Further clarity on changes for non-doms

In the 2015 Summer Budget, the government issued a consultation document on proposed reforms to the tax rules for people who are not domiciled in the UK (“non-doms”).  HMRC have now published their response to the consultation and we have a clearer idea of how the reforms will work and when they will come in.  This note summarises the current state of play.

As a non-dom you have hitherto enjoyed two main UK tax advantages, and a number of subsidiary ones.  Very broadly the main advantages are:

  • For Inheritance Tax (“IHT”) purposes your estate includes only UK assets.  But once you have been UK-resident for 17 years you are deemed to be of UK domicile and this IHT advantage is removed from you.
  • You don’t pay Income Tax or Capital Gains Tax (“CGT”) on foreign income or foreign gains unless you bring them into the UK.  But once you have been here for 7 years you get this treatment for any tax year only if you pay a “remittance basis user charge” of £30,000 for the year.  After you’ve been here for a further 5 years that goes up to £60,000; and after a further 5 to £90,000.

Two main changes are being made.  These will both come in from 6 April 2017.

The first main change is that non-doms who have been tax-resident in the UK for at least 15 out of the previous 20 tax years will be deemed domiciled within the UK for the purposes of Income Tax, CGT and IHT.  So the tax advantages described above disappear on 6th April of the 16th year of residence.  Once “deemed UK domicile” has been acquired it will be shed only after a period of non-residence.  For Income Tax and CGT purposes, the period is six years: for IHT, four years will do.  Different, harsher, rules apply to a small class of people who were born in the UK of UK domicile, have subsequently acquired foreign domicile and who later resume residence in the UK.

There are some transitional rules.  The most important of these are:

  • If you become of deemed UK domicile overnight on 6 April 2017 when the new rules come in, you can elect to “rebase” foreign assets for CGT purposes to their market value on that date.
  • If you have an offshore fund in which “clean capital” is mixed with foreign income, foreign gains or both you will be able to rearrange the income, gains and capital into separate accounts in order to facilitate tax-efficient remittances to the UK.  This re-arrangement can be done at any time in the tax year 2017/18 (but remittances can be made in a later year)

Much of the detail now released by HMRC is to do with making existing rules on domicile (especially in the anti-avoidance field) work properly with the concept of deemed domicile, and in ensuring that unintended tax charges do not arise as a result of the changes.  For more detail on this, see our website.

The second change relates to IHT on UK residential property.  As a non-dom your estate excludes non-UK assets.  In principle it is easy to convert a UK asset into a non-UK asset: you simply inject it into a foreign structure (such as a foreign company) and the asset in your estate is then not the UK asset but your shareholding in the foreign company.  From 6 April 2017 this “situs shifting” will not work with regard to UK residential property (though it will still work with regard to other UK assets such as commercial property).  The way this will be done will be by bringing non-UK assets into your estate for IHT purposes to the extent that their value is attributable to UK residential property.  This means that existing “situs-shifting” structures will no longer be effective.  HMRC have resisted pressure to introduce targeted relieving provisions to facilitate dismantling such structures; but nonetheless it will sometimes be advisable to consider doing so.

For specific questions, please get in touch with your usual BKL contact or use our enquiry form.

Terry Jordan

Senior Adviser, Private Client

T +44 (0)20 8922 9360
E terry.jordan@bkl.co.uk

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