If you’re a ‘non-dom’ then the way you pay tax may be about to change. Announced in the Summer Budget 2015 this series of tax changes affecting people not domiciled in the UK seeks to address some of the perceived unfairness currently embedded in the UK tax system.
The Government argues that it is only fair that people residing in the UK for a very long time should pay their fair share of tax in respect of their personal foreign income and gains. The abolition of the permanency of the non-dom status will be replaced with a ‘deemed domicile rule’ meaning that it will not be possible to claim you are non-domiciled if you reside here long-term (residing in the UK for more than 15 of the previous 20 years).
In addition, individuals who are born in the UK and who are UK domiciled at birth will not be able to claim that they are not domiciled for tax purposes while they are living in the UK, even if they have left the UK and acquired a domicile of choice in another country.
From April 2017, the new measures will support those who wish to move to the UK but who do not intend to stay here permanently.
• Taxation of individuals with non-dom status who have been resident in the UK for 15 years
• Individuals who own UK residential property indirectly, e.g. via an overseas company or trust
• UK domiciled individuals who are UK born who leave and acquire a non-UK domicile of choice and then come back again later to the UK
The impact of the changes
If you have been living in the UK as a non-dom for over 15 years from 6th April next year you will no longer be able to access the remittance basis.
Any global assets will be subject to IHT (Inheritance Tax) apart from those held in an excluded property trust settled prior to becoming UK domiciled or deemed domiciled.
When applying the 15-year rule, part-years of UK tax residence are included therefore an individual who became UK resident in the 2002/03 tax year will be deemed domiciled from 6th April 2017.
A new measure included within Budget 2016 confirms that individuals who become deemed domiciled in April 2017 as a result of these changes will be able to rebase their overseas assets to market value at 6 April 2017 for capital gains tax purposes. This means that on a future disposal, UK tax will only apply to gains accruing after this date. It is unclear at this stage how this measure will apply to all individuals who become deemed domiciled after April 2017.
Offshore trusts that are settled prior to deemed domiciled status will remain as ‘excluded property status’ for the purposes of IHT. So any trust assets outside of the UK will still fall outside of the scope of IHT. IHT exemption will no longer apply to UK residential property held by an offshore company/trust structure however with effect from 6th April 2017.
What to do now
If your status will become deemed domiciled as a result of the new changes, then it is advisable to take action as soon as possible to protect your overseas income and gains from UK tax and your overseas assets from IHT.
These three steps should now be considered:
1. Settle an offshore trust
If you will become deemed domiciled under the new rules from April 2017, estate planning needs to be urgently reviewed. By settling an offshore trust now, you will be able to take advantage of tax free foreign income and gains from within the trust, there will be no liability to the remittance basis charge and you’ll benefit from IHT protection for overseas assets held within the trust (as long as no UK residential property is held within the it).
2. Review existing trusts
Review existing trusts and possibly extract income and capital gains from them now whilst the remittance basis can still be claimed as it is most likely that there will be no option to claim the remittance basis after 6th April 2017.
3. Leave the UK to re-start the 15-year clock
You could opt to leave the UK before the effective date. You will have to spend several years outside the UK to restart the 15-year clock however this will prevent you from falling into the deemed domiciled category if you are able to do this.
Find out more about the full scope of the taxation of non-domiciles on the Government website.
As there is just a short window left of some months, it is advisable that professional advice is sought immediately if you fall into the affected category so as to maximise your tax allowances as much as possible and mitigate substantial loss to overseas income and assets.