Taxation and non-dom rules - everything you need to know

The 2016 Finance Bill means the future of non-domiciled individuals (‘non-doms’) could be impacted quite significantly explains Ercan Demiralay FCCA.

Essentially, the reform is trying to remove a loophole in the non-dom rules and regulations that currently allows non-doms to keep their unremitted foreign income out of the reach of UK taxation. The measures will return the system to its original intention of supporting those from overseas who come to the UK, but don’t intend on staying permanently. This will result in non-doms who live in the UK for a long period of time needing to pay their fair share of tax.

The changes brought about by the 2016 Finance Bill

The three major changes are as follows:

• Non-doms who have been resident in the UK for at least 15 out of the preceding 20 tax years will be deemed to be domiciled in the UK for income tax, capital gains tax (CGT) and inheritance tax (IHT) purposes. This has been reduced from 17 out of the preceding 20 tax years.

• Individuals born in the UK with a UK domicile of origin will not be able to claim a non-dom status while living in the UK, even if they decide to return to the UK after they’ve left and have acquired a domicile of choice in another country.

• Inheritance tax (IHT) will be charged on all UK property, including property held indirectly by non-doms, through a structure such as an offshore company or trust. 

The access to the remittance basis for long term UK residents will be restricted, bringing them in line with others who are UK domiciled residents, meaning that the remittance basis for deemed domiciled individuals will be abolished from 2017/18.

From 5 April 2017, those deemed domiciled under the new rules will be subject to UK tax on their worldwide income and gains– and no longer have the benefit of the remittance basis of taxation. In addition to this, their worldwide estate will be subject to inheritance tax (IHT).

The Government has confirmed deemed-doms can treat the base cost of their personally held foreign assets as the market value of the asset as of 6 April 2017 for capital gains tax purposes. Therefore only gains arising and accruing after this date will be taxable.

It’s important to note that, when applying the deemed domicile rules, split tax years will count as whole years of residence and the individual could fall into the new domicile rule after just over 14 years’ presence in the UK.

It isn’t all bad news; the Government has indicated existing offshore trust structures established by non-doms who become domicile under the new regime will retain their IHT excluded property status. (Non-UK trust assets continue to fall outside the scope of IHT).

What to consider between now and 5 April 2017

• Non-doms who will become deemed domiciled for UK tax purposes next year have a window of opportunity between now and 5 April 2017 to receive foreign income and take advantage of the remittance basis of taxation whilst it remains available to them. Individuals whose deemed domicile takes effect in a later year will obviously be in a position to enjoy the benefits of the remittance basis for a longer period.
• Consider succession planning involving the gifting of non-UK assets, which prior to 6 April 2017 will be outside the scope of IHT. Thereafter such gifts will fall within the regime for potentially exempt lifetime transfers, or may be immediately chargeable to IHT if to a trust.
• Consider the restructuring of overseas investments so as to roll up income and gains and defer future UK tax thereon. This will require specialist investment and taxation advice, since such restructuring is invariably complex and requires consideration of a range of tax and other issues.
• Deemed-domicile status for IHT purposes will cease after four consecutive tax years of non-UK residence. However, you still need to remain non-UK resident for 6 full consecutive tax years in order to reset the 15 out of 20 years clock, in the event you decide to return to the UK. Bear in mind, full consideration of the wider practical and lifestyle considerations associated with becoming non-resident.
• Dispose of non-UK assets in order to realise gains which can be protected from tax by retaining the proceeds abroad, coupled with a claim for the remittance basis of taxation. It may also be possible to ‘re-base’ assets by disposing of and subsequently reacquiring them. However, where shares are involved it will be necessary to defer any reacquisition for at least 30 days.
• The government has proposed a major concession for individuals who become deemed domiciled on 6 April 2017. Such persons will be able to elect to re-base overseas assets on an asset-by-asset basis to their market values at 5 April 2017, thereby effectively ‘washing out’ any gains accrued to that date for CGT purposes.
  
  The concession will apply to assets which had a non-UK situs on 8 July 2015 (the date when the new regime was first announced), provided that the individual has at some time prior to 6 April 2017 paid the annual remittance basis charge. Regrettably, the government has decided not to extend such rebasing to those becoming deemed domiciled under the ‘15 out of 20 year’ rule in a later tax year.
• Request distributions from trustees of non-UK trusts, protect those distributions from UK tax by claiming the remittance basis, and retain the proceeds outside the UK to meet future overseas expenditure.
• Review all existing offshore trust structures and evaluate the potential benefits of setting up new overseas trusts before 6 April 2017, so as to secure long term income tax and CGT deferral, as well as IHT protection for future generations.
• A transitional rule will offer a one-off opportunity to cleanse offshore ‘mixed funds’ from 6 April 2017 until 5 April 2018. A mixed fund includes different types of non-taxable and taxable funds (e.g. clean capital, foreign income, capital gains, etc.) potentially spanning multiple tax years.
  
  The new rule will allow all non-UK domiciled individuals (other than those born in the UK with a UK domicile of origin) to separate out the constituent parts of a mixed fund into different offshore bank accounts, thereby enhancing the tax- efficiency of future remittances to the UK.

The content of this post is up to date and relevant as at 01/12/2016.

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