Major tax changes to Non-Domiciled Individuals

Over the last 10 years we have seen major changes to the taxation of UK resident but non-domiciled individuals (“non-doms”) and from April next year we will see the introduction of further more radical changes which will substantially change the landscape in which non-doms will operate. In this article I set out some of these points to consider.

WHAT ARE THE CHANGES?

From 6 April 2017 anyone who has been resident in the UK for more than 15 years out of the last 20 will become deemed domiciled in the UK for all tax purposes. This means that their entire worldwide assets will be subject UK Inheritance Tax and their non-UK source income and capital gains will become liable for tax on an arising basis.

Individuals born in the UK and with a UK domicile of origin who have been living outside of the UK, perhaps for many years, will immediately acquire a UK domicile on becoming UK resident. There will be a limited grace period before such individuals fall within the scope of Inheritance Tax on worldwide assets, but their worldwide income and gains will become immediately chargeable to UK tax.

There will be a rebasing election available but only for individuals who become deemed domiciled on 6 April 2017. The final detail has not been made available but it is likely that this will apply only to foreign assets which were held on 8 July 2015, the date on which the first consultation document was published.

The UK government has indicated that they will provide a year in which all non-doms will be able to “cleanse” their offshore bank accounts so as to segregate capital from income and capital gains to allow more tax efficient remittances to the UK.

Remember that income and gains previously covered by a remittance basis claim will still be taxable in the UK if brought to the UK after someone has become UK domiciled.

The UK has substantial anti-avoidance provisions designed to counter the use of offshore structures to avoid charges to Income Tax and Capital Gains Tax. The government has announced that these anti-avoidance rules will not apply to Trusts set up by non-doms when they are not domiciled in the United Kingdom but this relaxation will apply only where no benefits are received by the individual or members of his family, and where no assets are contributed to the Trust after he or she becomes deemed domiciled under these new rule changes.

There will be some planning that can be done to alleviate the impact of these changes and the following ideas may be in point for some or all non-doms:

• The cleansing rules will apply only to offshore bank accounts and not to other assets. Consideration should therefore be given to potentially realising gains and income during the period to 5 April 2017 so that the amounts can be satisfactorily segregated into funds to allow more tax efficient remittances to the UK post 5 April 2017.

• The rebasing rules will only apply to individuals who will become deemed domiciled on 5 April 2017. The cleansing rules relate to all non-doms and so can be considered for all non-doms and not just those longer term residents.

Where the residence of non-dom spouses is different, consideration should be given to swapping of assets in order to take advantage of the rebasing election, if possible, or to segregate funds where necessary.

• Also with regard to non-dom spouses, care should be taken with regard to the returning non-dom rules which will now place under a greater risk individuals who were born in the UK with a domicile of origin here even if they may have lived outside the UK for many years. Individuals not born in the UK will fall under these rules and therefore their domicile status will remain to be established under general case law principles. Continuing access to the remittance basis may therefore be available with suitable planning prior to coming to the UK.

• For those likely to become deemed domiciled under the changes from 6 April 2017, consideration should be given to the setting up of Trusts which will protect the assets from falling within the scope of UK Inheritance Tax.

• Those with existing Trusts will also need to consider their suitability because of the risks of tainting those Trusts when the new changes are introduced. It may be that multiple Trusts holding different classes of assets and with different beneficiaries will give the most optimum position for families in the new regime.

• Any individuals currently resident outside of the UK should seriously consider the timing of their return to the UK because there will be an absolute premium on establishing six successive years of non-residents in order to preserve the remittance basis for up to 15 years after their return to the UK.

These are just general planning points to be considered. It is highly likely that not all of these points will be relevant to all non-doms and careful consideration should be given to precise circumstances, including establishing non-domiciled status when the deemed domicile rules will apply.

Darren Hersey

November 2016

Darren Hersey is a partner in Simmons Gainsford LLP specialising in private client tax matters. He can be contacted on 020 7447 9000 or at darren.hersey@sgllp.co.uk