In the Summer Budget 2015 the government announced a number of significant reforms to the taxation of foreign domiciled taxpayers (‘non-doms’) who are resident in the UK for longer periods. The key points are highlighted below.
The ‘15-Year’ Deemed-Domicile Rule
It was proposed that there will be a new deemed-domicile rule which will apply after a taxpayer has been UK resident for 15 of the last 20 tax years (the ‘15 year’ rule). Non-doms who have been tax resident in the UK for this period of time, in their 16th year of UK residence, will be unable to benefit from the remittance basis of taxation and will become deemed UK domiciled for all relevant heads of taxation (including Inheritance Tax (‘IHT’), Capital Gains Tax (‘CGT’), and Income Tax (‘IT’)).
Non-doms caught by these rules will therefore suffer tax on their worldwide income and gains, whether remitted to the UK or not, and will be exposed to IHT on their worldwide assets. These individuals would need to leave the UK for 5 complete tax years if they wished to lose this deemed-domicile status.
The rules around the old ‘estate duty treaty’ reliefs relating to deemed-domicile for IHT purposes may also be changed, potentially affecting non-dom clients with Indian, Pakistani, French or Italian domicile. Although at this early stage the position is unclear.
These changes will be legislated in Finance Bill 2016 and introduced from 6 April 2017. A detailed consultation document will be published later at the end of 2015.
There will be no change to the remittance basis charges of £30,000 and £60,000 for non-doms who are UK resident for 7 out of 9 tax years and 12 out of 14 tax years respectively. The £90,000 remittance basis charge for non-domiciled taxpayers who are resident for 17 out of 20 tax years will be discontinued after April 2017 as it will be replaced by the new ‘15-year’ rule.
The Returning Non-Dom Rule
The government is also proposing to make it more difficult for an individual to acquire a domicile of choice outside of the UK and then return to the UK and avail themselves of the advantageous position afforded to non-doms. In a scenario where an individual has a UK domicile of origin, leaves the UK, gains a domicile of choice overseas, but then returns to the UK, the intention now is that as soon as they resume tax residence in the UK they will lose their non-dom status (and revive their UK domicile) regardless of their intentions. Any offshore structures the individual created while overseas could come within the scope of UK taxation and advice should be sought before commencing UK tax residence. These new rules will apply to returning non-doms from 6 April 2017.
Offshore Structuring for Non-Doms
It was also proposed in the Summer Budget 2015 that all UK residential property will be subject to UK IHT even when held via an offshore structure. This could have repercussions for non-doms who have used offshore structuring in the past, perhaps using offshore companies and/or excluded property trusts.
These changes will be introduced from 6 April 2017, with a full consultation document published later this year.
It is worth noting that it is intended that there will be no changes to the excluded property regime for non-doms generally, and the use of offshore trusts may still be a tax efficient method for holding non-UK situated assets.
It was previously announced that the Annual Tax on Enveloped Dwellings (‘ATED’) charge will apply to UK residential properties valued over £500,000 from 1 April 2016, where they are held through a ‘non-natural person’, broadly a UK or offshore company. Historically the charge applied to properties valued over £2 million from 1 April 2013, though these limits were reduced to £1 million from 1 April 2015, and will be reduced to £500,000 from 1 April 2016.
There is relief from the ATED charge if the property is let to a third-party on a commercial basis but there is still a filing obligation. ATED returns and payments are required by 30 April each year and HMRC may levy penalties and interest if ATED returns and payments are late.
Properties within the scope of the ATED charge will also be subject to ATED-related CGT at a rate of 28% on any increase in value between acquisition and disposal (subject to an element of re-basing).
Many clients may wish to consider de-enveloping any UK residential property currently held via offshore structures ahead of the announced changes, though advice should be taken as these structures may well still offer some tax benefits.
For further information or if you have any questions in relation to this matter, please feel free to contact any member of the Tax Services team.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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