Following the Summer Budget, the consultation on the proposed changes to the taxation of non-UK domiciliaries (non-doms) was published on 30 September 2015. The fact that the proposed changes will take place from 6 April 2017 is not open for discussion, only the detail needs finessing – but even such detail is somewhat lacking in the consultation.
Non-doms will bear the burden of the new rules through increased taxes and increases in professional costs resulting from extended disclosure requirements and lost confidentiality.
Key highlights of the consultation
A non-UK dom will acquire a deemed UK domicile status for all tax purposes from the 16th tax year of their UK tax residence; and split years of residence will count as full years. Their non-dom status can be regained by becoming non-UK resident for six consecutive tax years if the required conditions are met.
Returning UK doms will be in the UK tax net for all tax purposes whilst they are resident in the UK, including inheritance tax (IHT), but a short IHT grace period may be introduced.
Protection is envisaged for offshore trusts and arrangements caught by the transfer of assets legislation (set up by non-doms prior to the acquisition of their deemed UK domicile). But offshore trusts set up by a returning UK dom will not be afforded the same protection as non-doms’ structures: such trusts will lose their IHT protection and may dip in and out of the IHT net depending on the returning UK dom’s residence position.
The period for which long term UK resident UK doms moving abroad remain within the scope of IHT could be extended to six tax years following their departure (currently three).
The value of benefits received from offshore trusts is likely to be determined without reference to the underlying income and gains of the trust or underlying entities.
The consultation is silent on some important detail, such as how offshore trust benefits will be quantified or the interaction of deemed UK domicile for IHT with the existing estate tax treaties.
Impact on individuals
The Government’s aim is to ensure that everyone coming to the UK pays a fair share of tax. But the impact of the proposed new rules on non-doms seems unbalanced as, if they choose to leave, they will be in the UK IHT net for twice as long as under the current rules; if they stay, they will continue to be taxed on their foreign income and gains of less than £2,000 unlike current long term non-doms (unless this limit is abolished for them also). If they return to the UK, non-UK trusts, set up whilst the settlor is non-domiciled under general law, could face additional administrative and tax burdens.
Impact on the UK
The Government believes the proposed changes would not impact the UK’s international competitiveness as a place to be based in. However, given the range of options and jurisdictions available to internationally mobile individuals, the costs of making the UK something more than a short-term transit point could mean that one realistic outcome of the proposed policy would be a net reduction in migration, and therefore revenues, through reduced tax contributions and diminished general spending.
What is next?
The consultation closes on 11 November and, given the intention to release draft legislation by the end of 2015, swift government action is needed. We wonder if the rush on the introduction of these provisions is justified, given their potential extensive impact; or would it be better to postpone their effective date to give the new measures some proper thought?