The UK Government has released draft
legislation giving effect to its proposal to deem the domicile status of
certain UK resident non-doms to be UK domiciled, regardless of their actual
domicile.
The changes only apply to non-doms who, on or after 6 April
2017, have been tax resident in the UK for 15 out of the previous 20 tax
years. For example, in tax year 2017/2018 beginning on 6 April
2017, the changes would only affect any individual who has been resident in the
UK continuously since UK tax year 2002/2003 or earlier. These non-doms
will be deemed to be UK domiciled.
Becoming deemed UK domiciled has a number of implications
for UK taxes.The main implications for personally held assets are:
Loss of access to the remittance basis of taxation
The remittance basis is a favourable system of taxation
allowing foreign income and gains to remain outside the scope of UK tax unless
remitted to the UK. Currently any non-dom, no matter how many years
resident in the UK, can claim this basis of taxation, although some have to pay
a charge for it. From 6 April 2017, deemed domiciled individuals cannot
access the remittance basis of taxation and will be liable to UK Income Tax (IT) and Capital Gains Tax (CGT) on their worldwide income and
gains in the year in which they arise.
Exposure to Inheritance Tax (IHT)
Personally held assets wherever situated in the world will
be exposed to IHT at 40% on death. All other aspects of the IHT regime,
including the need to survive lifetime gifts by seven years and not to retain
benefits in gifts in order to make effective gifts for IHT purposes, will apply
to worldwide assets.
Rebasing opportunity: for long term resident non-doms
only
The previously trailed rebasing opportunity will allow
inherent gains in assets as at 6 April 2017 to be wiped so that, on a
subsequent disposal whilst deemed UK domiciled, a non-dom individual will not
suffer CGT on the pre 6 April 2017 element of the gain. The qualifying
criteria have slightly altered and are now the following:
- The asset disposed of simply needs to be a personally held non-UK situated asset (or if it has been a UK situated asset in the past, it ceased to be so from 16 March 2016 until 5 April 2017). The previous requirement to have held the asset on a certain date in 2015 has been dropped. It remains the case, however, that rebasing is not available for assets held in trust and only if the disposal of the asset will give rise to gains taxable to CGT, as opposed to IT (so beware offshore income gains).
- The individual must become deemed domiciled on 6 April 2017. Unfortunately if an individual becomes deemed domiciled in a later tax year, rebasing is not available so re-examine the residency status of individual tax years if necessary, to see if more tax residency years can be found if needed.
- The Remittance Basis Charge (RBC) must have been paid for at least one tax year. Claiming the remittance basis is insufficient on its own. It may be possible to amend a return for a previous tax year in order to claim the remittance basis of taxation if necessary.
- It will be necessary to elect out of rebasing, on an asset by asset basis. Rebasing will be automatic on assets that qualify but an election out will allow losses to be claimed and utilised.
- The individual must not be a ‘formerly domiciled resident’, meaning someone born in the UK with a UK domicile of origin.
Non-doms will still need to think carefully about how the
non-gain element of the non-UK asset will be taxed on disposal, if some or all
of the proceeds of sale are to be brought into the UK. This is where the
mixed fund cleansing opportunity (explained below) may help to prevent so-called
mixed funds being brought to the UK after the asset is disposed of, with the
punitive UK tax consequences that usually follow.
Mixed
fund cleansing opportunity: for all non-doms
All
resident non-doms can bring funds untainted with any foreign income and gains
which have arisen in a period of UK residency (called ‘clean capital’) to the
UK without having to worry about having to pay UK tax on them. Accordingly
clean capital is a precious commodity. The mixed fund cleansing
opportunity allows non-doms already resident here to create more clean capital
to bring into the UK – a tempting prospect if the supply of clean capital to
cover UK living expenses could run out before the non-dom is ready to leave the
UK and cease residency.
The
good news is that the opportunity is open for a year longer than previously
announced. It will run from 6 April 2017 to 5 April 2019.
In
contrast to rebasing, there is no requirement to become deemed domiciled on 6
April 2017 and no requirement to have paid the RBC; just to have claimed the
remittance basis.
The
quid pro quo for this generosity is that it will only apply to cash in non-UK
bank accounts, so to create clean capital from non-cash assets, they will have
to be liquidated and it must be possible to identify the different elements of
the proceeds, so that if the asset was purchased from clean capital, the
original clean capital corpus must be readily distinguishable from subsequent
foreign income and gains, especially if these were reinvested or commingled
with the original clean capital.
Heading for the exit?
If a non-dom individual is currently non-UK resident or will
be so before 6 April 2017 but, due to recent UK residency, would satisfy the
new 15/20 year test on 6 April 2017, the changes will not apply to them if they
maintain their non-UK residency.
However,
anyone who will be deemed UK domiciled from 6 April 2017 and then leaves the UK
would have to stay non-UK resident for six complete UK tax years before being
able to return to the UK with a re-set clock and start claiming the remittance
basis of taxation again. At least ceasing UK residency would allow
foreign income and gains to be enjoyed free of IT and CGT again immediately
though, as exposure to these taxes requires residency. The new
legislation imposes a different rule for IHT – only three complete tax years of
non-UK residency will be required to lose deemed domicile status for IHT
purposes but in this period, exposure to IHT on worldwide assets will continue
as IHT exposure only requires a UK domicile; UK residency status is not also a
requirement.
