Raising Liquidity for Trusts Ahead of Potential Changes to the UK’s Non-dom Regime

The UK’s resident non-domiciled tax status regime (“non-dom regime”) has long been a source of contention and it has now, once again, come under scrutiny. The cost-of-living crisis and the scale of government debt have forced Rishi Sunak’s government to consider the regime and its benefit to the UK and, as a result, it is possible that the Conservative party will lay out plans to potentially amend or even abolish the regime. 

Both expert and public opinion on the non-dom regime is divided. Some say that it allows wealthy individuals to benefit from overly generous tax breaks, and that non-doms should pay significantly more tax than they do, with a 2022 report suggesting that the UK Treasury would benefit from an additional £3.2 billion in annual revenue if the regime were abolished. 

However, opposing parties argue that while the non-dom regime offers a fiscal benefit, the scheme does benefit the UK overall, given it generates more than £7.85 billion in revenue a year, without counting the business, employment opportunities and investment non-dom’s bring to the UK as the result of their links to the country. Without the non-dom regime in place, supporters argue that UK non-dom residents will simply leave the UK, taking their tax revenue with them.

Announcements surrounding the status of the UK’s non-dom regime are expected as early as the April budget. While it is unlikely that any changes would come into force immediately and conversations around the UK’s non-dom have arisen before, there currently seems to be stronger sentiment around amending the regime than previously, making some kind of change feel perhaps more likely. The Labour party have also stated they would move to abolish the regime, and on this basis some HNWI will be watching popularity polls carefully to see if they need to make plans for the future. All this means advisers and HNWI alike are considering what any potential amendments would mean, and how they could react on a practical level.

Considerations

If the UK’s non-dom regime is abolished, most HNWI will look to protect their UK and worldwide assets, to optimise their fiscal position. For many, this will mean looking towards traditional wealth protection and estate planning structures such as trusts, as well as investment portfolios, including private fund structures, venture capital or private equity funds, all of which are usually managed and administered offshore. 

While the logic makes sense, many of these individuals are asset rich but cash poor, and don’t have enough capital reserves to generate the capital required to put in a trust or invest into a fund. Wealth is tied up in businesses, property, investments and so on, and selling these assets makes little sense given they won’t benefit from future appreciation or returns. Generating capital using the individual’s existing assets as collateral is therefore one of the most effective ways to do this. 

Settling tangible assets like property directly into trusts is also increasingly complex for settlors and their advisors, particularly due to the Annual Tax on Enveloped Dwellings introduced by the UK Government. The move has made it more challenging to structure property in trusts, and, at the same time, reduced many of the benefits of holding real estate through offshore structures. This means that settlors will usually benefit from injecting cash into a trust, rather than assets, which again means that raising liquidity can be particularly advantageous. 

How To Raise Capital For A Trust Or Investment Portfolio

One option for these individuals is to leverage their personal assets to access liquidity that can be invested in various ways – in funds or trusts, for example. If your clients are considering raising capital as part of a response to potential changes to the non-dom regime, we can help arrange finance, including in scenarios where:

• Your client wants to use both UK and global assets as security for a loan. HNWI are not obliged to use UK assets only 
• Your client wants to access very significant capital – we can broker finance of £1 million or more, but regularly broker loans of £10 million or more
• You are looking to arrange financing for your client against assets held in corporate structures – both on and offshore – not all lenders can do this, and negotiations are key
• Your client has a significant asset base and needs to raise finance against multiple asset classes to raise the amount they want
• You need the lending facility to be at least somewhat flexible in the sense that it will be invested, either via the trust or directly into funds or portfolios and it is likely that the client will need to use complex income to service the loan

How can Enness help?

Accessing Finance

Not all lenders are willing to finance unusual scenarios, and this will be the case for raising liquidity to set up a trust. Because the capital raised and held in the trust will then go on to be invested, lenders will need to understand more about the asset manager, proposed investment strategy and management of the funds, as well as more conventional considerations like the exit (when applicable), the profile of the borrower and so on. Enness can help you document this for the lender in such a way that they can consider lending. This will require tailored negotiations and applications with each lender to showcase how the borrowing scenario matches their lending criteria and risk appetite.

Global Asset Review

We will start the process by undertaking a holistic analysis of your client’s assets with a view to releasing equity. Raising loans against property and securities tend to be the most straightforward options (with securities-backed lending, in particular, often being more competitive in price than property finance). Here, we are not confined by jurisdiction – we have access to global lenders and can arrange loans against prime property anywhere in the world. As well as raising finance collateralised against securities on major stock exchanges, we can also arrange finance against single lines of stock (including those listed on smaller stock exchanges), stock with low trading            volumes and high levels of private ownership, financing against shares in pre-IPO companies, unlisted stock, bonds, private equity carry and hedge funds.

Streamlining

To raise significant liquidity, settlors may need to use several different assets or asset classes as security. In these cases, we will always look at how to arrange lending in the most streamlined way: from a cost perspective, in terms of efficiency as well as from a structuring and fiscal perspective and in line with advice given by relevant advisers. Understanding what is required, we will then negotiate the loan to meet the needs of the settlor and the trust structure, rather than opting for off-the-shelf finance products, which can be inflexible and not as competitive as can otherwise be arranged. 

We will also look at efficiency wherever we can. In many cases for example, we can release equity from multiple properties using a single loan, rather than taking out individual loans against each real estate asset.