HMRC has published a summary of responses and draft legislation following the recent consultation on part surrenders and part assignments of life insurance policies.

Further to our earlier bulletin HMRC has today published a summary of responses and draft legislation following the recent consultation on part surrenders and part assignments of life insurance policies.
By way of summary the consultation was to look at three alternative ways of taxing life policies:

• Taxing the economic gain
• The 100% allowance (from the date of investment as opposed to accruing it at the rate of 5% per annum for 20 years)
• Deferral of excessive gain

While the most favoured route presented by the industry was the 100% allowance, having considered the responses HMRC has decided not to legislate any of the three options presented in the consultation document.

Instead it will accept an alternative proposal put forward by industry which will allow the small number of policyholders who inadvertently generate a wholly disproportionate gain to apply to HMRC to have the gain recalculated on a just and reasonable basis.

Broadly, applications must be made in writing and received by an officer of HMRC within 2 years after the end of the insurance year in which the gain arose. A longer period may be allowed if the officer agrees.

While some believe that chargeable events legislation is somewhat outdated, this may actually come as a welcome change as in practice only a few are likely to be affected.


In the Budget of 2015, the Government announced that new rules would be introduced on the taxation of non-UK domiciled persons. The Government has now published awaited detailed consultation on its proposals.

In the Budget of 2015, the Government announced that new rules would be introduced on the taxation of non-UK domiciled persons. The Government has now published awaited detailed consultation on its proposals. The Government have confirmed in the Autumn Statement (23 November 2016) that these new rules will be effective from 6 April 2017. Draft legislation will be included in the Finance Bill 2017 to be published on 5 December 2017.

Although the final rules might still change, given the timescales involved many lawyers are recommending that non UK domiciled persons who are likely to be affected should review their arrangements now – particularly those who hold UK property through offshore companies or trusts. As ever, the right strategy for a client will depend on the client’s individual circumstances.

The new rules broadly affect persons in one of three categories:-

• those non-UK domiciliaries who have been tax resident in the UK for 15 tax years;
• those non-UK domiciliaries who had a UK domicile of origin, acquired a non-UK domicile of choice and are now UK resident or may become UK resident in the future;
• those non-UK domiciled persons who own UK residential property through an offshore structure.

We now look at these in more detail.


From 6 April 2017 individuals who have been tax resident in the UK for 15 of the last 20 tax years will be deemed to be domiciled in the UK for income tax, capital gains tax (‘CGT’) and IHT purposes.

Currently there is no deemed domicile rule for income tax and CGT purposes but there is a rule that treats a person who has been resident in the UK for 17 of the last 20 tax years as deemed domiciled for IHT purposes.

The most significant impact of the changes is that once a UK resident becomes deemed domiciled under the new rules they will be subject to UK income tax and CGT on their worldwide income and gains on an arising basis – i.e. the remittance basis will cease to be available even if they remain non-domiciled in the eyes of the law.

Scope of New Rules

Under the new rules, if a person who has become deemed domiciled under the 15 year test is then non-resident in the UK for six consecutive years, they will lose their deemed domicile status. This means that the clock re-starts so that they can once again access the remittance basis of taxation for foreign income and gains if they return to the UK after that point.

However, this six year change will not necessarily be fair for inheritance tax purposes. This is because currently a person is able to lose UK domicile for IHT purposes when they once have acquired a non-UK domicile for 3 years. In light of this, the proposed rules include a slight concession in that deemed domicile status is lost for IHT purposes only after a four year period of consecutive non-residence. This should mean that if an individual dies after this time, but before they have spent six consecutive years outside the UK, then their foreign assets will be outside their estate for IHT purposes. However it should be noted that this will not make any difference to the IHT levied on indirectly held UK residential property (under the new rules described in 3 below) nor on UK assets generally.


