Whats going on in the UK Has it

What’s going on in the UK? Has it gone completely mad? Iain Younger, Director, Frank Hirth Mark Summers, Partner, Charles Russell Speechlys October 10, 2019 1

Statutory Residency Test Relevant for determining UK residency status for: • Automatic non-residents • Automatic residents • Residency considerations for “arrivers” • Residency considerations for “leavers” • “Split-year” treatment UK residency is relevant for exposure to income tax & capital gains tax as well as determination of “deemed” domicile status 2

Domicile & “Deemed” Domicile The following assumes that the individual does not have a domicile of origin in the UK Domicile of Choice in the UK Everyone has a domicile of origin. A domicile of choice replaces domicile of origin This can be achieved through residing in a place and forming a clear and fixed intention of making that their permanent home or indefinite residence “Deemed” Domiciled For an individual that has not acquired a domicile of choice in the UK under English common law, they will be considered “deemed” domiciled in the UK from 6 th April when they have been UK resident for any part of at least 15 of the 20 tax years immediately prior A UK resident, “deemed” domiciled individual is subject to UK income tax, capital gains tax & inheritance tax on a worldwide basis For certain tax purposes, it is essential that the individual remains non-UK domiciled under English common law, albeit they are “deemed” domiciled 3

UK Basis Of Taxation Effective from 6 April 2017 Status Income Tax/Capital Gains Tax Inheritance Tax UK non-resident/Non- UK domiciled Certain UK source income Gain on sale of residential & commercial real estate (adjusted basis) UK situs assets (subject to treaty relief) UK non-resident/UK domiciled Certain UK source income Gain on sale of residential & commercial real estate (adjusted basis) Worldwide assets UK resident (<7 years)/Non-UK domiciled UK source income & gains Offshore income & gains remitted to the UK (Remittance basis) UK situs assets (subject to treaty relief) UK resident (7 out of 9 years)/Non-UK domiciled Remittance basis only applies if annual £ 30 k charge is paid If not paid, worldwide income & gains (arising basis) UK situs assets (subject to treaty relief) UK resident (12 out of 15 years) /Non-UK domiciled Remittance basis only applies if annual £ 60 k charge is paid If not paid, worldwide income & gains (arising basis) UK situs assets (subject to treaty relief) UK resident (>15 years)/Non-UK domiciled but “deemed” domiciled Arising basis (cannot however remit previously non-taxed income to the UK without incurring a tax charge) Worldwide assets (planning required predeemed domicile) UK resident/UK domiciled Arising basis Worldwide assets 4

“Protected” Trusts New from 6 April 2017 It has long been the case that an offshore trust formed, and all contributions being made, prior to an individual becoming “deemed” domiciled in the UK, can qualify for Excluded Property Trust status, whereby non-UK situs assets within the trust are outside the scope of UK inheritance tax Effective from 6 April 2017, such trusts also attract certain protections in that the settlor will only be subject to income tax and/or capital gains tax when benefits are received from the trust by the settlor or by close family members. The trust can therefore offer either complete protection from UK tax in respect of income & gains generated within the trust, or a deferral of any UK tax liability until a point at which benefit is received (CAUTION – deferral may not be beneficial if a “grantor” trust for US tax purposes) Protected trust status is lost for the entire trust if additions are made subsequent to the settlor becoming deemed domiciled Excluded property trust status for inheritance tax should remain unaffected Protected trust status is not available if the settler is domiciled in the UK under common law, even if non-domiciled at the point of settlement 5

Non-Residents & UK Real Estate Non-Resident Capital Gains Tax Prior to 6 April 2015, non-UK tax residents would not be charged to capital gains tax on the sale of UK assets, including UK real estate From 6 April 2015, all non-UK resident individuals, closely held companies, trustees, personal representatives and funds have been subject to non-resident capital gains tax (NRCGT) when disposing of a UK residential property Any gain is calculated with regards an adjusted basis in the property to fair market value at 5 April 2015 The maximum applicable rate is 28% (19% for corporate entities) Effective from 6 April 2019, NRCGT has been expanded to cover disposals of commercial UK property and certain “indirect” disposals of interests in ”UK property rich entities For the purposes of calculating any gain, the commercial property can obtain a rebased value as at April 5 2019 The maximum applicable rate is 20% (19% for corporate entities) 6

