The proposed reforms were first mentioned in the Summer 2015 Budget; in September 2015, a consultation document was issued, inviting comments on the various proposals, and a further consultation document was issued in August 2016. In this latest document, the government has confirmed that it is committed to pushing through the reforms and draft legislation has been published. The changes are due to come into effect in April 2017.
The existing rules
As matters currently stand, an individual who is not domiciled in the UK (a ‘non-dom’) is in a rather favourable position vis a vis UK taxes:
- A non-dom can shelter offshore income and gains from UK taxes by opting to be taxed on ‘the remittance basis’. If they do this, they pay UK Income Tax and Capital Gains Tax (CGT) on income and gains which are remitted to the UK but income and gains, which stay outside the UK, are not caught. There are rules as to what constitutes a remittance but, very broadly speaking, if income or gains are received or used in the UK, they are taxed in the UK. There is an escalating charge payable for the privilege of taxation on the remittance basis, which is payable once the non-dom has been resident in the UK in seven or more of the last nine tax years.
- The position is less favourable for Inheritance Tax (IHT) as the rules provide that a non-dom will be treated as domiciled (‘deemed domiciled’) in the UK for IHT purposes, if s/he has been resident here for seventeen out of the last twenty years. If a non-dom is deemed domiciled here, s/he will be subject to IHT on the value of his/her worldwide assets on death and on the value of lifetime gifts, subject to any applicable exemptions and reliefs. An individual who is neither domiciled, nor deemed domiciled in the UK, will suffer UK IHT on their UK situated assets only.
- A non-dom (who is not deemed domiciled in the UK) can avoid a liability to UK IHT on UK residential property by holding the property through an offshore company. The non-dom will own the shares in the offshore company, which will be outside the UK IHT net (‘excluded property’), rather than the underlying asset thereby avoiding an IHT liability on death or lifetime gifts of the property.
The proposed changes
From 6 April 2017, non-doms will be treated as domiciled (deemed domiciled) in the UK for all UK tax purposes, if they have been resident in the UK for at least fifteen out of the previous twenty tax years. Thereafter, they will not be able to use the remittance basis to shelter offshore income and gains from UK taxes and they will be subject to UK Income Tax, CGT and IHT on their worldwide income, gains and assets.
A non-dom, who has become deemed domiciled for tax purposes under the new rules, will need to become non-UK resident for at least six full tax years (and acquire or retain a domicile outside the UK) to avoid being deemed domiciled in the UK. But, once an individual has become non-UK resident, his deemed domicile status will only be relevant for IHT, not for Income Tax and CGT.
Individuals who were born in the UK and have a UK domicile of origin will be treated as UK domiciled for all tax purposes once they become resident in the UK. Any such individuals will not be able to opt for offshore income and gains to be taxed on the remittance basis at any point and they will be deemed domiciled in the UK, for IHT purposes, during any time they are resident in the UK.
UK residential property
The new rules will provide, in effect, that shares in an offshore company which owns UK residential property will not qualify as ‘excluded property’. If the shares do not qualify as ’excluded property’, there will be a liability to UK IHT in relation to the shares.
Under the current laws, a non-dom is taxed on gains realised by the trustees of offshore trusts if s/he receives a benefit from the trust, which is remitted to the UK. If a non-dom, who is a settlor of an offshore trust, becomes deemed domiciled in the UK under the new rules, s/he would (in the absence of any change to the existing legislation) be taxed on the gains realised by the trustees as they arose.
The government are proposing to introduce rules which will, in effect, offer protected status to trusts set up and funded by individuals before they become domiciled or deemed domiciled in the UK. The settlor of such a trust would not face a liability to CGT on gains realised by the trustees on an arising basis provided that (a) no property is settled after the settlor becomes deemed domiciled and (b) neither the settlor, nor his/her spouse, nor his/her minor children receive a benefit from the trust.
Similar rules will prevent income from offshore trusts being taxed on settlors on an arising basis.
Capital Gains Tax: re-basing
A non-dom who becomes deemed domiciled in the UK under the new rules in April 2017 on the grounds that s/he has been resident in the UK for at least fifteen out of the previous twenty tax years will be able to opt to ‘re-base’ offshore assets. This will mean replacing their true acquisition value with their value as at April 2017, so, on any subsequent disposal, the CGT will be calculated by reference to the April 2017 value.
This option will only be available to individuals who have paid the remittance basis charge in any year prior to April 2017.
The consultation period will close on 21 October 2016 so we can expect to hear further details on the new rules when the Chancellor presents his Autumn Statement to Parliament on 23 November and the draft legislation may be amended in the light of responses to the consultation. In the meantime, non-doms who may be affected by the new rules should review their current position, the status of any offshore trusts and the ownership of their assets.