The proposed new rules contain some limited rebasing provisions. Individuals who become UK deemed domiciled on 6 April 2017 will be able to rebase directly held foreign assets to their market value on 5 April 2017. This means that any gain which accrued before April 2017 will not be charged to CGT in the UK. Any further increase in the value of an asset between April 2017 and the date of disposal will be chargeable to CGT in the normal way.

However, rebasing will be limited to assets held directly by the individual (not via trusts or companies) which were located abroad on 8 July 2015. Also the rebasing rules will be restricted to those people who had paid the remittance basis charge in any year before April 2017. For some who have never so elected, it may be worth electing for the remittance basis charge in 2016/17 just to get this treatment. Those individuals who become deemed domiciled in years after April 2017 will not be able to rebase their foreign assets.

Mixed Funds – Transitional provisions

As a further transitional measure there will be a temporary window, which will last for one tax year from April 2017, during which individuals will be able to rearrange their mixed funds overseas into separate accounts. These can be placed into separate accounts holding separate clean capital, foreign income and foreign gains. This will give investors certainty on how amounts remitted to the UK will be taxed in future and enable people to choose the most tax efficient method of remitting those funds.

This is quite a generous relief although it also has limitations. It will only apply to mixed funds which consist of amounts deposited in bank and similar accounts, though where an asset was purchased from mixed funds, if it is sold overseas during the transitional window, then the proceeds can be separated in the same way. However, this form of “cleansing” will not be available where an individual is unable to determine the component parts of their mixed fund, for instance where there are no or insufficient records.

Offshore Trusts

There are some changes proposed to the taxation of trusts to sit alongside the new deemed domicile rules. The current proposal is that protections will be introduced with respect to offshore trusts set up before the rules change. These protections will ensure that the settlor of an offshore trust should not, when they become UK deemed domiciled, automatically become subject to CGT on all gains as they arise and to income tax on all foreign income as it arises. However the proposed rules are quite strict. The concession will only (broadly) apply until the settlor or certain family members benefit from the trust, at which point this protection will be lost. Further if anything is added to the trust after the settlor has become deemed domiciled, then this concession will also cease to apply. At the time of writing, a number of professional bodies, who regard this proposal as somewhat draconian, have put forward other ways of giving protection to pre-existing offshore trusts. The position here could therefore change before we have final legislation.


The second category of person who will be affected by the new rules is individuals who were born in the UK with a UK domicile of origin but who have subsequently acquired a domicile of choice elsewhere. These individuals will be deemed domiciled in the UK for tax purposes in any tax year that they are UK resident after 6 April 2017.

This is the most draconian of all the measures and the trusts of such individuals will not be protected from IHT for any year in which the settlor is UK resident or benefit from any of the concessions mentioned above. This means that if an individual with a UK domicile of origin establishes an excluded property trust having acquired a domicile of choice outside the UK and then returns to the UK and becomes UK resident, the trust will no longer be excluded property for IHT purposes while he remains resident in the UK for tax purposes.

The one minor concession is that for IHT purposes only these ‘formerly UK domiciled residents’ will not be treated as being domiciled in the UK until they have been resident for at least one of the two prior tax years. This is to help people who regularly come and go from the UK.


From 6 April 2017, all UK residential property owned in an offshore corporate structure will fall within the UK IHT net. This means that on the death of an individual who owns a share in an offshore company that owns a UK residential property, IHT will be charged on the shares to the extent that any underlying assets of the company consist of UK residential property.

This will be a huge change for individuals who are not domiciled in the UK. At present no IHT liability arises on property (or any assets) owned through offshore companies because the assets in the individual’s estate are non-UK shares in that company. In turn because non-UK assets owned by non-domiciled individuals are “excluded property”, they are not chargeable to IHT.

