The Chancellor announced in his Budget speech on 8 July 2015 that:
“I am today abolishing permanent non-dom status. Anyone resident in the UK for more than 15 of the past 20 years will now pay full British taxes on all worldwide income and gains. We will consult to get the detail right.”
The way the Government proposes to implement this is by deeming someone who has been resident in the UK for at least 15 out of the preceding 20 tax years to be domiciled in the UK for tax purposes. (There is also a stricter provision for people who were born domiciled in the UK.)
A consultation paper was published on 30 September 2015, and this has been followed by a further consultation paper, published on 2 February 2016, which includes some draft clauses to be incorporated into this year’s Finance Act, though with effect only from the tax year commencing on 6 April 2017.
The main areas of uncertainty following the September 2015 consultation related to offshore structures and in particular:
- The extent to which a person who established an offshore structure prior to becoming deemed domiciled would become liable to tax on all the income and capital gains of the structure on an arising basis after becoming deemed domiciled. There were suggestions in the September 2015 paper that such persons would not be taxed on an arising basis but would instead only be taxed by reference to benefits received.
- The manner in which beneficiaries (including potentially the settlor/transferor) would be taxed if they received benefits from an offshore structure. Somewhat alarmingly, the September 2015 paper floated the idea of taxing deemed domiciled recipients of benefits from an offshore trust structure at a flat rate, regardless of whether income or capital gains have been realised within the structure. This would be disastrous for beneficiaries of “dry” trusts and where trusts are subject to tax on an arising basis in another country, such as the U.S.
The February Consultation paper and the draft legislation accompanying it is clearly a work in progress, and further legislation on the subject will be included in the 2017 Finance Bill.
The draft legislation published on 2 February 2016 deals with a number of relatively esoteric technical matters, but also contains two key provisions:
- It abolishes the remittance basis for deemed domiciled individuals from tax year 2017/18 onwards for both income tax and capital gains tax.
- On the face of it, the legislation extends the arising basis charge to deemed domiciled settlors of offshore trusts in which the settlor is deemed to have an “interest”. In most cases, a settlor is deemed to have an interest in a trust even if he is not able to benefit but his children and/or grandchildren can.
However, the consultation paper states that:
“When the reforms were announced in the summer 2015 Budget, the government made it clear that those long-term resident non-doms who have set up an offshore trust before they become deemed-domiciled having been resident for 15 of the past 20 years will not be taxed on trust income and gains that are retained in the trust. These protections will be legislated in Finance Bill 2017.”
The consultation paper is at least as interesting for what it doesn’t address. In particular, it is entirely silent about the proposal floated in the September 2015 consultation paper of taxing deemed domiciled recipients of benefits from an offshore trust without reference to the untaxed income and/or gains within the trust. It may not be until the draft Finance Bill 2017 is published that the position will become clearer. Particularly in the case of trusts which at present have a mix of domiciled and non-domiciled beneficiaries, action may be required before the end of the current tax year to take maximum advantage of the current regime.