 for pre-6 April 2017 income should be included within the legislation. Suggested legislative amendments 70. A relief provision modelled on new s628C, ITTOIA 2005 (as amended for our suggestions) should be included.

Schedule 8, Para 24 71. Para 24 introduces a carve-out for PFSI from s633 by inserting a new restriction into s635 that ensures that the available income is constituted of non-PFSI income only. 72. Again we note that there is no transitional relief pre-6 April 2017 income (i.e. no equivalent of the new s628C). We assume this is an oversight so should be remedied. Recommendation 73. Transitional relief from s633 for pre-6 April 2017 income should be included within the legislation. Suggested legislative amendments 74. A relief provision modelled on new s628C, ITTOIA 2005 (as amended for our suggestions) should be included.

Schedule 8, Para 25 75.

No comments.

Schedule 8 Para 26 76. This amendment raises the question of why s628A(4) is required (i.e. Condition B). S628A is designed to operate as a carve-out from s624. Therefore to be within s628A at all, s624 must apply to the income. S624 does not require the concept of “originating” where there is only one settlor. And in the event of more than one settlor, s644 uses the origination rule to apply s624 appropriately. Our concern 77. We do not understand what HMRC has in mind in including Condition B in s628A. Our concern, albeit a minor one, is that there will be a scenario whereby there is a single settlor, s624 applies, but the additional requirement in Condition B (which should only be relevant in the case of multiple settlors) means that the RFI is not classified as PFSI. Recommendation 78. Remove condition B from s628A. Suggested legislative amendments 79. See paragraph 78. 13

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

Schedule 8, Paras 27-28 80. Para 28 inserts new subsections (3B) and (3BA) into s721. 81. Subsection (3B) modifies the rule in s721 ITA 2007 such that, broadly, s721 continues to apply to all income if the transferor is UK domiciled but only applies to non-PFSI income otherwise (unless there is a tainting event). 82. The extra gateway over and above what is required to generate the same effect for s624 is due to the fact that the ToAA provisions are considerably wider than trusts and the intention here is to generate protected status for trust structures only. Suggested legislative amendments 83. Subsection (3BA) equates PFSI with “Protected Income” in s733A. We think the clearer solution would have been to change the wording of s733A and amend s721A.

Schedule 8, Para 29 84.

Para 29 inserts new ss721A and 721B into the ToAA provisions.

85. S721A defines what is PFSI for the purposes of the amended s721 (and only for s721 – see s721A(1)). 86. S721A(3) defines PFSI with respect to trustee income. S721A(4) defines PFSI with respect to underlying company income. Our concerns – s721A 87. S721A(4)(c) & (d) provide the relevant link between the trustees and the underlying company. As we said previously, the drafting of this legislation needs to be very precise as, depending on the wording, poorly drafted legislation could either: 

 88.

come under pressure from avoidance activity; or exclude from the PFSI definition income which should be included. S721A(4)(c) requires that: the trustees of a settlement…(ii) are participators in the first in a chain of two or more companies where the last company in the chain is the person abroad and where each company in the chain (except the last) is a participator in the next company in the chain,

89. This clause poses several issues. The most obvious is how chains of companies are to be dealt with. Consider a protected trust (T) owns a HoldCo (HCO) which owns a Jersey resident company (JCo) which owns a Guernsey resident company (GCo) which generates income. GCo is the last company in the chain and its income is protected. What about a dividend from GCo to JCo? This would appear to be outside the protection. 90.

S721A(4)(d) states that: the individual’s power to enjoy the income results from the trustees being participators as mentioned in paragraph (c)(i) or (ii),

91. This appears to place a restriction on how the power to enjoy is derived meaning that income within s721, which should be PFSI (according to the stated policy intention) will not be PFSI unless it falls into this narrow band. It is worth nothing that the definition of relevant transaction within s716 is very wide indeed and there are many transactions which trustees could enter into which generate income within a company but where the trustee is not a participator.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

