Non-doms investing in offshore funds – a helpful change from HMRC

HMRC has announced a change that may be of significant benefit to certain individuals domiciled outside the UK who have holdings in ‘non-reporting’ offshore income funds.

A package of measures affecting the taxation of UK residents who are domiciled outside the UK (‘non-doms’) has already been announced. As part of these proposals, from 6 April 2017 such individuals will be treated as UK-domiciled for tax purposes once they have been resident in the UK for more than 15 out of the last 20 tax years (i.e. from the beginning of year 16). In broad terms the result is that they will then be taxable in the UK on all their overseas income and gains whereas previously they could elect to be taxed only on amounts remitted to the UK (the ‘remittance basis’).

An individual who becomes deemed domiciled under these rules on 6 April 2017 will be able to ‘rebase’ his or her offshore assets to their market value on that date, so that any future taxable capital gains will be limited to the gain arising thereafter.

The draft legislation issued on 5 December 2016 did not extend this rebasing facility to ‘offshore income gains’ (i.e. gains on assets held in ‘non-reporting’ offshore income funds) which are calculated on capital gains tax principles but chargeable to income tax. Revised draft legislation has now been issued, and a small change of wording has the effect that the rebasing provisions do now extend to offshore income gains. HMRC have confirmed that this is an intentional change of policy.

Various criteria must be met, in the same way as for capital gains. Broadly, these are that the individual is becoming deemed domiciled at 5 April 2017, that he or she has at some point paid the ‘remittance basis charge’ (a flat rate charge that certain longer-term residents already have to pay before they are entitled to use the remittance basis), and that the asset is a personally held asset that has been an offshore asset from 16 March 2016, or from the time of acquisition if later, up to 5 April 2017. 

This is potentially of great advantage to affected taxpayers. However, given the long notice period often required by such investments vehicles for the withdrawal of funds, many taxpayers may already have withdrawn funds unnecessarily on the basis of previous announcements.

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