In the 2015 Summer Budget, proposals were announced to change the UK tax regime for non-domiciles. These proposals were the subject of a consultation paper which was published on 19 August 2016. The new regime will take effect as planned from 6 April 2017. Key elements include the following:
- Introduction of the ‘15/20’ deemed domicile rule
Any non-UK domicile individual who has, as of 6 April 2017, been UK-resident for 15 of the previous 20 tax years, will be deemed UK-domiciled in respect of all taxes.
For the purposes of the test, split years under the statutory residence test will be treated as full years of residence. The regime will retain the £2,000 de minimis, applicable to individuals once they become deemed UK-domiciled.
The ‘15/20’ test will also apply to individuals born in the UK to non-domiciled parents to the extent that they will be deemed UK-domiciled at 16 years old if they are continuously UK-resident.
Individuals who are not UK-domiciled are not subject to UK IHT in respect of their overseas situs assets. Should these individuals become deemed UK-domiciled under the new rules, their overseas situs assets will become subject to UK IHT. Therefore non-domiciles who are not yet deemed domiciled for UK IHT purposes, but who will become deemed UK-domiciled under the new rules sometime in the foreseeable future, should consider creating an excluded property trust to shelter their overseas situs assets before deemed domiciled status is acquired.
- UK domicile of origin
Individuals born in the UK with a UK domicile of origin will not now be able to claim a foreign domicile of choice if resident in the UK.
- Statutory rebasing on foreign assets
Individuals who become deemed UK-domiciled on 6 April 2017 might be able to benefit from a statutory rebasing on their foreign assets (if those assets were held on 8 July 2015) to the market value as at 5 April 2017. This rebasing, however, will only be available to long-term resident non-domiciles who have previously paid the remittance basis charge in any year prior to 2017. This provision will not be available to those who become UK-domiciled in years subsequent to 2017 or to individuals born in the UK with a UK domicile of origin. The rebasing will apply on an opt-out basis, and so each asset will need to be considered individually.
- Overseas mixed fund bank accounts
Another benefit that the new rules include a one-off opportunity to ‘cleanse’ overseas mixed fund bank accounts. A mixed fund is one that contains capital, income and/or capital gains. Once formed, it is almost impossible to remit the clean capital to the UK without suffering a tax liability.
The Government has extended the window of opportunity to use this relief. It will now run for two tax years from 6 April 2017 to 5 April 2019. No election is needed under the draft legislation but the un-mixing of funds will have to be nominated by the relevant account holder. Non-domiciles who have mixed funds and who will become deemed domiciled from April 2017 should start to collate records in respect of the mixed-fund accounts, in order to utilise the window provided for the un-mixing of funds.
All individuals who are likely to be affected by these changes should now review their position and any structures as a matter of urgency.