On 19 August 2016 HMRC published documents on their proposed changes to the taxation of non-UK domiciled individuals (“non-doms”) which are due to take effect from 6 April 2017.
There are some complex changes to the UK taxation of non-doms and careful deliberation needs to be taken to understand the full effect of the changes and how they may interact with commercial or investment issues.
This is the first part of a two-part blog that will cover the major changes in the consultation paper.
Deemed domicile and long term residents
Non-doms who have been UK resident for 15 out of the previous 20 tax years will be now be treated as deemed domiciled in the UK for all tax purposes, which means these individuals will no longer be able to pay tax purely on the income and gains brought into the UK; they will be taxed on all worldwide income and gains. This new rule is aimed to ensure individuals who have chosen to make the UK their long-term residence will pay tax on the same basis as UK domiciles.
However, to ensure that internationally mobile non-doms are not overly penalised, individuals will not be deemed domiciled for income and capital gains tax (CGT) purposes if they cease UK residence for six complete tax years; or for inheritance tax (IHT) purposes if they cease UK residence for four complete tax years.
Individuals becoming deemed domiciled on 6 April 2017 will benefit from an automatic rebasing of their directly held assets using market value at that date. The impact being that any gain accruing before that date should be protected from UK capital gains tax on a later disposal, subject to the following:
- The rebasing will apply to directly held assets only (e.g. not to those held within trusts).
- It will only be available to individuals who have previously paid the remittance basis charge in any year before April 2017.
- It applies only to those who become deemed domiciled under the 15/20 year rule on 6 April 2017 – it will not apply to those becoming deemed domiciled on a later date, or to individuals born in the UK with a UK domicile of origin.
Relief for mixed fund bank accounts
HMRC plan to introduce a one year window of opportunity or ‘period of grace’ from 6 April 2017 in which non-doms will be able to reorganise their offshore mixed funds and separate them into their identifiable constituent parts. This will mean, for instance, that they will be able to move their clean capital, foreign income and gains into separate accounts, and then remit from those accounts accordingly.
This treatment will apply only to mixed funds deposited in bank and similar accounts, rather than to assets. However, an individual could sell an overseas asset during the transitional period and separate the sales proceeds if required.
Unlike rebasing, this relief is not restricted to those non-doms who become deemed domiciled in April 2017 under the 15 out of 20 rule. However, it will not apply to individuals born in the UK with a UK domicile of origin.
Returning non-doms i.e. individuals born in the UK with a UK domicile of origin but have since changed country of domicile, will be taxed on the arising basis once they have recommenced UK residence. However, HMRC will allow a two year period of grace for IHT purposes. This means that the returning non-dom will be subject to IHT on his worldwide estate if he has been UK resident for at least one of the two tax years prior to the year in question.
Any offshore trusts set up by such individuals during their period of non-domicile will be within the scope of UK IHT. In addition, returning non-doms will not be able to benefit from asset rebasing or relief for mixed fund bank accounts, as set out above.
The second part of this blog will be published next week but if you have any questions about non-domiciled taxation, the forthcoming changes or any taxation questions please contact our expert team on 0845 177 5500 or using our on-line contact form.