The Chancellor has announced wide ranging changes to the taxation of non UK domiciliaries. These announcements are short on detail. A consultation on the changes will be published in the autumn, and the new rules will form part of the Finance Bill 2016 and apply from 6 April 2017.
We therefore have time to plan for the future.
What we do know
UK residents will be deemed domiciled for income tax and capital gains tax purposes after 15 years of residence, and will pay tax on their worldwide income and gains. This rule will also apply to inheritance tax. There is already a deemed domicile rule for inheritance tax but this applied where someone had been resident for more than 16 out of the previous 20 years of assessment.
There will be no grandfathering provisions, so these rules will apply regardless of when someone came to the UK. However, the old regime will continue to apply where someone leaves the UK before 6 April 2017. It will only be possible to break this deemed domicile status by ceasing to be resident in the UK for five tax years.
This means that the recently introduced £90,000 remittance basis charge (RBC) for residence of more than 17 out of 20 tax years will not apply from 2017/18, as individuals will now be deemed domiciled at that point. The result is that the proposal to elect into the remittance basis for tranches of three years has been scrapped. The £30,000 and £60,000 RBC rates will still apply.
The potential good news is that non-doms who have set up an offshore trust before they become deemed domiciled in the UK may not be taxed on trust income and gains that are retained in the trust, and the assets will remain outside the scope of inheritance tax (unless UK residential property – see our separate briefing note
). They could be taxed on trust distributions and benefits. However, there will be detailed consultation on the new rules as it is recognised that this will be a significant change to a complex area of law.
It also seems that these rules do not affect an individual’s domicile status under general law, so an individual may continue to pass their non-domicile status on to their children. The child will then be considered independently as to when they reach deemed domiciled status.
Whilst it is easier said than done, the key thing is not to panic!
1. There will be a period of consultation followed by draft legislation. You can rest assured that Moore Stephens will be actively involved.
2. There is time to plan. The provisions are not introduced until 6 April 2017.
3. Some of the proposals in relation to offshore trusts appear to be helpful and better than the current rules, although it is obviously early days.
4. The statutory residence test can allow an individual to spend a reasonable amount of time in the UK whilst knowing with certainty they are not resident.
Someone who had a UK domicile at birth, and then leaves the UK to take up a domicile of choice outside the UK, will be treated as UK domiciled if they return to the UK and take up residence here.
However, in their case the tax treatment of offshore trusts settled by them whilst non-domiciled, will be as for a UK domiciliary. So that income and gains of the trust will be taxable on them on an arising basis. Additionally it seems the trust assets will come within the charge to inheritance tax.
The remittance basis will still apply to 5 April 2017. Connected offshore structures will require a thorough review to establish their tax implications post that date and whether any restructuring is required.
Private client tax team