Significant changes affecting the UK tax status of non-domiciled individuals (non-doms) will take effect on 6 April 2017. They will have far-reaching consequences for the majority of those who have previously enjoyed the tax breaks associated with non-dom status, regardless of whether they were initially born overseas or in the UK.
Introducing the 15/20-year rule
Under the new changes, non-domiciled individuals who have been a resident in the UK for 15 of the past 20 financial years will now be considered ‘deemed domiciled’ in the UK for all associated tax purposes, regardless of when they arrived.
The concept of deemed domicile has long been in place for Inheritance Tax (IHT) purposes, though previously the relevant length of time in the UK was 17 out of 20 years. The new rules will see this reduced to 15 out of 20 years.
This legislative change, known as ‘the 15/20-year rule’ will also effectively mean that such individuals will no longer be entitled to claim the remittance basis for Income Tax or Capital Gains Tax (CGT) purposes. Consequently, those affected will be subject to UK tax on their worldwide income and gains.
Furthermore, those who were born in the UK and had a UK domicile of origin, but later moved abroad, thus acquiring a domicile elsewhere, their UK domiciled status will be immediately reinstated if they resume residence in the UK.
New rules surrounding residential properties
As of 6 April 2017, non-doms who hold UK residential property indirectly through an overseas intermediary, such as an offshore trust, will see such properties subject to UK IHT.
Previously, residential property held in such structures would be overlooked as ‘excluded’, but under the new rules, such property – however held – will be within the scope of IHT. This means that UK IHT will be payable upon any significant IHT event, including a death, gift or ten year anniversary of a trust.
Grace period for ‘mixed funds’
Non-doms with offshore funds made up of untaxed foreign income and gains will be granted a grace period of two years from April 2017’ to rearrange these mixed funds, sell any assets and separate any funds into their constituent parts of foreign income, foreign gains and clean capital. The latter can then be remitted from their segregated clean capital account in line with previous rules.
This will give people certainty over what is treated as remitted to the UK and their ability to access and remit to the UK, funds that were previously trapped in a mixed fund.
Under these rules, excluded property trusts can be used as an important planning tool as they will remain an effective way of sheltering assets from UK Inheritance Tax before an individual becomes UK domiciled. This will also apply to those who are newly ‘deemed domiciled’ under the 15/20-year rule.
If you are concerned that any of these changes may affect you, please contact Milsted Langdon. Our experts can determine the wider implications of any tax changes, how you will be personally affected and how we might be able to help you to mitigate any potential tax charges.