There will be no changes to the general IHT position for non-domiciliaries and therefore other UK assets including offshore investments and commercial property held by an offshore company, will remain outside the IHT net. However UK residential property (including let residential property) will no longer be excluded property and so will be potentially subject to IHT, irrespective of how it is owned. In cases where the use of the property has changed from non-residential to residential or vice versa, the property will be within the charge to IHT if it has been a residential dwelling at any time within the two years preceding the chargeable event. Where the property has a mixed use, it will be within the IHT net, but the tax liability which arises will only relate to the residential part of that property.

Trust Company Structures

In the past many non-UK domiciliaries have used a trust to hold the shares in an offshore company that owns the UK residential property. This excluded property trust arrangement could have been useful if the individual was likely to regain UK domiciled status in the future which would have meant a direct holding of shares by the individual would have become chargeable to IHT. By holding the shares in a trust, the future domicile status of the settlor would not affect the IHT position.

With effect from 6 April 2017, where an offshore trust owns shares in an offshore company that in turn holds UK residential property, the trust property will no longer be excluded property – and so will be within the IHT trust charging regime – to the extent that, the value of the shares is derived, directly or indirectly, from residential property in the UK. This will normally mean that trustees will pay IHT on the value of the property at 10 year anniversaries and if the property is removed from the trust after 6 April, there may be an IHT exit charge.

A further potential difficulty for property held through trusts is that, when the new rules come into effect, the IHT the Gift with Reservation of Benefit rules may apply for the first time, with the result that the whole value of the property may also be within the individual’s estate for IHT purposes. This could happen in the fairly common situation where the settlor of the trust is also a beneficiary of the trust and/or continues to live in the property that the trust indirectly owns. It is already the case that where the trust owns UK property directly, that property is within the IHT charging regime.

Lifetime Gifts

These changes also have implications for non-doms planning to make lifetime gifts or changes to their offshore structure. From 6 April 2017, gifts made by a non-domiciled individual of shares in an offshore company owning UK residential property may trigger an IHT charge, either immediately or if they fail to survive seven years. For instance, where a donor dies on or after 6 April 2017 within 7 years of a gift of shares in an offshore company which owns UK residential property, he/she will be treated as making a PET or chargeable lifetime transfer for IHT purposes. The redistribution of the share capital of an overseas company which owns UK residential property may also trigger an IHT charge.

Scope of the New Rules

The changes will be effective for all chargeable events which take place after 5 April 2017, regardless of how long the property has been owned by the company and whether or not the individual is UK resident. There are no transitional provisions or concessions for existing arrangements. Individuals with existing offshore structures – particularly those where the company currently pays ATED (the Annual Tax on Enveloped Dwellings) – may conclude that once the IHT protection is lost, it is no longer cost effective for the property to remain within the company. However taking the property out of the corporate structure (or “de-enveloping” as it is known) can involve triggering tax charges which may in some cases prove prohibitive. It was hoped that the government might introduce some form of relief to enable individuals to dismantle current structures but at present there appear to be no plans to do this.

When the new charge does apply, IHT will be charged on the value of the residential property at the time of the chargeable event (e.g. death, lifetime gift or at the trust’s 10 year anniversary) taking into account any debts relating exclusively to the property (e.g. amounts outstanding on a mortgage which was taken out to purchase the property).

Of course, in cases, where UK property is owned through an overseas company, HMRC might have difficulties in identifying whether a chargeable event has taken place and hence whether a liability to IHT has arisen. To deal with this it is intended that provisions will be put in place substantially extending the responsibility for both reporting to HMRC and for paying any tax.

Business Investment Relief

Business Investment Relief (BIR) was introduced in April 2012 to encourage individuals who are taxed on the remittance basis to invest their foreign income and gains in businesses in the UK. To date, over £1.5 billion has been invested in UK businesses under the scheme.

Generally, a UK resident non-domiciled individual who is taxed on the remittance basis will be subject to UK tax on the overseas income or gains which they bring to the UK, regardless of the purpose for which such funds are used. In some circumstances, this can be a significant disincentive for non-domiciles who wish to invest in a business in the UK. In introducing BIR, the Government sought to address this issue and provided a means to encourage these individuals to invest their money in the UK and support the UK’s economy.