Non-Residents & UK Real Estate Inheritance Tax Exposure Non-UK Individual “Offshore Co. ” • Prior to 5 April 2017, this would have been an effective “blocker” structure between the non-UK individual and the UK property and remove any exposure to inheritance tax • Now, the “offshore” company is looked through and the shareholder is considered to own a UK asset, which is exposed to UK inheritance tax (maximum 40% of value over available “nil rate” band (£ 325 k) to the extent that the value of the company can be attributed to UK real property) • Potential treaty relief for US Persons able to utilise 1978 US/UK estate tax treaty, to exempt UK situs intangible assets (i. e. shareholdings) from UK inheritance tax • Residential real estate held within an offshore corporate structure subject to Annual Tax on Enveloped Dwellings (ATED) UK Real Estate 7

Non-Residents & UK Real Estate Inheritance Tax Exposure Non-UK Individual • The “offshore” trust is considered transparent to the settlor (relative) to the UK real estate) and the settlor is considered to own a UK asset, which is exposed to UK inheritance tax (maximum 40% of value over available “nil rate” band (£ 325 k)) • This exposure can be removed if settlor, and settlor’s spouse, is excluded from benefit • Even if excluded from benefit, UK real estate is still considered to be “relevant property” subject to IHT “exit” & “ 10 year” charges “Offshore Trust” UK Real Estate 8

Brexit and visa regime 9

HMRC Enforcement Impact of International Transparency • FATCA & CRS Information flow into HMRC that has been the basis of enquiry • EU DAC 6 (expanded CRS MDR) This sharing of information will further HMRC’s approach to non-compliance in respect of offshore income & assets, and related disclosure • Publicly available registers of beneficial ownership Aim for register for UK real estate by 2022 that looks through holding entities Attempt to impose on CDOTs by end 2020, Channel Islands already agreed in principle 10

HMRC Enforcement 11

HMRC Enforcement “Failure to Correct” Regime • Applicable to corrections relating to offshore activity filed from 1 October 2018, where the error occurred prior to 6 April 2016 and a disclosure was not made under the RTC regime • Applies to any taxpayer in the world required to identify and disclose previous delinquency relating to UK income tax, capital gains tax and inheritance tax • Penalty exposure: • 200% of the tax due (can be reduced with reasonable cause but only to a minimum of 100%) • Potential 10% asset-based penalty • Potential “naming and shaming” 12

Type of Assessment Last Date for Making the Assessment where the loss of tax is not due to careless or deliberate behaviour 4 years from the end of the tax year of assessment in which the tax loss arises Assessment where the loss of tax is due to careless behaviour 6 years from the end of the tax year of assessment in which the tax loss arises (can be as many as 12 years) Assessment where the loss of tax is due to deliberate behaviour 20 years from the end of the tax year of assessment in which the tax loss arises 13

HMRC Enforcement Strict Liability Offence Focused on prosecutions relating to offshore tax evasion Will apply if any of the following applies to a UK taxpayer: • fails to notify HMRC of their chargeability to tax • fails to file a return • files an incorrect return And this is in respect of income, gains or assets in a non-CRS country And the underpaid tax is more than £ 25, 000 per tax year This is considered a criminal offence and the maximum sanction is six months of imprisonment 14

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HMRC Enforcement 16

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HMRC Enforcement Penalty Avoidance Disqualified Advice For the purposes of avoiding penalties, a taxpayer cannot rely on the fact that professional advice was taken if that advice is found to be “disqualified” Advice is “disqualified” if: • the advice was given by an “interested person” (participator/paid promoter) • there was an arrangement between an `interested person’ and another person (an advisor) who gave the taxpayer the advice • the advice was given by an advisor without the appropriate expertise (consider the need for a second opinion) • the advice took no account of the taxpayer’s specific circumstances • the advice was given or addressed to someone other than the taxpayer 18

