The UK government is planning major changes to the way non-domiciled individuals are taxed once they have been long-term resident in the UK. The new rules will take effect in April 2017 and represent the most fundamental tax change non-doms living in the UK have ever faced. Many will consider their options. Some will leave while others will stay and accept higher taxes. What's clear is that those approaching 15 tax years of residence in the UK need to plan ahead for these changes.
Other important tax changes affecting non-doms are also being introduced in 2017. These will affect non-doms owning UK residential property through offshore companies and non-doms who were born in the UK with a UK domicile of origin and who return to the UK, even if only on a temporary basis.
At Mishcon de Reya we have a specialist team advising affected clients in the run-up to 2017. Over the next 18 months we will be issuing bulletins updating our clients and contacts as more details emerge of the government's plans. We will closely monitor developments, explain the changes, advise on possible planning opportunities and report on how clients are reacting. We would also welcome your views on the proposals, and how you or your clients are likely to react to the changes. This will help inform our discussions with the government on the design and implementation of the new rules.
Who are the new rules aimed at?
The main changes are aimed at non-domiciled individuals who have been long-term resident in the UK. Currently a non-domiciled individual is able to claim the remittance basis of taxation. This means they don't pay tax on foreign income and gains as long as they are not brought (or "remitted") to the UK. This special tax regime is available free of charge for the first 7 years. Thereafter it involves paying the remittance basis charge (currently £30,000, £60,000 or £90,000 per annum after 7, 12 and 17 years respectively).
Currently a person who is not domiciled in the UK will automatically become deemed domiciled when they have been UK resident for 17 of the last 20 years but only for inheritance tax. Under the new rules, a non-domiciled individual who has been UK resident for 15 of the last 20 tax years will automatically be deemed domiciled for all tax purposes. This will not change their domicile status under the general law but only for tax purposes.
What does this mean for non-domiciled individuals?
The main change for non-doms is that they will no longer be able to access the remittance basis once they have been UK resident for 15 of the previous 20 tax years. They will pay tax on their worldwide income and capital gains on an arising basis regardless of whether the income or gains are remitted to the UK. Non-doms will also then be subject to inheritance tax on their worldwide assets. They would generally need to leave the UK for six complete years before they lose their deemed domicile status. They could then return to the UK and remain non-domiciled for another 15 years, with access to the remittance basis by paying the appropriate remittance charge.
Are there any exceptions?
Trusts that were set up before a non-dom becomes deemed domiciled will still offer future protection. Although we still have no detail, the government has indicated that any trust income and gains retained in the trust will not be taxed even if the person who created the trust, or the beneficiaries, are deemed domiciled under the new rules. Such trusts will generally also offer the same inheritance tax treatment as at present, namely that any non-UK assets in the trust will be permanently excluded from inheritance tax.
What are the new rules for UK residential property?
All non-domiciled individuals who own UK residential property through an offshore company (whether the shares are owned personally or through a trust or foundation) will be subject to inheritance tax as if the offshore company is transparent or does not exist. Currently an offshore company offers non-doms a way of converting what would otherwise be a taxable UK property into non-taxable shares in the offshore company. This shelters the entire value of the underlying property from inheritance tax. That advantage will be removed from April 2017 and will apply to all offshore companies holding UK residential property. It is not restricted to those owned only by long-term UK resident non-doms.
What are the changes for non-doms who had a UK domicile of origin?
An individual born in the UK with a UK domicile of origin may have left the UK many years ago on a permanent basis and acquired a domicile of choice elsewhere. If that individual ever becomes UK tax resident again, even on a short term basis (for example, on a three-year employment contract), they will immediately be treated as UK domiciled for income tax and capital gains tax purposes. For inheritance tax purposes they will have a grace period of just one year. They will not be entitled to non-domiciled tax treatment and they won't have the 15 year grace period available to other non-doms who move to the UK. Even trusts set up before they returned to the UK won't receive favourable treatment unlike those set up by other non-doms before they become deemed domiciled.
When will the new rules apply?
The new rules for long-term resident non-doms will apply from 6 April 2017 irrespective of when the individual arrived in the UK.
The inheritance tax changes affecting UK residential property held by offshore companies will apply from 6 April 2017 and will affect existing structures as well as new ones.
The new rules for returning non-doms with a UK domicile of origin will apply from 6 April 2017 but will include those who returned prior to April 2017. This is particularly harsh on those who returned before the proposals were even announced and who will now be facing a very different tax regime following the introduction of what are, arguably, retrospective tax changes.
What action should you take now?
It is still too early to take any concrete planning steps. There is very little detail on most of the changes and it is possible the government will respond positively to the critical submissions made by Mishcon de Reya and other professional firms and bodies. Taking action now before full details of the new rules are known could even result in unnecessary tax charges and wasted professional fees. Any planning using a "tax scheme" almost certainly won't work anyway and could increase the risk of an unwelcome tax enquiry. That said, those who will be affected should already be considering their options well in advance of the changes being implemented.
We will be closely tracking the new legislation and accompanying government guidance and related announcements. We will publish further editions of Countdown to 2017 over the coming months. In the meantime, if you have any questions about the proposals, or you would like us to analyse your particular circumstances and advise on possible tailored mitigation strategies, then please contact Andrew Goldstone or your usual Mishcon de Reya tax contact.