The Government will change the rules for the BIR scheme from April 2017 to make it easier for non-domiciled individuals who are taxed on the remittance basis to bring offshore money into the UK for the purpose of investing in UK businesses. The Government will continue to consider further improvements to the rules for the scheme to attract more capital investment in British businesses by non-domiciled individuals.


Whilst the consultation period has now finished, the final provisions are unlikely to be subject to substantial change. However, given the time scales involved, individuals will now need to urgently review the relative merits of retaining or dismantling existing arrangements for holding UK property and also consider the availability of other methods of covering or reducing any new IHT liability.

For those who are deemed UK domiciled on 6 April 2017 or at some point thereafter, they will need to assess the likely effects on their finances and begin to put in place any necessary measures to mitigate the impact of the new rules. Those who will be deemed domiciled from 6 April 2017, may also wish to consider deferring liquidity events or sales of offshore assets to take advantage of rebasing. The right strategy will depend on the individual’s particular circumstances.


Office of Tax Simplification reaffirms its call for the ‘outdated system’ of NICs to be reformed to make it ‘fit for the future’.

The Office of Tax Simplification (OTS) has published its further review on the closer alignment of income tax and national insurance, reaffirming its call for this outdated system to be reformed to make it fit for the future.

This report builds on the Office of Tax Simplification’s first report on this subject published in March 2016.

The first report concluded that aligning the way the two taxes are calculated would create a simpler, more transparent and fairer system for taxpayers and employers, and set out a 7 stage programme for bringing the two taxes closer together- see our earlier bulletin here.

As the OTS recommended, further work was commissioned to get a fuller picture of the potential impact of the two key aspects of the proposals:

• calculating employee NICs on a similar basis to PAYE
• moving employer NICs to a payroll levy

Annual, cumulative and aggregate NICs

• The review considers what the impact might be across different demographics: earning levels, ages, gender, industry sectors and location.
• About 5.5 million people would pay more NIC, £242 per year on average – mainly those who are paid more than £20,000 and those with two or more jobs.
• About 7.6 million people would pay less NIC, £169 per year on average – mainly lower earners and those working for only part of the year who still benefit from a full year’s “NIC allowance”.
• The link between NIC and contributory benefits, such as the state pension, would have to be considered, as would the link with Universal Credit entitlement.
• A new “NICs code” will be needed, similar to the PAYE code.

Employer payroll levy

The review sets out a number of options for introducing a payroll levy, without identifying a clear winner.

• Flat-rate payroll levy.
• Replacing employer threshold with a cumulative annual employee allowance.
• Replacing employer threshold with a full-time equivalent employee allowance.
• Linking it to a percentage of employee NIC.


Draft regulations have been published on the requirements to meet the definition of an overseas pension schemes

As announced in the Autumn Statement 2016, the government has published The Pension schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) (Amendments) Regulations 2017.

These Regulations make amendments to the 2006 regulations that originally set out the requirement for QROPS.

The draft Regulations remove what is known as the 70% rule from the overseas pension scheme regulations, which required the rules of a scheme to designate a minimum of 70% of the funds that have had UK tax relief to be used to provide the member with an income for life.

The draft Regulations introduce a new requirement that a provider of a non-occupational pension schemes to be regulated in the country where the scheme is established, if the scheme itself is not regulated. This ensures that where there is a regulator, then the pension scheme or the provider of the scheme, as the case may be, will be regulated.

Changes have also been made to the pension age test. The test, introduced by S.I. 2015/673, requires that benefits paid out of UK tax-relieved funds can be paid no earlier than they would be under pension rule 1 (which provides that, generally, pension benefits are payable no earlier than age 55) that applies to a UK registered pension scheme. The draft Regulations provide that as an alternative, payments can be made before age 55 where it would be an authorised payment if paid by a registered pension scheme.

