In August the UK government provided further details of the proposed changes to the UK’s regime for the taxation of individuals who are treated as non-domiciled individuals resident in the UK. The government has confirmed that it will pursue the reforms despite the hope in some quarters that the reforms might be postponed or reconsidered in their entirety.
The principal proposed changes can be summarised as follows:
After 15 years of UK residence in the last 20 years individuals will be deemed to have acquired UK domicile (15/20 Rule) with residence being determined by reference to the Statutory Residence Test. There is no surprise in the proposal which was first flagged in the July 2015 Budget Statement. Individuals who fall within the 15/20 Rule, have the opportunity to reset the clock by ceasing to be resident for at least 6 years before returning to the UK.
For non-dom individuals, who become deemed UK domiciled on 6 April 2017 under the 15/20 Rule, the government is considering allowing the benefit of CGT rebasing of asset values from 6 April 2017. As a result only gains that accrue after April 2017 will be subject to CGT in the UK. If approved this could be a significant benefit to those individuals who become deemed UK domiciled. However, ity should be noted that the Annual Tax on Enveloped Dwellings (ATED) charged on residential properties held by offshore companies, will continue to be payable.
It was hoped that the government would allow some relief for the cost of dismantling offshore property owning structures, but this hope has been scotched with the government asserting that it would be inappropriate to provide an incentive or encouragement to exist from their existing structures.
An additional concession permits individuals to have the full use of foreign losses from the date of becoming deemed domiciled.
Under the current regime a UK non-dom can own residential property in the UK through an offshore company or an ‘excluded property’ trust. Providing that the individual was still a non-dom at the time of their death, the company and the trust would be excluded from UK inheritance tax. The government wishes to make such UK property subject to UK inheritance tax whether the individual is or is not, a UK non-dom at the time of death.
Details of how this will be enforced and the tax collected have yet to be announced. The difficulty for the UK authorities will be to discover when the beneficial owner has died but it appears new reporting obligations will be introduced and power may be given to allow HMRC to block a sale until the outstanding Inheritance Tax has been paid. It is intended that the rule will come into force in the new financial year on 6 April 2017.
One concession is proposed that would allow non-doms, who currently have bank accounts made up of mixed funds, to have one year (from 6 April 2017 to 5 April 2018) to segregate those funds into separate accounts of income, capital and interest, provided that they can trace the source of the funds to ensure the correct allocation. This is an opportunity that is anticipated that many individuals will wish to take and permits the remittance of funds to the UK, if required.
The government has confirmed that trusts established by a non-dom before they became UK domiciled, will not become subject to a flat rate of UK tax on the ‘benefit’ received from the trust, as had initially been proposed. It has been confirmed that the existing rules will continue to apply, providing that the settlor and family do not receive a benefit from the trust.
Other changes apply to individuals who are currently considered non-dom, but at birth acquired UK domicile of origin, will no longer to be able to enjoy non-dom status.
The government acknowledges that non-doms make a significant contribution to the UK economy not least in their significant investment is UK businesses. To encourage business investment the government has indicated its intention to extend Business Investment Relief and, possibly, widen the categories of the investments that qualify for this relief. Further details remain to be provided.
There were few additional announcements in the Autumn Statement in November, except to state that the previously announced reforms would be implemented. The Chancellor did confirm that the Business Investment Relief, enabling non‐dom taxpayers to remit funds to the UK and invest in business there without triggering a charge to tax, is due to be extended.
It is expected that the draft legislation will be released on 5 December.
For further advice on the above matters please contact Rosemont in Monaco.