Changes to the taxation of non-doms were perhaps expected after the UK general election; however, they were not expected on such a fundamental scale. Whether non-doms will stay or go, and what the net impact on the UK economy will be, is a big unknown!
On 8 July 2015, in the UK Summer Budget, George Osborne announced the most substantial changes to the taxation of non-UK domiciliaries (non doms) since 2008. 'From now on they will pay the same tax as everyone else' stated the Chancellor.
What may change and when?
From 6 April 2017, those non-doms who have been UK resident for more than 15 out of the previous 20 tax years will become ‘deemed UK domiciled’ for UK tax purposes; they will be subject to income tax and capital gains tax (CGT) on worldwide income and gains and UK inheritance tax (IHT) on worldwide assets (the ‘15 year rule’). Furthermore, those with a UK domicile of origin, who acquire a foreign domicile of choice but then return to the UK, will face UK taxes as if they had never left (the ‘returning UK dom’ rule).
In addition, the Government wants to reform taxation of worldwide income and gains generated in, and distributed from, offshore trusts - proposing that these are taxed on UK resident deemed UK domiciled settlors and beneficiaries on the arising basis, yet again aligning their treatment with that of UK domiciliaries.
The final and significant piece of the jigsaw puzzle is the intention to withdraw the IHT advantages of opaque trust/company structures holding UK residential property – using such structures will no longer keep such UK property outside the UK IHT net. Yes, yet a further targeted tax on UK property!
The proposed changes will be consulted on later this year with draft legislation expected to be released in 2016.
What is the position now?
Currently, UK resident non-doms can benefit from the remittance basis of taxation in respect of their foreign income and gains, meaning that they pay UK income tax and CGT on these only to the extent they are remitted to the UK. UK source income and gains are broadly taxable on the arising basis. In addition, non-doms are within the scope of UK IHT on their UK assets only, but this exposure can be mitigated through use of certain overseas holding structures.
What impact will the changes have?
For wealthy individuals, having to change from the remittance basis to the likely higher worldwide basis of taxation, in addition to increased scrutiny of one’s worldwide affairs, may be too much to bear. The UK may be a good place to do business, live, socialise and raise a family, but such individuals do have the real option to stay or go, with many other jurisdictions welcoming them; hence there are risks associated with this tougher tax policy.
The UK government estimates the new measures will raise £1.5bn, however this may not transpire if individuals leave the UK and direct tax is lost, not to mention tax related to general spending in the UK economy.
What can be done?
Tax planning using non-UK structures may still be appropriate in certain circumstances, if properly implemented in good time, and the proposed new rules give enough scope to review existing arrangements to evaluate the pros and cons of maintaining/unwinding them. It is also possible to become non-resident but still spend time in the UK - leaving for more than five complete tax years can re-set the deemed UK domicile clock, reinstating access to the non-dom remittance basis of taxation for those affected by the new 15 year rule.
Given these drastic changes, it is crucial that non-doms seek professional advice and consider their options as soon as possible in order that they are prepared for the outcome of the consultation.