The latest round of consultation on the changes to be made to the non-dom tax regime was released on Friday. The changes are to come in on 6 April 2017 and will mean that non-doms are deemed to be UK domiciled for all tax purposes after 15 years of UK residence. There will also be look through provisions for UK residential property held in offshore structures.
There has already been consultation and some draft legislation since the changes were announced in Summer Budget 2015 . However, there were some gaping holes, questions and anomalies which needed to be addressed.
This consultation has done so to a limited extent but the questions and problems are far from resolved - and we don't yet have a complete set of draft legislation! The changes are still due to come in on 6 April 2017: there has been no postponement announced.
Key new points from this consultation
New deemed domicile rules
- The proposal for a trusts benefits charge is being scrapped in favour of amending the existing rules. This will mean the settlor pays capital gains tax (“CGT”) on trust gains as they arise and income tax on benefits (wherever received) to the extent they are matched to foreign income arising in the trust.
- Trusts set up before the settlor becomes deemed domiciled will have some protection – in particular the settlor will not have to pay CGT on an arising basis. However, this protection will be lost once a benefit is paid to the settlor or his immediate family.
- Non-doms will be able to segregate mixed funds during the tax year 17/18 only provided they know what is in the mixed fund. This will include segregating sale proceeds where an asset is sold during this time. The detail of this is not yet clear. This is not limited to those who will become deemed domiciled under the new rules on 6 April 2017 and appears to be a very generous relief.
- Individuals becoming deemed domiciled on 6 April 2017 will benefit from an automatic rebasing of their directly held assets. This will mean that only any gain from 6 April 2017 will be taxed. Again, this appears generous as any gain accrued up to 6 April 2017 would be tax free (rather than taxed on the remittance basis);
- Deemed domicile will be lost for IHT purposes after 4 years – even though an absence of 6 years is required to shed deemed domiciled for income tax and capital gains tax.
- Returning-doms (individuals born in the UK with a UK domicile of origin) will be taxed on the arising basis while they are UK resident. The consultation confirms a grace period for IHT only. This means that the returning dom will be subject to IHT on his worldwide estate if he has been UK resident for at least one of the two tax years prior to the year in question.
- Subject to the grace period for IHT, trusts settled by a returning-dom while non-domiciled will be within the relevant property regime while the returning-dom is UK resident.
Inheritance tax on UK residential property held through non-UK structures
- Under current rules, non-UK property, including shares in a non-UK company and an interest in a non-UK partnership, is exempt from inheritance tax if owned by a non-UK domiciled individual who is not yet deemed domiciled or by a trust settled by them. The draft legislation removes this exemption to the extent the non-UK property derives its value from UK residential property. For example, shares in a non-UK company which owns only UK residential property will cease to be exempt from 6 April 2017. Thus where a UK residential property is held through an offshore structure, it will be subject to IHT in the same way as if it were held directly.
- Debt on UK residential property will be deductible if, and only if, it relates directly to the UK property. Thus it is assumed that the debt would need to have been used to buy or do works to the property and in most cases should be secured on the property. The consultation suggests that ‘debt from connected parties’ will not be allowed – but there are no details of what this means.
- Contrary to previous indications, there will be no reliefs for unwinding existing structures - otherwise known as ‘de-enveloping’!
- A targeted anti-avoidance rule will be introduced to counter attempts to avoid IHT on UK residential property.