92. We also wonder what the position is regarding entity types (such as foundations) which are not explicitly catered for in s721A (it refers to trustees and participators explicitly). Recommendation 93. We recommend that further thought is given to how to establish the necessary link between the trustees and the underlying company. 94. Consideration also needs to be given to situations where the underlying company is UK resident such that the individual pays UK tax on the arising basis on the company income. On a dividend up in a later tax year (a dividend in the current tax year being seen as taking priority such that the charge is only levied at trust level) it used to be the case that credit could be given for the UK tax paid to avoid double taxation. It is not clear what the situation is under the new provisions. Since tax has already been paid on the company income it would only be fair to take the dividend out of the PFSI definition. Suggested legislative amendments 95. Amending S721A(4) to better define the necessary link between the trustees and the underlying company. 96. Adjusting the PFSI definition, so that where the income of the underlying company has been taxed on the settlor it cannot be taxed again when it is “dividended” up to the trust. Our concerns – s 721B 97. S721B deals with tainting and draws on the CGT clauses so similar comments as those at paragraphs 25 to 41 apply.

Schedule 8, Paras 30 – 31 98.

No comments.

Schedule 8, Para 32 99. This para mirrors Para 29 of the legislation in that it attempts to do for s729 what Para 29 does for s721. 100.

The material differences from Para 29 are contained in the new s729A(4)(d) and (e).

101.

The same issue as that discussed in paragraphs 87 to 97 above applies to s729A(c).

102.

S729(4)(d) states: “the condition in paragraph (c) is met as a result of a relevant transaction (whether or not it is also met otherwise than as a result of a relevant transaction),”

103.

We are not clear as to why this is included.

104.

S729A(4)(e) states: “the income has become the income of the person abroad as a result of that relevant transaction,”

105. This appears to require the income of the foreign company to arise to the company as a result of the transaction that made the trustee a shareholder (for example). So a subscription for shares and the company then investing in a portfolio of listed foreign resident companies would presumably not qualify since the subscription is a different transaction to the act of investing. Recommendations 106. We think that both these provisions, alongside their sister provisions in s721A, need to be fundamentally reworked. It does not seem to us that they achieve the policy intentions.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

107. We appreciate that the Government wants to pass legislation for 2017/18 and there is insufficient time to rework the legislation since a mid-November Royal Assent date is being worked towards for Finance (No 2) Act 2017. However, changes can go through Finance Bill 2017-18 to improve the legislation and ensure that there is alignment between the ToAA and settlements’ regime provisions.

Schedule 8, Para 33 108.

No comments.

Schedule 8, Para 34 Our concerns 109. This Para amends s731 and inserts a new subsection (1A) (i.e. s731(1A)). 110. We have found subsection (1A) difficult to work through. Indeed the whole of the changes to s731 et seq seem quite tortuous and do not sit well with the principles behind the Tax Law Rewrite; we expect that they will be impenetrable to all but a few. 111. Subsection (1A), when read in accordance with the amendment para 35 makes to s732, extends the scope of the ToAA charge to tax to:  

non-resident settlors who receive benefits matched to income; and benefits matched to income in connection with close family members of the settlor.

112. The extension of the scope of ToAA seems to apply both to current and future year matching. Recommendations 113. This extension of the scope of ToAA was not announced previously. We feel that an announcement should be made given its importance. Schedule 8, Para 35 Our concerns 114. See above. 115. Para 35(5) also inserts into s733(1) a further restriction stating that matched income can only be deducted if tax has been charged under s731 for an earlier year. We would question how practical this is. Is it intended to have the trustees check with the non-resident recipients of a benefit every year to see if there has been a change in circumstances and so a matched benefit has become taxed in an earlier tax year? There will be cases where the information cannot be obtained, what should be done then? Recommendations 116. See paragraph 113. 117.

The practicality of para 35(5) needs to be considered and guidance provided for trustees.

Schedule 8, Para 36 118. No further comments except to say that it is s733A which leads to most of the amendments for s731 et seq and nearly all of the additional complexity. Recommendations 119. The drafting should be re-considered in the light of the legislation for Finance Bill 2017-18 to ensure there is consistency between analogous provisions and that the legislation is appropriately targeted and clear.

