The government has now published its consultation document on Reforms to the Taxation of Non-domiciles ("non-doms"). In Summer Budget 2015, the government announced that from April 2017 it would treat non-doms who have been resident in the UK for at least 15 of the past 20 tax years as deemed UK domiciled for all UK tax purposes.
From the 16th year, non-doms will be deemed UK domiciled and will no longer be able to use the remittance basis of taxation. This is the system under which no UK tax is payable on foreign income and gains that are not remitted to the UK. In response to pressure from voters and the media, the government is closing this perceived loophole. Long-term UK resident non-doms will instead pay tax on an arising basis, effectively putting them on the same footing as UK domiciliaries. Their foreign assets will also be subject to inheritance tax in the same way as their UK assets always have been, again putting them on par with UK domiciled taxpayers.
Offshore trusts, set up by non-doms and holding foreign assets, will remain outside the scope of Inheritance Tax (IHT) even after the non-dom becomes deemed UK domiciled. This is a very valuable benefit for non-doms approaching 15 years of UK residence.
The proposals don't just affect foreign-born non-doms. An individual born in the UK with a UK domicile at birth, who later moved abroad and acquired a foreign domicile of choice, will automatically be treated as UK domiciled for tax purposes as soon as he becomes UK resident again, even if only for a short period. In contrast, if he was born abroad but in all other respects the facts are identical, he can return to the UK and will only be deemed domiciled after 15 years of residence. The emphasis on place of birth is both surprising and irrational and potentially contrary to EU law.
The proposals are to be implemented in the Finance Bill 2016, with effect from April 2017. There will still be planning opportunities available to those who are well advised, particularly before the new rules take effect. However, it is clear that the tax advantages for long term UK resident non-doms will all but disappear from 2017. Whether or not that leads to an exodus of non-doms or an increase in tax take remains to be seen.
The consultation runs until 11 November 2015. Mishcon de Reya will be responding to the consultation and we welcome comments from clients and contacts for possible inclusion in our submissions.
Please contact Andrew Goldstone or Kassim Meghjee if you have any queries.