Member Article

Changes to Tax System for UK non-domiciles

The Spring Budget 2016 announced more changes to the tax system for UK non-domiciles. The pressure already on the government post-Brexit could affect the final shape of the changes, but they are almost certain to come into force for 6 April 2017, and will definitely impact non-dom taxes across the board, including income tax, capital gains tax, and inheritance tax.

What is the point of the changes?

The non-dom tax reforms aim to change the treatment for individuals who are resident in the UK though not domiciled in the UK for tax purposes. As to why: well, the changes proposed could be politically motivated, to entice high net-worth non-doms who spend time and money in the UK via the commercial route (i.e. a reduction in corporation tax), while ensuring that all non-doms who spend significant periods in the UK pay the same taxes as other UK residents.

What are the current rules?

Individuals who are both UK-resident and domiciled in the UK are taxed on their worldwide income and gains (this is known as the arising basis), but UK-resident non-doms can choose not to be taxed in the UK on income and gains that they do not bring into the UK (this is known as the remittance basis).

Long-term non-doms who are resident in the UK can benefit from offshore income and gains and decide whether to be taxed on the remittance or arising basis each year. However, non-doms using the remittance basis of taxation who reside in the UK for over 7 years are charged a tax levy (of £30,000, £60,000, or £90,000), depending on the length of their residency.

What is changing, who will if affect?

The intention is to restrict who can make use of remittance basis tax, so that the rules for long-term UK residents match those for UK-resident and domiciled. This is the first time a distinction will have been made between

• Someone born in the UK (Condition A)
• Someone domicile of origin in the UK (Condition A)
• Someone UK-resident (Condition B)
• Conditions, what “deems” certain individuals UK domiciled?

Condition A applies to anyone born in the UK with a UK domicile of origin. They will be deemed UK-domiciled while resident in the UK. Under this condition, there is no protection for offshore trusts for either tax on income/gains in the trusts or for inheritance tax (IHT) purposes, even if the trust was set up while the individual was non-domiciled. The remittance basis for deemed domiciled individuals will be abolished from 2017/18.

Condition B applies to anyone who has been resident in the UK for at least 15 out of the previous 20 tax years, although a non-dom who becomes deemed domiciled will not have to pay UK tax on income and gains in offshore structures created before they became deemed-domiciled. It could be that under the new rules a flat rate will be charged based on the taxable value of benefits received by anyone deemed domiciled. No one will any longer be able to inherit a “non-UK domicile” status if born in and resident in the UK.

Think about which elements of the likely changes are going to affect you

• Extension of the 15 out of 20-year rule: Non-doms resident in the UK for 15 of the last 20 years will be deemed UK-domiciled for income tax and capital gains tax (CGT) purposes from the beginning of the tax year 2017.
• Loss of remittance basis taxation: Once an individual is deemed domiciled in the UK, they will no longer be able to claim the remittance basis of taxation.
• Periods of residency: Anyone born in the UK with a UK-domicile of origin, who has a domicile of choice elsewhere, will be seen as UK-domiciled for periods of residency in the UK.
• “Deemed domicile”: the new rules could charge IHT on all UK residential property held by non-doms through an offshore company or trust.
• Trusts established by returning UK domiciles while they were non-UK resident and non-UK domiciled will fall within the scope of UK inheritance tax at any time the “settlor” meets the “deemed domicile” test for inheritance tax.

What could you be doing in the meantime?

• If this is likely to affect you, be sure of your residency status;
• If you are a long-term resident non-dom, aim to understand your annual income tax and capital gains tax liability when taxed on the worldwide basis from 6 April 2017;
• Non-doms likely to be “deemed domiciled” from 6 April 2017 should consider how to maximise the benefit of the remittance basis for the 2015/16 and 2016/17 tax years.

Conclusion

These seem like major changes that are likely to create a hiatus of tax planning moves and measures. Understanding what will be needed for reporting purposes (assets, offshore income/gains, etc.) and executing a tax-planning strategy now, could save you a lot of time, money, and stress. If any of this is likely to affect you, please get in touch so that we can start planning now to lessen the impact of the changes later.

This was posted in Bdaily's Members' News section by Sumit Agarwal .