Schedule 8, Para 36 Our concerns 16

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

120. We note that there is no amendment to s735. We understood that the intention was to allow trustees to bring foreign income and gains to the UK without triggering a taxable remittance. 121. Since the trustees remain relevant persons in connection with the settlor, unless s735(4) is amended (removing the words “relevant income, or”) then the effect of s735(4) is, broadly speaking, that the deemed income which arises from matching a benefit to “relevant income” taxed upon the settlor will be treated as remitted if the foreign income is remitted. 122. Thus, where the settlor or close family members of the settlor may receive a benefit (that is in practically all situations), trustees will not be able to bring funds to the UK due to the risk of matching a benefit to the remitted income. Recommendations 123. The solution, as mentioned above, is simple. The effect would be that s731 et seq works in a manner similar to s87 in that one considers the remittance of the benefit only. 124. We note that there is a similar issue in the FB 2017-18 draft clauses for the settlements’ regime. As such, if the amendment above is not made to Finance Bill 2017-19 we would ask that it is made in FB 2017-18 in addition to a similar amendment to the draft legislation for the settlements’ regime. Suggested legislative amendments 125. Delete the words “relevant income, or” from s735(4). Schedule 8, Para 37 126. No comments. Schedule 8, Para 38 Our concerns 127. Para 38 inserts a new s735B which suffers from the same issue as that outlined above in paras 120 – 125. Our recommendations The reference in s735B(3) to “relevant income” should be removed. Suggested legislative amendments 128. Delete the words “or relevant income” from s735B(3). Schedule 8, Paras 39 - 40 129. No comments. SCHEDULE 8, PART 3 – CAPITAL GAINS TAX REBASING Schedule 8, Paras 41 – 43 Overview Rebasing relief enables qualifying individuals (strictly defined) to calculate gains on qualifying foreign assets held by reference to the market value of the asset as at 5 April 2017. The rebasing applies to non-reporting funds (where income tax is payable on the gain) as well as chargeable assets. It does not apply to deep discounted securities or life policy gains (since the chargeable amounts are not computed as chargeable gains). Our concerns 130. The legislation does not specifically refer to rebasing being available on partnership (and LLP) foreign situs assets. However, based on the language used in Para 41 (“the asset was held by P on 5 April 2017”) it appears that this will be the case (cf s 59, s59A TCGA 1992 and SP D12). From correspondence with HMRC we understand that the intention was to allow rebasing for partnership foreign situs assets and that advice was taken to establish that a direct reference within Sch 8, Part 3 (Capital Gains Tax Rebasing) to s 59 and s59A TCGA 1992 was not necessary. 17

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

131. The issue is of significant concern, as many assets are held in partnership structures, as such clarity on the matter is important. Recommendations 132. Even if it is not felt to be strictly necessary to amend the legislation to include explicit reference to partnership assets as qualifying for rebasing it would ease concerns. If amending the legislation is not felt desirable covering the issue in detail in the rebasing guidance would be helpful. SCHEDULE 8, PART 4 – CLEANSING OF MIXED FUNDS Schedule 8, Paras 44 – 46 Overview 133. Sch 8 Part 3 introduces a new relief such that for a limited period (from 6 April 2017 to 5 April 2019) mixed funds can be cleansed provided the conditions are met. Para 44 deals with post 5 April 2008 funds. Paras 45 and 46 extend the relief to deal with pre-6 April 2008 funds. Our concerns 134. As stated in our Executive Summary (see bullet d) we have a number of significant concerns with the legislation. Overnomination 135. We feel that the legislation at Para 44(5) of the draft legislation should be adjusted. It is currently a trap for taxpayers as an overnomination will invalidate the entire cleansing transfer. We do not think that this could have been the policy aim. A typical mixed fund analysis will be complex, often with a material number of transactions (hundreds, possibly thousands). Various foreign currency accounts, transfers between different currencies, acquisitions of securities in one currency, sales with proceeds in another (both of which may be different to the actual currency the security is denominated in) can all feature making the analysis extremely complex. An inadvertent overnomination is entirely possible and is unlikely to be picked up in time to allow corrective action prior to any remittance. Recommendation and suggested change to the legislation 136. Invalidating the entire cleansing transfer is unfair and it should only be the excess that is disallowed. Offshore transfer definition 137. We are also concerned about the use of the term “offshore transfer” in para 44 since para 44 (6) states that “offshore transfer” has the same meaning as at s809R(4), ITA 2007. The issue is that the s 809R(4) meaning is taken from s 809R(5) and s 809R(6) and s 809R(6) states that a transfer cannot be an offshore transfer where there is an intention to remit (which with cleansing there will be). Recommendation and suggested change to the legislation 138. We appreciate that HMRC has considered the point and feels that the legislation does what is intended. However, we feel that there is insufficient clarity and that the issue is important enough that it should be put beyond doubt. We would suggest that either:  

para 44(6) is changed to read “offshore transfer has the meaning in s809R(5) but ignoring s809R(6)”; or the references to “offshore transfer” are replaced by different wording such as “a transfer between bank accounts”.

