Currently, non-UK domiciliaries (non-doms) can pay UK income tax and capital gains tax (CGT) on their foreign income and gains only if these are brought (‘remitted’) to the UK.
For UK inheritance tax (IHT) purposes, until the acquisition of a ‘domicile of choice’ or a ‘deemed domicile’ in the UK (after residence in 17 out of 20 tax years), non-doms are liable to IHT only on their UK assets; this exposure can be mitigated through ‘opaque’ structures involving a non-UK corporate entity. Non-UK assets can be protected from UK IHT even after the acquisition of domicile/deemed domicile status if settled on trusts before this status is acquired (such trusts are known as ‘excluded property trusts’).
The proposed changes are fundamental and have a critical impact on the majority of non-doms.
- Proposed changes – what is known so far?Those who have been resident in the UK for more than 15 out of the previous 20 tax years will no longer be able to claim non-domicile status. They will become ‘deemed UK domiciled’ for UK personal taxation purposes and will start paying income tax and CGT on their worldwide income and gains, as well as being exposed to IHT on their worldwide assets (‘the 15 year rule’).
- Those with a UK domicile of origin who have left the UK and acquired a foreign domicile of choice will regain their UK domicile immediately on return to the UK. They will be subject to worldwide basis of taxation of income and gains and IHT on worldwide assets - as if they had never left (‘the returning UK dom rule’).
- Excluded property trusts, created before deemed domicile status is acquired under the new rules, will remain protected from UK IHT unless they hold assets deriving value from UK residential property.
- Trusts set up by individuals who fall under the returning UK dom rule, before their return to the UK, will not benefit from excluded property status.
- Worldwide income and gains of settlor-interested trusts (except gains of UK resident trusts as these are already in the UK tax net - being taxable on the trustees) will be taxable on UK resident and deemed domiciled settlors as they arise. If UK anti-avoidance rules apply, income and gains arising in underlying entities can also be taxed in the UK.
- Worldwide benefits and distributions from non-settlor interested trusts will be taxable on UK resident and deemed domiciled beneficiaries on the arising basis (as opposed to the remittance basis, as is currently the case).
- Any opaque structures (except diversely-held non-UK companies) holding UK residential property will become ‘transparent’ for tax purposes – meaning the value of the property will be within the scope of IHT (i.e. regarded as within the estate of the ultimate individual owner; e.g. the shareholder if such a property is owned by a company), irrespective of whether it is let or occupied by the beneficial owner. There is no minimum threshold value.
It is intended that the proposed changes will be consulted on after the 2015 Parliament summer recess, with the resulting legislation to form part of Finance Bills 2016 and 2017, coming into effect on 6 April 2017.
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 to the UK economy 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.
Given the drastic nature of the changes, it is crucial that non-doms seek professional advice to evaluate the potential impact of the Government’s proposals and ensure they know their options and are ready to act when consultation documents are issued in autumn 2015. It is advisable to review existing structures to consider their suitability and possible alternatives. Those who choose to leave the UK need to understand how to effectively break UK tax residence and remain non-resident going forward under the current statutory rules.