The election of a Conservative government will have come as a relief to UK resident, non-domiciled individuals (RNDs) as the Labour threat to abolish non-domicile status entirely was extinguished. However, last week’s Budget announcement of proposals designed to significantly curtail the UK tax advantages available to long-term resident RNDs, and indeed, all non-domiciled individuals, may renew their concerns.

Permanent non-domicile status will be abolished

The Chancellor announced that, from 6 April 2017, RNDs will be deemed UK domiciled for all UK tax purposes after being tax resident in UK for 15 out of 20 years (the ’15 year rule’). This means that RNDs will no longer be able to claim the remittance basis of taxation at this point but will be subject to UK income and capital gains tax on their worldwide income and gains.

RNDs will also be deemed to be domiciled in the UK for UK inheritance tax (IHT) purposes. This will mean that the entirety of the assets they own worldwide will be within the IHT net. The £90,000 remittance basis charge (RBC) for RNDs who have been resident for 17 out of 20 years will therefore become redundant from 6 April 2017.

However, the 15 year rule will not affect the individual’s actual domicile status under general legal principles or the domicile status of the deemed domiciled individual’s children. The children’s domicile status will be determined independently. In addition, any non-domiciled individuals who have set up offshore trusts before they become deemed domiciled under the 15 year rule will not be taxed on trust income and gains that are retained in the trust. Excluded property trusts will have the same IHT treatment as at present, subject to the changes regarding the tax treatment of UK residential property mentioned below.

RNDs will, however, have a grace period to reorganise their affairs and the 15 year rule will only apply to RNDs who are still resident in the UK after 5 April 2017. A detailed consultation will be published after the 2015 summer recess and the measure will be included in the Finance Bill 2016.

This proposal will prompt many long-term resident RNDs to question whether they should continue to live in the UK and, if they do wish to remain here, to thoroughly review - and possibly reorganise - their affairs before these changes kick in.

All UK residential property to be brought within the IHT net

Currently, broadly speaking, provided that UK property is held by a non-UK domiciled individual or offshore trust via an offshore company, that property will not be subject to IHT charges on the death of that individual or during the lifetime of the trust (as appropriate). However, the Chancellor intends a complete overhaul of this tax regime with an announcement that all UK residential property owned indirectly via offshore companies and similar vehicles will be subject to IHT from 6 April 2017.

This new IHT charge will apply to all UK residential property, whether occupied or let and of whatever value. Shares in offshore companies and similar vehicles will therefore no longer be ‘excluded property’ for IHT purposes to the extent that they derive their value directly or indirectly from UK residential property or if their value is otherwise attributable to UK residential property.

Again, a detailed consultation will be published after the 2015 summer recess which, importantly, will include a consideration of the costs of de-enveloping property, with the measure being introduced in the Finance Bill 2017.

All UK residential property structures involving a holding company should be reviewed in the light of this proposal to determine the merits of retaining such structures. Once this legislation is introduced, the UK tax treatment of such structures will be the equivalent to or, perhaps, worse than holding such properties directly (which is, indeed, the intention of the Government).

Confidentiality and succession planning will still be relevant and be the drivers for structuring the ownership of UK residential property in this way as they have always been. It remains to be seen what impact this proposal will have on the high value UK property market as the only other means of escaping these tax charges will be to exit the market entirely and invest elsewhere. However, if the introduction of the ATED regime is to be used as a gauge, these proposals should not prove to be a deterrent.

Returning UK domiciled individuals

From 6 April 2017, individuals with a UK domicile of origin will be deemed to be UK domiciled whenever they are resident in the UK (the ‘returning UK domicile rule’).

Again, this measure will be included in the consultation to be published after the summer recess.

Remittance basis charge

The Chancellor announced that a minimum claim period for the RBC (as referred to in our May Private Client update, which can be found here.) will not be introduced.

It is anticipated that these changes will raise an extra £1.5 billion in tax for the Exchequer.