Typo at para 45(2) 139. In contrast to the wording at para 44(3)(b) where “and” is used para 45(2)(b) states: P is not an individual18

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

i. ii.

who was born in the UK, or whose domicile of origin was in the United Kingdom. (Our underline)

The use of the word “or” make the class or individuals disqualified from the relief far wider and we assume it was a mistake. Para 144 of the Explanatory Notes reinforces the impression that this is a mistake. Recommendation and suggested legislative change 140. At para 45(2)(b)(i) substitute “and” for “or”. Cleansing and foreign exchange – mixed fund account analysis 141. Following the General Election we have been in correspondence with HMRC over various aspects of the cleansing rules. One particularly important issue is cleansing of mixed fund accounts where there are foreign currency bank accounts. We appreciate that HMRC believe that the analysis should be carried out in the currency of the bank account. 142. We do not feel that the HMRC assertion is supported by legislation or case law. Furthermore, we have considerable practical concerns. As mentioned in paragraph 135 a mixed fund analysis can involve:     

the analysis of many different foreign currency accounts with multiple transfers between the various accounts; hundreds (possibly thousands) of transactions various categories of income, gains and capital; an active security portfolio with income, gains and capital reinvested continuously; and acquisitions and sales of securities in different currencies with the currencies used for the acquisitions and sales often being different to the currencies in which the securities are denominated.

143. Whilst an analysis in the foreign currency might be possible in a simple situation in a situation such as the one above it will be exceptionally difficult and technically does not seem to be the better answer. We feel that carrying out the analysis in sterling has to be better and is in alignment with UK tax law. Recommendation 144. We do not think there is merit in becoming embroiled in a technical argument over the matter. We would prefer a pragmatic solution such that it is accepted that either analysis in sterling or the foreign currency is acceptable provided the method is followed consistently. Suggested legislative amendments Ideally the mixed fund legislation would be amended to make it clear that it is acceptable for a mixed fund analysis to take place in sterling or the foreign currency provided the methodology is followed consistently. At the least the issue should be covered in the guidance Interaction between cleansing and rebasing 145. Appendix 3 provides an example of this issue, which could potentially prevent the delivery of the policy objective and/or cause taxpayers to trigger inadvertent remittances in scenarios where they believed they had successfully cleansed their FIG. This is particularly so in light of the “all or nothing” drafting of the excess nominations provisions (see paragraph 135). Extending the cleansing window Our concern 146. As explained at (d)(vi) of the Executive Summary around nine months of the current cleansing window (running from 6 April 2017 to 5 April 2019) will have passed with affected individuals being in a state of uncertainty over how cleansing is to operate. Whilst we know that this has been caused by unique political circumstances it does not help these individuals.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

Recommendation 147. The cleansing window should be extended to 5 April 2020. Suggested legislative change 148. Replace para 44(2)(a) with the following wording: “the transfer is made in the tax year 2017/18, 2018/19 or 2019/20. Other issues 149. There are various other concerns with respect to cleansing, which should be covered off in the guidance (in addition to including the issues we have corresponded with HMRC on). A couple of the additional issues are: 



It remains unclear how cleansing will work when the funds represent more constituent parts of a mixed fund than its nominal amount (e.g. £100 of cash represent £100 of income and £30 of capital - which can occur due to how the remittance tracing rules work or the interaction with anti-avoidance rules like s13 TCGA). It remains unclear how cleansing exercises can be carried out practically where there are many transactions, incomplete records etc. This is important as, if the issue is not resolved, cleansing will not be taken up by as many individuals as the government may wish due to the professional fees involved and the danger of an over-nomination (again see 135).

