Non-dom changes: work-in-progress

25 January 2016

Changes to the taxation of non-doms announced in the summer 2015 Budget are still a work-in-progress. Drafts of some relevant legislative clauses were included in the 30 September 2015 consultation paper and, for inheritance tax only, in the Draft Finance Bill 2016. However, the government is yet to provide a complete set of proposed legislative revisions as well as comments on the stakeholders’ responses to the consultation which closed on 11 November 2015. The government’s response is expected in early 2016 and, given the rapidly approaching implementation deadline of 6 April 2017, very prompt action may be required by all those affected by the new policies.

What we know so far?

  • On 6 April 2017, all non-doms who have been resident in the UK for at least 15 of the previous 20 tax years would become deemed UK domiciled and, as such, would be taxable on their worldwide income and gains on the arising basis and would be within the scope of UK inheritance tax (IHT) on their worldwide personal assets. This is different from the original proposal’s wording of 'for more than 15 of the previous 20 tax years', which effectively results in worldwide tax exposure being brought forward by a year.

  • On this basis, it is necessary to be non-UK resident for at least six full tax years (rather than 'more than five') to reset the non-dom clock.

  • This distinction could have serious consequences for those who were planning to stay out of the UK for five full tax years but, more importantly, those who had already stayed non-resident for five years and have now returned.

  • The only less negative news is for returning UK doms (those born in the UK with a UK domicile of origin who have left the UK and acquired a foreign domicile of choice but then return): they may receive an IHT grace period whereby they will fall within the UK IHT net only once they have been UK tax resident in at least one out of the two previous tax years. Therefore, those who return to the country for the very short term can breathe a sigh of (IHT) relief - if this is indeed implemented as planned.

  • UK IHT protection is still envisaged for offshore trusts set up by non-doms prior to acquiring deemed UK domicile. Offshore trusts set up by returning UK doms will not, however, benefit from this, and may fall in and out of the IHT net depending on the settlor’s residence status.

  • It is also still unclear how benefits and distributions from offshore trusts will be calculated and taxed in the UK (other than mentioning the system will be reviewed, the Government has been silent on this complex tax area).

What are the wider implications? 

The proposed measures will undoubtedly have drastic consequences, especially for those with complex non-UK income streams and/or significant non-UK situs assets, with the impact of the arising basis of taxation for those falling within the rules not just limited to a potentially higher UK tax bill. It comes with a package of increased administrative and financial burdens of tax compliance and lost confidentiality. Whether this is a price wealthy internationally mobile non-doms will accept for being in the UK is a big question – as is the cost for the UK of their potential departure.

Despite a lot of unknowns pending the outcome of the consultation, only a limited time within which to plan remains. It is therefore crucial that long term resident non-doms start considering whether the tax impact of the new policy on their personal and commercial plans can be mitigated, or whether the changes mean it is time to go (and not look back – for at least six tax years)?