The consultation paper on the significant changes to the taxation of UK resident, non-UK domiciled individuals (‘non-doms’) has been released today. The details below are based on the proposals in the consultation paper.

Long-term UK resident non-doms

Deemed domiciled –  personal assets

From 6 April 2017, non-doms who have been tax resident in the UK in 15 out of the last 20 tax years will be treated as if they are UK domiciled for all tax purposes. The remittance basis will not be available to them; they will be subject to UK tax on their worldwide income and gains on an arising basis and to UK inheritance tax on their worldwide assets. If a non-dom is treated as UK tax resident for only part of a tax year (because split year treatment applies) that tax year will still count towards the 15 years. This means, a non-dom could (if he was badly advised) become deemed domiciled in the UK for all tax purposes after having been in the UK for as little as 13 years and a couple of months.

This will have a very significant impact on those who will have been UK resident for 15 years (or more) by April 2017, as it will bring all their non-UK income and gains into charge to UK tax, regardless of whether those sums are remitted to the UK or not. Relief under double tax treaties will become much more important.

It is proposed that a non-dom who has become UK deemed domiciled will have to be non-UK resident for at least six complete (consecutive) tax years in order to lose this deemed domiciled status. After that, a non-dom will be able to return to the UK and (provided he remains non-domiciled under general rules) will be able to spend another 15 years in the UK before being treated as deemed domiciled again. Once a non-dom has become non-UK resident the fact that he is still treated as deemed domiciled for six tax years will only normally be relevant for UK inheritance tax purposes. This is because a non-UK resident individual will generally only be liable to UK income tax on UK source income and to UK capital gains tax on UK residential property.

Deemed domiciled – offshore trusts

A non-dom who set up an offshore trust before becoming deemed domiciled, will not be taxed on the foreign income and gains of the trust as they arise once he becomes deemed domiciled. He will instead be taxed on the ‘taxable value’ of any distributions or benefits he receives from the trust (wherever they are received) without any reference to the income or gains of the trust. This means, for example, that he will be subject to tax on his rent-free occupation of UK residential property held in trust, even if no income or gains arise to the trust.

This is a very substantial change, and would bring all benefits received by deemed domiciled beneficiaries from “dry trusts” (i.e. those with assets but no income or gains) within the charge to UK tax. It also effectively converts trust capital into taxable sums when a benefit is received. There is a suggestion in the consultation paper that this new regime should apply to all UK resident non-doms, not just those who are deemed UK domiciled.

Non-UK assets of a trust set up by the non-dom before he became deemed domiciled will continue to be outside the scope of UK inheritance tax.

Non-doms born in the UK with a UK domicile of origin

An individual, born in the UK with a UK domicile of origin, who has acquired a domicile in another country but who returns to the UK to take up residence will be treated as UK domiciled for all tax purposes, as soon as he becomes UK resident. He will be taxed on his worldwide income and gains and his worldwide assets will be subject to UK inheritance tax.

He will also not be able to benefit from any favourable tax treatment in respect of an offshore trust set up by him while he was non-domiciled. If he is a beneficiary of the trust, he will be subject to UK tax on all income and gains of the trust as they arise, and if he dies while resident in the UK the entire trust fund will be subject to UK inheritance tax. The UK Revenue accepts that where an individual becomes UK resident for a short period and dies the inheritance tax consequences could be harsh and is considering providing for a short grace period for inheritance tax purposes.

If the individual leaves the UK, he will be treated as non-domiciled again in the tax year after the year of his departure unless he has been UK resident for 15 or more tax years. If the individual has been UK resident for 15 or more tax years he will have to be non-UK resident for at least six complete tax years before he will be treated as non-domiciled again. This means his worldwide assets will remain subject to UK inheritance tax for six complete tax years after he has ceased to be UK resident. Although he will still be treated as  deemed domiciled for income tax and capital gains tax purposes for those six tax years this will not normally be relevant because he will be non-UK resident and so only be liable to UK income tax on UK source income and to UK capital gains tax on UK residential property.

This change will apply, from 6 April 2017, to all non-doms who were born in the UK with a UK domicile of origin and return to the UK, whether they return before or after 6 April 2017.

UK domiciled individuals who leave the UK

A UK domiciled individual who leaves the UK permanently, after 6 April 2017, and acquires a domicile in another country will continue to be subject to UK inheritance tax  for six tax years after he leaves. However, after six tax years he will no longer be subject to UK inheritance tax on his non-UK assets.

UK inheritance tax on UK residential property

It was also announced at the time of the Summer Budget that all UK residential property held by a non-dom, whether directly or indirectly, including UK residential property held by offshore companies, offshore trust and company structures and non-UK partnerships will be subject to UK inheritance tax from 6 April 2017. The consultation on this proposal is due out later in the autumn.