Long term UK resident non-doms set to lose remittance basis of taxation

Author: Helena Luckhurst

This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK

Anyone who does not regard England as their permanent home (non-dom) but who has been resident in the UK for at least 15 out of the past 20 income tax years will wake up to a very different UK tax regime on 6 April 2017, according to a further consultation issued by the Government on 19 August.

Currently anyone claiming non-dom status but who is resident in the UK can choose not to be taxed to UK tax on their non-UK situated (i.e. foreign) income and gains in the tax year in which they arise, if those foreign income and gains can be kept outside of the UK or not used to enjoy a benefit in the UK. This is the favourable remittance basis of taxation offered by the UK to all non-doms, although anyone resident in the UK for at least seven out of the previous nine income tax years has to pay the remittance basis charge in order to access the remittance basis.

Under current rules, access to the remittance basis can continue indefinitely for non-doms, as long as a non-dom does not acquire an actual UK domicile. However, under the new rules proposed by the Government, once the 15/20 year rule applies to a non-dom, the remittance basis is no longer available.  To be precise, a non-dom will be deemed domiciled for all UK tax purposes – income tax (IT), capital gains tax (CGT) and inheritance tax (IHT) once the 15/20 year rule is met.  This means that a non-dom will be subject to UK income tax and capital gains tax on their worldwide income and gains from directly held assets, on an arising basis – i.e. the year in which that income or those gains arise – starting from 6 April 2017.  Therefore many long term resident non-doms will find their UK tax bill increases in the next tax year, if they remain resident in the UK and do nothing.

Unfortunately none of the above and the planning ideas in the rest of this note apply to anyone born in the UK with a UK domicile of origin (broadly, to British parents), who has acquired a foreign domicile of choice whilst living abroad and has returned to the UK and taken up UK residency again.

Transitional sweeteners – some light relief?


It would be harsh indeed if a long term resident non-dom chose to realise an asset after 6 April 2017 and found that gains relating to the pre 6 April 2017 period of his UK residency (which could be significant if the asset has been held for many years) were all taxable to CGT. So the Government proposes to offer a rebasing election, to prevent pre-6 April 2017 gains from being taxable.  However, the conditions for qualification are several:

  • The asset must be in personal ownership – assets in a structure, such as a trust or company, are not re-based.
  • The asset must have been owned at 8 July 2015 (the date of the UK’s Summer Budget 2015, when these changes were initially proposed in outline).
  • The non-dom must have paid the remittance basis charge for at least one UK tax year before April 2017.
  • The non-dom must become deemed domiciled under the new rules as at 6 April 2017 (i.e. the 15/20 rule applies to them).
  • The non-dom must not have a UK domicile of origin.

So if a person is going to become deemed domiciled in a tax year after 2017/2018 under the new rules, this option is not open to them and they may wish to consider taking deliberate steps to bring about a re-basing by other means before 2017/2018, if they are likely to become deemed domiciled under the new rules in the short to medium term. Some non-doms may wish to weigh up whether it is worth paying the remittance basis charge in 2015/2016 or 2016/2017 for the first time, if that will enable them to access the re-basing opportunity.

Mixed fund amnesty

In addition, for all non-doms, not just those who will become deemed domiciled on 6 April 2017, the Government is offering a window of opportunity, in tax year 2017/2018, to reorganise foreign assets which have become ‘mixed funds’ during the period of ownership, meaning that the asset comprises a mixture of foreign income, gains and the initial capital. For example, a portfolio of investments which was held before UK residency commenced, and thus would comprise ‘clean capital’ (capital capable of being remitted to the UK free of tax), could have had dividends and gains on realised investments ploughed back into the portfolio for reinvestment over the years.  The portfolio is a mixed fund as the income and gains have not been segregated from the initial capital.  Remitting a mixed fund to the UK is unattractive for UK tax purposes as the income element, which is taxed at the highest rates, is deemed to be remitted first in any given tax year.

However, if the necessary records exist, the offshore mixed fund can be segregated into its constituent components of clean capital, foreign income and gains, while it remains offshore, by putting the different categories into separate accounts. A non-dom can then choose to remit only funds from the clean capital account while UK resident, which will not trigger a UK tax charge.  In effect, this opportunity will enable those eligible to boost their levels of clean capital, perhaps sufficient to meet their living needs while their UK residency persists.  But one of the key qualifying conditions is that the asset must be in the form of a bank account, although assets not in the form of cash currently which are liquidated and segregated can still take advantage of this opportunity.  Only those with decent accounting records need apply but it is not clear from the consultation just how scrupulous the records will need to be in order to take advantage of this.  If this could be of interest, assessing the strength of those records is something that can be usefully done now.

Offshore structures set up by long term res non-doms

Many non-doms who have already become deemed domiciled for IHT purposes under the current rules, because they have been resident in the UK for 17 or more tax years out of the previous 20 income tax years, will have set up offshore structures to hold non-UK situated assets, to shelter those assets from IHT, before they became deemed domiciled. Offshore trusts set up for this purpose are often referred to as ‘excluded property trusts’ because the non-UK situated assets in them are ‘excluded property’ for IHT (essentially meaning that they are ignored for IHT purposes.

If a person who funds an offshore trust (the settlor) and benefits from it, being one of the beneficiaries, becomes deemed domiciled for IT, CGT and IHT under the proposed new rules, this will have an effect on the taxation of the trust, as this ‘At a glance’ table briefly summarises the position for non-dom settlors:

Settlor interested offshore trust taxation: pre and post 6 April 2017

Current rules If remittance basis claimed, unremitted foreign trust income not taxable on settlor. All trust gains not taxable on settlor unless settlor receives capital payment/benefit from trust in UK. Trust shelters non-UK situs trust assets from IHT.
Government proposals Foreign trust income taxed on arising basis to settlor, unless no benefit to settlor, settlor’s spouse or minor (step)/children from 6 April 2017 onwards, and no additions to the trust. All trust gains taxed on arising basis on settlor, unless no benefit or additions etc (as for IT). IHT position unchanged, provided trust assets not comprise UK residential property, directly or indirectly.

However, the Government’s consultation suggests that, if a settlor can put some or all of the existing trust assets into ‘lock-down’, preventing any benefit being received or enjoyed from those assets by any of himself, his spouse and his minor children or stepchildren, the post 6 April 2017 IT and CGT position outlined in the table above will be avoided. Settlors with plans to leave the UK at some point in future could quantify how much benefit from their existing trusts they will need to see them through their residency period and, if the terms of the trust permits, ringfence in the existing trust (or spin off to a new trust, if not disadvantageous for tax or other reasons) assets from which a benefit must be taken and therefore UK taxation must be suffered.

Non-doms in this situation should review their offshore structures. Will they continue to serve a purpose after 6 April 2017, bearing in mind that non-tax considerations of asset protection and privacy may mean that they have a role to play still.

What now?

The Further Consultation remains just that, a consultation. However, the language indicates that the Government has made up its mind on the core tenets of the changes and so we advocate taking planning advice now.  If, as would seem possible, the draft legislation to effect these changes is published around the time of the Autumn Statement (23 November 2016) or, more likely, the announced date for the publication of the Finance Bill 2017 (5 December 2016), that will leave very little time to 6 April 2017 to assess the impact and take any planning steps necessary.  These few months before the end of the year offer an opportunity for unrushed reflection so that, when the details are published, well organised non-doms will be ready to respond.  This will be particularly important for non-doms who will become deemed domiciled on 6 April 2017 – they do not have the luxury of ‘waiting and seeing’ necessarily.

If you are concerned about how the proposals may affect you or your clients, please speak to me or your usual Fladgate contact.

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)

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