Changes to taxation of non-domiciled individuals

Background

Following an announcement in the July 2015 Budget the Government issued a consultation document on 30 September proposing a number of changes to the taxation of individuals who are resident in the UK for tax purposes but who are domiciled elsewhere (non-doms).

There are three major changes proposed, to be included in the 2016 Finance Bill and to take effect from 6 April 2017.
  • Individuals who have been resident in the UK for 15 of the last 20 years will be deemed to be UK-domiciled for income tax and capital gains tax (CGT) purposes from the beginning of year 16.
  • Individuals born in the UK with a UK domicile of origin, who have acquired a domicile of choice elsewhere, will be deemed to be UK-domiciled for periods for which they are resident in the UK.
  • The inheritance tax rules, which already provide for deemed domicile in certain circumstances, will be aligned with these new rules.
Separate proposals will charge IHT on all UK residential property held by non-doms through an offshore company or trust, and these will be the subject of a further consultation document in due course.
Further details are available here, in our news item issued at the time the original consultation document was published.

Draft legislation still awaited for income tax and CGT changes

On 9 December 2015 the Government issued in draft the majority of the material that will form the 2016 Finance Bill. This included draft provisions to change the inheritance tax deemed domicile rules, but the income tax and CGT measures are not expected to be published until early 2016.

One area of particular uncertainty, on the basis of the consultation document, is the treatment of overseas trusts settled by the individuals concerned. It seems that we must wait until the new year for any resolution of this issue.

A relaxation to the rules for individuals born in the UK

The draft legislation for IHT contains one significant change from the position set out in the earlier consultation. This applies to the rule that individuals born in the UK with a UK domicile of origin, who have acquired a domicile of choice elsewhere, will be deemed to be UK-domiciled for periods for which they are resident in the UK. That rule will now apply only if the individual has also been resident in one of the previous two tax years.

HMRC says that the current draft takes no account of responses to the initial consultation and may therefore change. However, it seems that the present draft responds to comments that were made to the effect that the new rules could have a very unfortunate effect on individuals returning unexpectedly to the UK, for example, to look after a sick parent for a relatively short period.

What to do

While HMRC has indicated that draft legislation will be published early in 2016, it has not promised it (as it has in some other cases) for January. There may still be a significant wait before further details are available.

In the meantime we would recommend that no immediate action be taken until there is more clarity on the proposed changes.
 

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