Author: Helena Luckhurst
The UK Summer Budget 2015 has brought the most significant reforms in the taxation of non-UK domiciliaries in recent years. However, most of the changes are due to take effect from 6 April 2017, so there will be plenty of time to consider the best course of action if you or your clients are affected.
The changes primarily affect non-doms who are long term residents of the UK and also those with a UK domicile of origin at birth, who return to reside in the UK following a period of absence.
Deemed dom after 15 years
Indefinite non-dom status, at least for UK tax purposes, is to become a thing of the past. The Government believes that non-doms resident in the UK long term should pay tax on their worldwide income and gains and Inheritance Tax (IHT) on their worldwide assets. To achieve this, they intend to legislate to automatically alter a resident’s domicile status for tax purposes after 15 years of residency. This marks a stark departure from the current system, where UK resident non-doms who are careful to maintain their non-dom status throughout their period of residency are entitled to choose to be taxed on the remittance basis, i.e. on UK income and gains but only on the foreign income and gains that they bring into the UK, albeit that that choice comes at a cost after seven years of UK residency.
From tax year 2017/2018, non-doms who have been resident in the UK for more than 15 out of the past 20 tax years will be regarded as domiciled in the UK for all tax purposes (Income Tax, Capital Gains Tax and IHT), regardless of their actual domicile as a matter of general law. This means that, from the 16th year of residence onwards, they will pay tax on their worldwide income and gains on an arising basis and will be subject to IHT on their worldwide assets. They will not be able to claim the remittance basis on any overseas chargeable earnings.
Once acquired, the new deemed domiciled status can only be lost by spending more than five tax years outside the UK. Exposure to IHT on worldwide assets will remain for up to five years following a deemed dom’s departure.
The new changes will apply to those already living in the UK but if a non-dom who is a long term resident leaves the UK before 6 April 2017 and would still have been resident in the UK for more than 15 out of the past 20 tax years as at 6 April 2017, the new rules will not apply to them.
The remittance basis of taxation will only be available to non-doms who have been resident in the UK for 15 tax years or less. The £30,000 and £60,000 remittance basis charges will continue to apply as now, but this means that the £90,000 remittance basis charge which was only set out in the 2014 Autumn Statement will fall by the wayside – such is the pace of tax change in these parts!
Long term resident non-doms wishing to protect their worldwide assets from IHT will still be able to transfer non-UK assets into an offshore trust before they become deemed domiciled under the new 15 year rule. Those assets (unless comprising UK residential property, as per other proposals outlined in Summer Budget 2015 – see our separate note on this) will remain excluded property for IHT; effectively exempt from IHT. Existing excluded property trusts will also retain their favourable IHT treatment.
However, any benefits, capital or income paid from any offshore trust to the deemed UK dom will be subject to UK taxes from 6 April 2017, no matter in which jurisdiction they are enjoyed or received. Capital and income retained in the trust will not be taxed in the UK.
The returning UK dom
Currently, UK doms who emigrate and acquire a domicile of choice in their new country of residence immediately must still wait three calendar years before only their UK assets (as opposed to their worldwide assets) are liable to IHT. This waiting period will be extended to five tax years of non-residency for any UK doms departing after 6 April 2017.
Taxpayers who have had a UK domicile of origin but have since lost it (for example, by settling in another country outside the UK) will need to be aware that any return to the UK will have significant tax consequences. No matter if they retain their non-UK domicile of choice once back in the UK; they will be deemed UK domiciled from arrival for all tax purposes.
This change will apply to returning UK doms from 6 April 2017, even if they returned to the UK prior to that date.
What should be done now?
To understand the impact of these changes, long term resident non-doms who will be affected by the new 15 year deemed domiciled rule and have created, or have an interest in, non-UK structures, such as trusts, companies and foundations, should ensure that those administering them are aware of these proposals and can confirm the amount of undistributed income and realised gains, as well as latent gains, that are in the structure. A value should also be placed on benefits currently taken from the structure.
This information should enable the potential tax issues that could arise on distributions, or benefits taken, from offshore structures by long term residents after 6 April 2017 to be analysed and a new strategy formulated.
It will also become apparent whether distributions should be made ahead of 6 April 2017 in order to enjoy the comparatively generous current rules.
If you are a long term resident non-dom, be clear about whether you will become deemed domiciled under the current rules (resident for at least 17 out of the last 20 tax years, ending in the current tax year) or under the proposed new rules (more than 15 out of the past 20 tax years) before 6 April 2017. If either of these might apply, you should consider whether it is advantageous perhaps to cease being resident in the UK for tax purposes or set up an excluded property trust while you still can.
Many more non-doms will require IHT planning advice once these changes take effect.
Further details of the changes will become available when the Government issues its consultation on these changes in the autumn. Draft legislation is scheduled for the Finance Bill 2016.
There is insufficient information yet available on which to base any firm plans and the proposals may change following consultation, so our advice is to stay calm and carry on! No immediate action need be taken but we recommend an early discussion with us so that we can start to consider the implications for you and your family.
Helena Luckhurst, partner (firstname.lastname@example.org)