CLAUSE 30 - DEEMED DOMICILE: INHERITANCE TAX Overview 150. This clause adjusts the Inheritance Tax (IHT) provisions to add individuals born in the UK with a UK domicile of origin to the categories of deemed domiciled individuals and to amend the 17 out of 20 year tax test so it is aligned with the 15 out of 20 tax year test for income tax and CGT (though the deemed domicile tail for IHT is shorter provided the individual does not return to the UK). Our concerns 151. The deemed domicile rule for inheritance tax has the effect that an individual who is UK resident for 15 years in a 20 year period will become deemed domiciled for inheritance tax purposes in the following year, even if he has left the UK during the fifteenth year of UK residence. 152. To avoid becoming subject to UK inheritance tax on worldwide assets, a foreign domiciliary will have to leave the UK during their fourteenth year of UK residence (that is the individual cannot be UK resident in the 15th year). This is contrary to most people’s understanding of what was announced in 2015 – i.e. that an individual could safely remain UK resident for 15 years without becoming subject to UK tax on a worldwide basis. Recommendation 153. We would prefer for the legislation to be changed such that deemed domicile would not apply if an individual is not resident in the UK in the tax year immediately after the 15th year of residence out of a 20 year period. However, we appreciate that a change in legislation is unlikely. As such, we would ask for the point to be flagged in the guidance with at least one example.

CLAUSE 31 AND SCHEDULE 9 – SETTLEMENTS AND TRANSFER OF ASSETS ABROAD VALUATION OF BENEFITS Overview 154. Clause 31 introduces Schedule 9, which contains statutory valuation rules for non-monetary capital payments/benefits. There are specific provisions within Schedule 9 setting out how to value the following capital payments/benefits that can be provided: 

a payment to the individual by way of a loan; 20

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

 

making movable property available to the individual; and making land available to the individual.

Our concerns 155. Where movable property is made available certain allowable costs paid for by the beneficiary can be set against the value of the benefit provided. Security is not shown as one of these costs (it does not seem to come within repairs, insurance, maintenance or storage) and yet where the movable property is sufficiently valuable it can be an extremely high cost. As such, this needs to be added in. 156. Maintenance is included as an allowable expense. We are not sure if this would include costs for ensuring the movable property is kept at the right temperature etc to prevent any deterioration (again critical for valuable movable property such as paintings). Clarification on this is required. 157.

We would also refer you to our comments above re tainting (see paragraph 37 to 40).

Recommendation and suggestion amendment to the legislation 158. We recommended that “security” be included in new s97B, TCGA 1992 and new 742D, ITA 2007 and that it be clarified whether costs for ensuring the movable property is kept at the right temperature etc are included in maintenance and if not the legislation should be amended so such expenses paid by the beneficiary can be set against the value of the benefit provided. CLAUSE 33 AND SCHEDULE 10 – INHERITANCE TAX ON OVERSEAS PROPERTY REPRESENTING UK RESIDENTIAL PROPERTY Overview 159. The provisions extend the scope of IHT to:    160.   

UK residential property owned by foreign domiciliaries (or trusts settled by foreign domiciliaries) through a foreign company or partnership; relevant loans (broadly a loan where the funds are used for the acquisition, maintenance or enhancement of an interest in UK residential property); and security, collateral and guarantees on such relevant loans. Section 33 Introduces Schedule 10 comprised of three parts as follows: Part 1 Overseas property attributable to UK residential property; Part 2 Supplementary; and, Part 3 Interpretation.

161. The legislation operates by removing the designated asset classes from the class of excluded property set out in IHTA 1984. SCHEDULE 10, PART 1 OVERSEAS PROPERTY ATTRIBUTABLE TO UK RESIDENTIAL PROPERTY Schedule 10, Para 1 162. No comments Schedule 10, Para 2 Close company issues 163. This para defines the scope of the interests in UK property which are covered by the schedule. This includes direct interests and indirect interests held via certain companies and partnerships. Para 2(2)(b) requires that an indirect interest in UK residential property be held via a close company (with a less-than-5% de minimis test). 21

