On 18 August 2016, HM Treasury published a further consultation on reforms to the taxation of non-UK domiciled individuals (“non-doms”). The changes are to take effect from 6 April 2017 and this note outlines the new deemed UK domicile rules and other proposals to charge inheritance tax (IHT) on UK residential property. The consultation also asks for input on how Business Investment Relief could be changed to make investing into UK businesses more attractive for non-doms but no specific proposals have been drafted to date.
Deemed UK domicile rules
Under the new proposals, there are two ways in which non-doms would be considered to be UK domiciled for income tax, CGT and IHT if either one of the following apply:
- The “15/20 rule”: This would apply to individuals who have been UK resident for at least 15 (including years spent during childhood) out of the previous 20 tax years so would be deemed domiciled in the UK from the 16th
- Returning UK domicile rule: This would apply to non-doms who were born in the UK and subsequently returned and would apply to the tax years they resume residence in the UK, but their worldwide assets would not become subject to IHT unless they were UK resident in one of the two preceding tax years.
Individuals will no longer be deemed domiciled for income and CGT purposes if they cease to reside in the UK for 6 consecutive tax years or for IHT purposes for 4 consecutive tax years.
The further consultation also confirms that the £2,000 de minimis rule for unremitted income and gains will remain for deemed domiciles.
Previously, it was announced that individuals who become deemed domiciled due to the “15/20 rule” on 6 April 2017 will be able to rebase their assets to their market value on 5 April 2017 for CGT purposes. The further consultation reveals that this will be optional and on an asset-by-asset basis. The asset will also need to have been foreign sited on 8 July 2015 (the date of the Summer Budget) and non-doms will need to have paid the remittance basis charge before 6 April 2017.
Mixed Funds Rule
The further consultation has announced that non-doms will be able to rearrange their mixed income and/or capital gains funds so the cash can be separated into their constituent parts. Non-doms will have one year from April 2017 to do this, but this will not be available to non-doms born in the UK with a UK domicile of origin.
Use of offshore trusts
One of the original proposals was that the income and gains of offshore trusts created before an individual became deemed domiciled would not be taxed. The further consultation provides that this would be done by adapting the existing anti-avoidance legislation.
For CGT, the rules will be extended to those who are deemed domiciled, but will stop at settlors of an offshore trust that was set up before they become deemed domiciled if no additions of property have been made. This protection will fall away if the settlor or any their spouse or their minor children receive any actual benefits from the trust.
For income tax, protection will be available in respect of offshore income arising to an offshore trust set up before the settlor became domiciled as long as the income remains within the trust. If the settlor, their spouse or minor children receive any benefits from the trust when the settlor was non-domiciled and the trust was protected, this will be taxed on the settlor.
IHT on UK residential property
At present, non-doms are only required to pay IHT on property in the UK. The new proposals seek to impose IHT on all property whether it is held directly or indirectly (e.g. through an offshore structure) by non-dom settlors or beneficiaries. A property will be within the charge to IHT if it has been a dwelling within two years preceding a transfer but any relevant debts such as mortgages can be deducted from the value of the property.
This briefing was posted on 8 September 2016.