The consultation on the draft clauses will run until 1st February 2017.

There has also been a publication of the draft forms relating to changes outlined above.


Update on Money purchase annual allowance and how to avoid the triggers.

The Autumn Statement saw the launch of a consultation “Reducing the money purchase annual allowance”.

The consultation proposes that from 6th April 2017, the MPAA will reduce from £10,000 to £4,000 which could clearly be significant for anyone that is currently contributing to a pension having already triggered the MPAA or may want to start contributing again in the future.

The government believes that an allowance of £4,000 is fair and reasonable and should allow people who need to access their pension savings to rebuild them if they subsequently have opportunity to do so. The government believes it limits the extent to which pension savings can be recycled to take advantage of tax relief, which they state is not within the spirit of the pension tax system. The government does not consider that earners aged 55 or over should be able to enjoy double pension tax relief.

The Money Purchase Annual Allowance only applies when income is taken following flexibly accessing your benefits. It was introduced to stop pension members who are using the new flexible benefits, recycling pension income, back into the scheme and gaining additional tax relief consequently rebuilding their tax free pension commencement lump sums.

The MPAA is only triggered by certain events including:

• Taking income in the form of flexi-access drawdown.
• Taking a flexible annuity – this is an annuity that can go down as well as up in the future.
• Taking an uncrystallised funds pension lump sum, which is a payment from a scheme that is 25% tax free and 75% taxed as income.
• Moving out of capped drawdown and into flexi-access drawdown and taking an income.
• A scheme pension where there are less than 12 members, this would usually be a small self-administered scheme.

However, there are some cases where benefits can be accessed without triggering the MPAA which are:

• Buying a standard annuity – this type of annuity will only be level, increasing or linked to inflation.
• Taking only the Pension Commencement Lump Sum.
• Using the small pots rules, where 3 personal pensions of less than £10,000 each can be accessed.
• Continuing to take income from a Capped Drawdown plan (pre 6th April 2015 plan).
• Crystallising further funds into an existing capped drawdown plan, if the scheme allows.
• Taking a scheme pension (usually from a defined benefit scheme) where there are at least 12 members.

It should also be noted that once the MPAA is triggered the member can no longer use carry forward for the MPAA although they can use it for the additional annual allowance that can only be used against defined benefit accrual.

There are many reasons why someone may want to avoid triggering the MPAA, including just keeping options open for future changes in circumstances. There seems little point in triggering the MPAA where there is an option to avoid or delay it because once it is triggered there is no option to revert back to a full annual allowance.


Annuity providers will be required to inform their customers how much they could gain from shopping around and switching provider before they purchase an annuity under plans announced today by the Financial Conduct Authority (FCA).

In consultation paper CP16/37 the FCA seeks views on proposed amendments to rules in relation to the purchase of products that provide consumers with guaranteed income in retirement (pension annuities). The changes would require firms to inform consumers how much they could gain from shopping around and switching provider before a potential annuity purchase.

The FCA’s proposals intend to implement an information prompt to help consumers understand the benefits of shopping around and, if appropriate, switching provider. The consultation paper asks specifically about:

• when the information prompt should be provided to consumers;
• the scope of the information prompt; and
• the content of the information prompt, and when firms should implement the changes.

The FCA propose requiring firms to include certain information in a certain format when providing an annuity quotation

The information should show the difference between the provider’s own quote, and the highest guaranteed quote available to the consumer on the open market, which will be determined from a comparison tool that includes all providers in the market. The information should be set in the context of other important information.

The consultation paper includes proposed templates for providers to use in different circumstances such as where:

• the annuity includes a guaranteed annuity rate
• the providers rate is the highest; and
• there is a higher rate available.

Next steps
The consultation closes on the 24th February 2017. The policy statement is expected in the spring of 2017 with implementation on 1st September 2017.


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