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

164. Our understanding was that only close companies would be brought within the scope of the legislation and that the legislation would not apply if there was an open company at any point within the chain of companies. We do, however, think there is an issue where a close company owns an open company fund (which is likely to invest in UK residential property through a special purpose vehicle). Partnership issues 165. In contrast to the provisions for companies in para 2 all partnerships are within scope including potentially real estate funds holding UK residential property and banks structured as a foreign partnership (with foreign domiciled partners) making commercial loans in connection with UK residential property. 166. Para 2(4) contains anti-fragmentation rules which consolidates shareholdings of connected persons in considering the 5% rule. This may pose issues for partnerships since they are all connected with one another and so the test is always met for all partners. Recommendations and suggested legislative change 167. An adjustment should be made to the legislation such that where there is an open company at any point in a chain of companies the extended IHT charge will not apply. 168. Legislation modelled on that for close companies should be brought in to restrict the scope of the charge on partnerships. 169. The connected person test should be adjusted so partners are not connected to each other just because they are partners in a partnership. Schedule 10, Paras 3 – 4 Our concerns 170. Paras 3 and 4 are anti-avoidance provisions which are widely drawn and bring loans made by foreign domiciliaries that have been used by the borrower to fund the acquisition of UK residential property within the scope of UK IHT. Collateral for the relevant loan is also brought within the scope of IHT. 171. The legislation means that the UK residential property, a relevant debt and related collateral can be subject to IHT. There is no cap to limit the value potentially liable to IHT charges and nothing to stop multiple charges on multiple persons. Nor is it prima facie the case that assets and liabilities will match up and net off. 172. As set down above, the provisions are, in some ways, extremely widely drawn (even unfairly so). However, they do not apply to loans taken out to acquire existing company/partnership structures containing a UK residential property . We assume that this limitation in scope were intentional and there will not be future changes to the legislation to extend the scope further. One additional issue with the scope of the legislation is the interaction with other IHT provisions. For example the provisions disallowing debts on death where the debt will not be paid back and there is no commercial reason why. Consider the following: Mrs A lends a trust, which she has qualifying interest in possession in, £1.5 million (on interest free repayment on demand terms). The loan is made to the trust so the trustees can repay a mortgage on UK residential property. Her loan would be a relevant debt as a result of Sch A1 para 4(2)(b). On Mrs A’s death the trust does not have any liquid assets with which to repay the loan and the trustees do not want to sell the UK residential property. Mrs A’s executors allow the loan to remain outstanding on the same terms. It will not be an allowable deduction against the value of the UK residential property as it is not repaid and there is no commercial reason for this. It seems unfair to impose a charge on a relevant debt in the estate of the Mrs A and disallow the debt.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

Recommendations and suggested changes to the legislation 173. We believe the legislation should set out an overall cap on the amount charged and an order of priority for charging IHT. 174. There have been so many changes to UK residential property taxation to impose additional taxes that it is important that there is now a period of consolidation for affected persons to get used to the new regime and to know where they are under it. Consideration also needs to be given to the various interactions with other provisions such as that shown in the example in paragraph 172. Imposing a charge on a relevant debt where there is not a corresponding deduction for the debt seems very unfair. Area of uncertainty when considering the scope of the legislation (paras 2 – 4) 175. Para 2 applies (broadly) to a right or interest in a close company which is attributable to UK residential property. Consider the following: A owns a Jersey Company (JCo) which owns UK residential property and B lends monies to JCo which JCo uses to invest in private company shares (CCo), and B has a lien over the shares as security. CCo fails and is wound up. Now B has a loan to JCo which can only be repaid from (i.e. it is attributable to) the proceeds of the UK residential property sale as JCo has no other assets. It therefore appears that B has an interest in the residential property within para 2. This is presumably not the intention. Additionally, it is not clear at what stage does the loan come within para 2: when CCo begins to fail or once it has failed? If the former, at what stage does the loan fall outside para 2 if CCo recovers? Nor is it clear how any of the above will interact with guarantees. If, in the example above, A guarantees the loan from B, then if CCo fails, presumably the loan is not attributable to the UK residential property as it can now be recovered from A. Recommendation 176. We feel that the above scenario should be covered in the guidance. Practical issue 177. Paragraphs 3, 4 (and also 5) presuppose that a (probably) foreign resident non-domiciliary will be aware that lending money to a family member or friend runs the risk of generating a UK IHT exposure. We think it highly unlikely that this will be the case and, in the case of the proceeds of a loan repayment (para 5 below), we consider it even less likely that the lender will realise that the proceeds are exposed to UK IHT for a further two years after repayment. 178.  