HMRC Enforcement Advisor Penalties New penalties for “enablers” of defeated abusive tax arrangements came into effect from 16 November 2017 In addition to penalties for advisors who promote failed tax avoidance schemes Looks at advisor’s involvement at any stage of the life of the scheme: • development • design • management • implementation The penalty will be equal to the total amount, or value, of the enabler's relevant consideration for their involvement with the arrangement, without deduction of related costs. The enabler can also be “named & shamed” It is understood that if an advisor has acted in accordance with relevant professional conduct guidelines (from appropriate UK bodies), and within the spirit of the standard for tax planning, it is unlikely that enabler penalties will be imposed 19

HMRC Enforcement Summary • Given the focus on offshore and sharing of information, expect enquiries to increase and a more aggressive approach from HMRC • Much enhanced penalty regime in respect of offshore income & assets • 12 year time limit relating to offshore matters (still 20 years if fraudulent) • Continued and further disclosure of avoidance schemes • Further pressure on advisors • Increased public pressure. Significant media coverage in the UK regarding the “offshore” world and the morality of tax avoidance 20

IAIN YOUNGER Awards: Spear’s 500 Top Ten Tax Advisors 2019. Spear’s 500 Top Recommended, 2016 -2018. Spear’s 500 Recommended, 2016 and e. Private. Client Top 35 under 35, 2013. Iain joined Frank Hirth in 2000 and has successfully established and built the Trust and Estates service within our Private Client offering. Iain personally covers numerous areas of US and UK taxation for both individuals and families. He offers specialist advice relating to FATCA reporting Iain recently turned his attention to the firm's business development plans and has been travelling the globe to promote Frank Hirth to new markets. Iain is also a Trustee of the NPT-UK. He is a qualified Chartered Tax Adviser (CTA) and US Enrolled Agent (EA), and was appointed to the Board of Directors in 2016. He was listed in e. Private. Client’s Top 35 Under 35 in 2013 and was also honoured when listed in The Spear’s 500, 2016 -2019 and in The Spear's 500 Top Ten Tax Advisors in 2019. MARK SUMMERS Mark advises on matters of cross border taxation and international estate planning. He advises wealthy individuals and family offices as well as the private banks and fiduciaries that service them. Mark is expert in structuring clients’ affairs where they are affected by complex multi-jurisdictional tax and legal issues. He is particularly noted for innovative solutions for clients with US or European connections. Mark is also expert on matters of UK taxation as it relates to individuals and their wealth holding structures. He regularly advises on the remittance basis of taxation for non-domiciliaries, matters of UK tax residency and the taxation of UK real estate. He also advises on the regularisation of untaxed assets particularly where there is a multi-jurisdictional dimension. Mark is admitted to the EU list of the supervisory commission of lawyers for the canton of Zurich and the Swiss Federation. He is a member of STEP and the IBA and speaks frequently at their conferences. He is ranked as a leading individual in Chambers Global and HNW for International Private Client and is a member of Legal Week’s Private Client Global Elite.

This presentation has been designed to stimulate further thought and enquiry and as something that we consider may be of general interest to our clients. The examples we use are fictitious and they do not contain answers to specific situations. If you have a problem that is similar to any of our examples, please use this presentation as a prompt to take specific advice on that particular issue. We believe that the matters that are summarised in this presentation are correct as at the time the presentation was given. If we discover that what is said might be received in a way that conveys a misleading impression (whether by tone, content, error or omission) we will make the necessary changes and draw attention to what has been changed once we become aware of the need to do so. We will not be responsible for any action taken by someone who relies on what we say during the presentation but does not seek further advice to answer any specific query. Frank Hirth PLC Registered in England Wales: Number 03945095. © Frank Hirth PLC 2019. www. frankhirth. com 22