Despite rumours that the EU referendum outcome would delay the reforms to taxation of non-UK domiciled individuals (non-doms) announced at the Summer Budget 2015, these are still going ahead.
The government has now published an update on its proposed reforms to non-dom taxation, together with some draft legislation and further matters for consultation – specifically, extending UK inheritance tax (IHT) to overseas structures holding UK residential property and possible changes to the business investment relief (BIR) rules – all to take place on 6 April 2017.
The current state of play
- On 6 April 2017, all non-doms resident in the UK for at least 15 of the previous 20 tax years (long term resident non-doms) will become deemed UK domiciled. They will be taxable on their worldwide personal income and gains as they arise, and within the scope of UK IHT on their worldwide personal assets.
- Six complete years of non-tax residence will be required to reset the domicile clock for income tax and capital gains tax (CGT).
- For IHT purposes deemed domicile can be shed after four consecutive tax years of non-residence.
- Two important transitional rules will be introduced:
1. Certain foreign assets can be rebased to their 6 April 2017 values for CGT purposes, such that the element of the gain prior to this date will not be taxed in the UK. The eligibility of foreign assets for relief should be considered as qualifying disposals can be delayed to obtain a tax free uplift.
2. During the 2017/18 tax year, non-doms will have an opportunity to clean up their ‘mixed funds’. Again, subject to conditions, funds in foreign bank accounts containing income, gains and capital can be segregated into their constituent parts, thus mitigating the tax burden of future remittances.
Those with a UK domicile of origin
- Those born in the UK with a UK domicile of origin, who have left the UK and acquired a foreign domicile of choice, will regain their UK domicile if and when they return. They will therefore also be within the scope of UK income tax and CGT on their worldwide income and gains. They will also be within the scope of UK IHT on their worldwide assets (from the second year of tax residence in any three year period).
- Other than the IHT grace period, no further protection will be afforded.
- Some protection is envisaged for settlor interested ‘excluded property’ trusts set up by long term resident non-doms prior to becoming deemed UK domiciled.
- Subject to conditions, they can safeguard the status of the trust for IHT purposes and mitigate their income tax and capital gains tax exposure in respect of trust income and gains. However, the requirements for preserving this protection are quite restrictive and without careful planning it can be easily (and permanently) lost.
- No equivalent provisions are envisaged for trusts set up by returning UK doms, who will be taxed on the income and gains of the trust as they arise.
UK residential property
- From 6 April 2017 UK residential property held in structures, which have historically shielded it from UK IHT, will fall within the IHT net.
- Full detail of new rules will not be available until later in the year. It has, however, been confirmed that no additional tax reliefs will be available for any such structures that are wound up.
Business investment relief
- Finally, the government intends to simplify the rules on BIR, which allows non-doms to remit their previously untaxed foreign funds, for certain investments in the UK, without incurring a UK tax charge.
- No specific proposals have been put forward, but the government is keen to hear stakeholders’ views and uphold the policy of encouraging inward investment into the UK.
Responses to the consultation are due by 20 October and we expect further detail and legislation later this year. Despite the temporary lack of full clarity and some of the anticipated changes seeming potentially unfair or overly restrictive, transitional provisions provide valuable planning opportunities. Given the fast approaching operative date of 6 April 2017, prompt action must be taken and we would urge all affected individuals to start planning now to avoid last-minute rush.
For more information please get in touch with Kristina Volodeva, or your usual RSM contact.