Non-UK domiciled individuals

Main Points:

  • Major changes for non UK domiciliaries who have been UK resident for any part of 15 of the last 20 years.
  • Worldwide income and gains to be taxable in the UK.
  • Worldwide assets liable to UK IHT.
  • Structures already in place impacted if they hold UK residential property.
  • Offshore trusts changes that affect how gains and income are taxed.
  • Limited opportunities for planning, but swift action required.

Following an announcement by the Government in 2015, draft legislation has now been published that will take effect from 6 April 2017 which will make substantial changes to the tax regime applying to individuals who are UK resident but whose origins are outside the UK.

All non-UK domiciliaries should therefore consider taking advice as soon as possible, ideally before these changes come into force. The main changes are outlined below, although you should be aware that the legislation is still being finalised, so some details could be changed before it is enacted.

“Deemed UK domicile” for long-term residents

From April 2017 there is to be a “compulsory arising basis” for non-doms who have been resident in the UK for 15 of the previous 20 UK tax years.

As a result, the ‘remittance basis’ will no longer be available to anyone who has lived here for 15 years or more, with ‘split years’ (i.e. years of arrival in or departure from the UK) also counting as a year of UK tax residence for this purpose. Long-term UK residents will consequently be automatically liable to UK income tax and capital gains tax (CGT) on their worldwide income and gains after living here for 15 years, which effectively aligns the income tax and CGT regimes with that which currently applies for Inheritance Tax (IHT). (Note that for IHT once a person becomes UK deemed domiciled (UK resident 15 out of 20 years) all of their worldwide assets will become liable to UK IHT.)

One concession will continue to apply though - even after individuals become deemed-domiciled for tax purposes, the current de-minimis protection should remain unchanged, whereby any non-dom who has less than £2,000 of unremitted income and/or gains does not have to elect to use the remittance basis and need not report the amounts in the UK, or pay tax on them. In addition, they do not forfeit their personal allowance or CGT annual exemption (as all other remittance basis users do), nor do they have to pay the remittance basis charge.
There are also to be two transitional reliefs related to the deemed-domicile change, as follows:

  • Anyone who has already been in the UK for at least 15 tax years within the last 20 and has actually paid the remittance basis charge for at least one tax year before 6 April 2017 will be entitled to rebase their foreign assets for CGT purposes at their 5 April 2017 market value.
  • Individuals who have been taxed on the remittance basis but who have ‘mixed funds’ overseas (essentially overseas bank accounts which consist of any mixture of capital, income and gains) will, during a temporary window of two tax years from April 2017, be able to move their clean capital, foreign income and foreign gains into separate bank accounts, and will then be able to remit from the new accounts as they wish, and pay the appropriate amount of tax.

UK domicile of origin ‘returners’ to the UK

Anyone who was born in the UK with a UK domicile of origin but who has left the UK and is claiming to have a non-UK domicile of choice will not have access to the remittance basis if they ever subsequently return to live in the UK, even if they are only UK resident for a short time. They will also become UK domiciled for IHT purposes after a one-year 'grace period' so that those returning for a short time would not need to re-write wills.

Inheritance Tax (IHT) on UK residential property

UK residential property held through non-UK structures will be brought within the scope of IHT from 6 April 2017, such that the value of an interest in a close company or partnership will not qualify as ‘excluded property’ to the extent that it is derived from a UK dwelling, even if the property is let commercially. Complex rules will also be introduced relating to the debts of an entity that holds UK residential property, and where property ceases to be caught by the new rules.

Offshore Trusts set up by non-UK domiciled persons

There are to be major, and highly complex, changes to both the CGT and income tax regimes of offshore trusts, which will be relevant to both the settlors and beneficiaries of those trusts, including those where beneficiaries are non-UK resident – so anyone with an interest in an offshore trust needs to obtain advice as soon as possible, as their ongoing tax position may well be changing going forward.
 
Trusts that are established by non-dom settlors who are not ‘deemed-domiciled’ under the ‘15/20’ rule when they settle the assets (protected trusts) will nevertheless be afforded certain beneficial treatments, even after the settlor has become subject to the ‘deemed-domiciled’ provisions so there remain planning opportunities for those who act prior to being deemed domicile. However, adding property or income to a settlement after ‘deemed-domiciled’ status under the new '15/20' rule has been triggered will forfeit all protected trust benefits and ‘taint’ the whole of the trust -  so trustees will need to monitor such matters very carefully.

Families who expect to need distributions in the future but whilst the settlor is "deemed-UK domiciled" may therefore wish to consider taking advice on whether it might be advantageous to take funds from a protected trust before April 2017, particularly if there are any non-resident beneficiaries.

Other changes

Various other changes are to be introduced including to the Business Investment Relief regime, in order to make it more attractive to non-dom investors, and to allow foreign capital losses to be offset once an individual becomes deemed-domiciled.

For further information, please get in touch with Danny Clifford.

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