To give the appropriate context, the individuals involved are likely to: Have no links to the UK; and, Have no awareness of the UK’s IHT laws or any reason to acquire that awareness.

179. In addition they may have no control over what the loaned funds are used to acquire and have no way of extracting said information. Coupled with a law that is not intuitive means that the default position for most of these individuals will be inadvertent non-compliance. Recommendation 180. We feel that consideration has to be given as to whether it is possible to enforce these provisions and we strongly recommend that the Court’s comments in the case of McGreevy v HMRC (mentioned in the Executive Summary) are considered. We accept that they will be enacted now but there should be a review to consider compliance and if the amount of non-compliance is 23

ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

material then consideration has to be given to amending the legislation. It is not good for a tax system to have unenforceable legislation. SCHEDULE 10, PART 2 SUPPLEMENTARY Schedule 10, Para 5 181. Para 5 is a further anti-avoidance provision that broadly continues to treat the proceeds of the disposal of a close company interest or partnership interest or loan repayments as being within the scope of UK IHT for two years after the date of disposal or repayment. The practical issues with para 5 are discussed in paragraph 177 above. Schedule 10, Para 6 Comment 182. We feel that a targeted anti-avoidance rule (TAAR) is unnecessary in this context and we are uncomfortable about the use of the word “minimising” as we are not aware of any case law as to what this means. We are concerned that taken literally it could catch a normal commercial transaction (such as where the maximum bank loan possible is taken out). We do not think this would be appropriate. Recommendation and suggested change to the legislation 183. We would prefer for the TAAR to be removed from the legislation but appreciate that this will not happen. As such, the wording “or minimising” should be deleted such that it just refers to “avoiding”. Schedule 10, Para 7 Comment 184. This provision is included as an attempt to prevent provisions in a Double Taxation Relief Agreement preventing the new legislation applying. It is intended to be a treaty override provision. Generally we are not in favour of such legislation as treaties are negotiated between two states and we feel that the terms should be kept to. Changes should be agreed between the states rather than put through unilaterally by domestic treaty override legislation. 185.

We also have doubts as to whether the legislation achieves the result intended by HMRC.

SCHEDULE 10, PART 3 INTERPRETATION 186. No comments.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

APPENDIX 1 ICAEW TAX FACULTY – WHO WE ARE ICAEW Tax Faculty is internationally recognised as a source of expertise and is a leading authority on taxation. It is responsible for making submissions to tax authorities on behalf of ICAEW and does this with support from over 130 volunteers, many of whom are well-known names in the tax world. ICAEW is a world-leading professional accountancy body. We operate under a Royal Charter, working in the public interest. ICAEW’s regulation of its members, in particular its responsibilities in respect of auditors, is overseen by the UK Financial Reporting Council. We provide leadership and practical support to over 147,000 member chartered accountants in more than 160 countries, working with governments, regulators and industry in order to ensure that the highest standards are maintained. ICAEW members operate across a wide range of areas in business, practice and the public sector. They provide financial expertise and guidance based on the highest professional, technical and ethical standards. They are trained to provide clarity and apply rigour, and so help create long-term sustainable economic value.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

APPENDIX 2

ICAEW TAX FACULTY’S TEN TENETS FOR A BETTER TAX SYSTEM The tax system should be: 1.

Statutory: tax legislation should be enacted by statute and subject to proper democratic scrutiny by Parliament.

2.

Certain: in virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs.

3.

Simple: the tax rules should aim to be simple, understandable and clear in their objectives.

4.

Easy to collect and to calculate: a person’s tax liability should be easy to calculate and straightforward and cheap to collect.

5.

Properly targeted: when anti-avoidance legislation is passed, due regard should be had to maintaining the simplicity and certainty of the tax system by targeting it to close specific loopholes.

6.

Constant: Changes to the underlying rules should be kept to a minimum. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear.

7.

Subject to proper consultation: other than in exceptional circumstances, the Government should allow adequate time for both the drafting of tax legislation and full consultation on it.

8.

Regularly reviewed: the tax rules should be subject to a regular public review to determine their continuing relevance and whether their original justification has been realised. If a tax rule is no longer relevant, then it should be repealed.

