This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

Mishcon de Reya response to the HM Treasury consultation on changes from April 2017 to the taxation of non-domiciles
Andrew Goldstone & Victoria Howarth
13 November 2015

Mishcon de Reya response to the HM Treasury consultation on changes from April 2017 to the taxation of non-domiciles

New taxation rules for non-doms are to be introduced from April 2017 and have been under consultation by HM Treasury for the past six weeks.  We have been involved in discussions at the Treasury about the impact of the new rules and have responded in writing to the government consultation. You can read our full views here.

Below is a summary of the main comments and suggested changes in our consultation response.

The government proposals would treat non-doms who have been resident in the UK for at least 15 of the previous 20 tax years as deemed UK domiciled for all UK tax purposes from April 2017.  They also affect individuals born in the UK with a UK domicile of origin who later acquire a foreign domicile of choice but subsequently return to the UK. We refer to these individuals as "returners".

  1. Our comments and proposed changes to the new 15/20 years deemed domicile rule

  • Interaction with existing inheritance tax (IHT) rules

Under the current proposals, for IHT purposes an individual will only lose their UK domicile (whether actual or deemed under the proposed 15/20 year rule) after six years of absence from the UK (the "six year tail"). In our view, the 15/20 year rule should only apply in relation to an individual's income tax and capital gains tax liability and therefore only when they are UK resident. For IHT purposes, the existing three year domicile tail should be retained for all leavers.

It is unreasonable to impose a six year tail on individuals who leave the UK before April 2017, and particularly so on those who left prior to the July 2015 Summer Budget.

  • Use of old losses against future post-April 2017 gains

We have suggested that all non-domiciled individuals should have the option to make an election broadly equivalent to the foreign loss election at the point of satisfying the 15/20 year rule to ensure any net overall pre-April 2017 foreign losses can still be used against their post-April 2017 arising basis gains.

  • Taxation of offshore trusts

In our opinion it would be better to maintain the existing income and gains matching regime for those who receive benefits from offshore trusts rather than changing to a charge based on the value of the benefit received. This is because "dry" trusts containing assets that generate no income or gains will have no cash with which to pay a benefit-based charge. Applying a benefit charge to pure trust capital becomes a wealth tax.

  • Motive defence

In our view, from April 2017 there will be an increase in claims for the motive defence exemption from the transfer of assets charge. This will become the only defence to an arising basis charge. It is important that the defence is preserved for those cases where there was no tax avoidance motive and that fall squarely within its ambit.

  1. Our comments and proposed changes to new rules affecting returners

  • Grace period

Under the proposals, returners will be treated as being UK domiciled as soon as they resume UK residence for tax purposes. There is a suggestion in the consultation paper of a short grace period of residence in the UK for returners for IHT purposes. We have suggested that this grace period should be five years and not just for IHT purposes but also for capital gains tax (CGT) and income tax purposes. This will ensure short term returners are not deterred from temporarily moving back to the UK and are not discriminated against by virtue of their UK birth.

  • Excluded property trusts

On moving back to the UK and at the end of the grace period, it seems that trusts set up by returners while they were both non-UK domiciled and non-UK resident will lose their excluded property status. This means a non-domiciled individual will effectively be retrospectively treated as UK domiciled at the time he set up the trust many years earlier.

We have suggested that all such trusts should never lose their excluded property status. At the very least, their excluded property status should be preserved if they were set up at least seven years before the returner moves back to the UK.

  • Returners with no current connection with the UK

We have argued that it is illogical for the government to seek to attract investment in the UK by offering tax incentives to wealthy foreign-born non-domiciled individuals but not to those who were born here.

For more information please contact Andrew Goldstone or Victoria Howarth