9.

Fair and reasonable: the revenue authorities have a duty to exercise their powers reasonably. There should be a right of appeal to an independent tribunal against all their decisions.

10.

Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade in and with the UK.

These are explained in more detail in our discussion document published in October 1999 as TAXGUIDE 4/99 (see http://www.icaew.com/-/media/corporate/files/technical/tax/taxnews/taxguides/taxguide-0499.ashx).

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

APPENDIX 3 Cleansing and foreign exchange example HMRC’s view, as we understand it, is that if a taxpayer receives $1,000 of foreign income when it is worth £500 but brings it to the UK when it is worth £700 (due to forex movements) then he is considered to have made a taxable remittance of £700. Prior to c.2012, there would also have been a part disposal as well so in effect the forex gain, under HMRC’s interpretation, would have been taxed twice. As mentioned, this double tax issue was resolved in 2012 for foreign currency but still remains for other assets if HMRC’s view is correct. Consider the following: The taxpayer has $1,000 of income which is worth £500 when received. It is then invested in an asset and later sold for $1,200 (worth £900 at that date) and the taxpayer remits the $1,200 to the UK immediately. HMRC’s interpretation is that the $1,200 represents i) the $1,000 of original income (now worth £750 due to forex – which we will call “the derivation approach” for ease of reference later) and ii) the £400 capital gain. Under this approach, the taxable remittance is £1,150 notwithstanding the taxpayer has only remitted £900 of cash. If we consider this example in the context of rebasing, the rebasing relief seems to only remove the £400 gain and may not remove the taxation of the forex gain that is included due to the derivation approach. This is likely to pose a considerable issue for the following reasons:      

Foreign domiciliaries typically have significant investments in assets denominated in foreign currencies. The announcement was that any gains accrued to 5 April 2017 would fall away – but this is not the case for forex gains – in the example above, only £150 could be brought to the UK rather than the £400 most people would expect. To establish how much forex gain under HMRC’s approach is not “rebased away”, a detailed investigation into the original funds invested will be required. Also we understand that HMRC’s practice on the derivation principle differs depending on whether the original receipt (the $1,000 above) is income (treated as above) or gains (no derivation approach is applied as this would clearly be contrary to case law). Working out the constituent parts of the proceeds for mixed fund purposes/cleansing purposes will be incredibly tricky/almost impossible for long term investments; The same issue will incidentally make cleansing very difficult in general as an over nomination will invalidate the cleansing and probably lead to inadvertent taxable remittances by the taxpayer.

In summary, our fear is that the above issue is likely to make taxpayers and advisors incredibly wary about cleansing certain funds and cleansing rebased asset proceeds. As such there is a real risk that it could end up undermining the policy intent of cleansing; it will not help facilitate the flow of trapped capital to the UK. We do not believe that the HMRC approach to the conversion of income is correct. There is nothing is law to support it and we feel that it is better to convert on the day the income arises to the individual (this is also consistent with the rules for foreign tax credits.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

We would appreciate HMRC’s comments on whether it believes that in the scenario above rebasing will in fact override the derivation approach (and so remove the forex gain as well) and on how the derivation approach (as interpreted above) is to interact with cleansing/rebasing generally. We appreciate that there is no merit to getting involved in a technical argument on the issues. However, we do feel pragmatism should prevail. Similar to our comments on mixed fund analysis work we feel that provided the approach is followed consistently either converting into sterling when the income arises or converting into sterling when the income is remitted should be allowed.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

APPENDIX 4 Explanatory Notes for Finance Act 2008 changes to the remittance basis See separate PDF attachment.

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ICAEW tax representation: FB17-19 cl 15, cl 29,30,31,33 & Sch 8-10 Domicile, offshore trusts, overseas property etc

FURTHER INFORMATION As part of our Royal Charter, we have a duty to inform policy in the public interest. To request further information, please contact: Sue Moore, Technical Manager, Tax Faculty, ICAEW E: [email protected] Visit our websites:  Tax Faculty www.icaew.com/taxfac,  News https://ion.icaew.com/taxfaculty/b/weblog  Forum https://ion.icaew.com/taxfaculty/f/tax-news---forum and To sign up for our free weekly newswire https://my.icaew.com/preferences/Home/LoginRegister

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