Reform of taxation non-doms – update on the 19 August condoc

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Summary: Significant changes to the taxation of UK resident, non-UK domiciled individuals (‘non-doms’) will come into force from 6 April 2017. Further details of the new rules were released on 19 August 2016. Read on for full details of the changes and the tax implications for non-doms.

Key points

  • The new rules will come into force from 6 April 2017 – there will be no delay in the implementation.
  • Non-doms who have been tax resident in the UK in 15 out of the last 20 tax years will be treated as if they are UK domiciled for all tax purposes.
  • Non-doms who become UK deemed domiciled on 6 April 2017 will be able to re-base foreign assets held directly so that they will only pay capital gains tax on any increase in the value of the asset from 6 April 2017 to the date of sale, subject to certain conditions.
  • All non-doms will be given one tax year (from 6 April 2017 to 5 April 2018) to re-arrange offshore mixed bank accounts to separate out any ‘clean capital’ in those accounts.
  • Non-UK trusts set up by a non-dom before he became UK deemed domiciled will enjoy some limited protections.
  • Non-doms who were born in the UK with a UK domicile of origin will be treated as UK domiciled for all tax purposes in any tax year in which they are UK resident.
  • All UK residential property held by a non-dom, whether directly or indirectly, including UK residential property held by offshore companies, offshore trust and company structures and non-UK partnerships will be subject to UK inheritance tax from 6 April 2017.

The proposals are summarised below. For full details see our BLP Private Wealth guides:

Long-term UK resident non-doms – personal assets

From 6 April 2017, non-doms who have been tax resident in the UK in 15 out of the last 20 tax years will be treated as if they are UK domiciled for all tax purposes. The remittance basis will not be available to them; they will be subject to UK tax on their worldwide income and gains on an arising basis and to UK inheritance tax (IHT) on their worldwide assets.

A non-dom who has become UK deemed domiciled will have to be non-UK resident for at least six complete (consecutive) tax years in order to lose this deemed domiciled status. After that, a non-dom will be able to return to the UK and (provided he remains non-domiciled under general rules) will be able to spend another 15 years in the UK before being treated as deemed domiciled again.

However, a non-dom who has become UK deemed domiciled will cease to be treated as UK domiciled for IHT purposes after he has been non-UK tax resident for four complete (consecutive) tax years. This means that after four consecutive tax years of non-UK residence the non-dom’s non-UK assets will cease to be subject to UK IHT.

  • Re-basing foreign assets for capital gains tax (CGT) purposes

A non-dom who becomes deemed domiciled on 6 April 2017 (and has paid the remittance basis charge in any earlier tax year) can elect to re-base any foreign asset held directly by him so that he is only subject to CGT on any increase in the value of the asset from 6 April 2017. Rebasing will apply on an asset-by-asset basis. Rebasing will not be available to a non-dom with a UK domicile of origin who becomes deemed domiciled on 6 April 2017, or to any non-dom who becomes deemed domiciled after 6 April 2017.

  • Mixed offshore funds

Non-doms who have offshore bank accounts containing mixed funds - e.g. capital, capital gains and income - can only remit the capital element to the UK (which can be remitted tax-free) once all the other elements in the account have been remitted to the UK and taxed.

All non-doms (other than those with a UK domicile of origin) will have a one-off opportunity to 'clean up' offshore mixed bank accounts and release the capital in those accounts which can then be remitted to the UK tax-free. Between 6 April 2017 and 5 April 2018, non-doms will be able to separate mixed funds into the different elements and place the clean capital, capital gains and income in separate accounts which can then be remitted as they wish. This temporary treatment will only apply to bank accounts. If mixed funds have been used to buy an asset the asset will need to be sold and then the sale proceeds can be separated into different elements.

This opportunity is only available if the non-dom can in fact identify the elements in the mixed fund.

Deemed domiciled - offshore trusts

Offshore trusts set up by a non-dom before he became UK deemed domiciled will enjoy some protections – but these are limited.

A non-dom who has become UK deemed domiciled but who set up an offshore trust before becoming UK deemed domiciled:

  • will be taxed on the UK source income of the trust on an arising basis
  • will not be taxed on the foreign income of the trust as it arises (provided he does not add funds to the trust after he has become UK deemed domiciled). However, if he, his spouse/civil partner or minor child/grandchild receives a distribution or benefit from the trust at a time when he is UK resident and UK deemed domiciled he will be subject to tax on the foreign income of the trust and any underlying company up to the value of the distribution or benefit. A loan or repayment of a loan is a benefit for this purpose. The application of these rules in practice is much more complex.
  • will not be subject to tax on the gains of the trust provided he does not add funds to the trust after he has become UK deemed domiciled, and no benefits are received from the trust by him, his wife/civil partner or his minor children. However, if he, his spouse/civil partner or minor child receives any benefit (whether capital or income)  from the trust after he has become UK deemed domiciled he will be subject to tax on an arising basis on all the trust’s gains while he is UK resident.

Non-UK assets of a trust set up by a non-dom before he became UK deemed domiciled will continue to be outside the scope of UK IHT.

A non-dom who has become UK deemed domiciled will also be subject to tax on any distributions or benefits he receives from offshore trusts of which he is not the settlor (or their underlying entities), wherever he receives those distributions/benefits, if those trusts have income and gains arising in them.

Non-doms born in the UK with a UK domicile of origin

An individual, born in the UK with a UK domicile of origin, who has acquired a domicile in another country but who returns to the UK to take up residence will be treated as UK domiciled for all tax purposes, as soon as he becomes UK resident (subject to a one year grace period). He will be taxed on his worldwide income and gains and his worldwide assets will be subject to UK IHT.

He will also not be able to benefit from any favourable tax treatment in respect of an offshore trust set up by him while he was non-domiciled. If he is a beneficiary of the trust, he will be subject to UK tax on all income and gains of the trust as they arise, and if he dies while resident in the UK (and was resident in either of the previous two tax years) the entire trust fund will be subject to UK inheritance tax.

If the individual leaves the UK, he will be treated as non-domiciled again in the tax year after the year of his departure unless he has been UK resident for 15 or more tax years. If the individual has been UK resident for 15 or more tax years he will have to be non-UK resident for at least six complete (consecutive) tax years before he will be treated as non-domiciled again. But his worldwide assets will cease to be subject to UK IHT once he has been non-UK resident for four complete (consecutive) tax years.

This change will apply, from 6 April 2017, to all non-doms who were born in the UK with a UK domicile of origin and return to the UK, whether they return before or after 6 April 2017.

UK inheritance tax on UK residential property

All UK residential property interests held by a non-dom, whether directly or indirectly, including UK residential property held by offshore companies, offshore trust and company structures and non-UK partnerships will be subject to UK IHT from 6 April 2017. Currently, UK assets held by a non-dom (or a trust set up by a non-dom) indirectly through, for example, a non-UK company are not subject to UK IHT.

The changes will affect all UK residential property of any value whether it is owner occupied or let. They will not, however, bring other UK assets held indirectly by non-doms (through, for example, a non-UK company) within the charge to UK IHT.

These changes mean, for example, that:

  • where a non-dom gifts the shares in a non-UK company which holds UK residential property to a trust an immediate charge to IHT will arise;
  • a charge to IHT will arise on the 10 year anniversary of a trust set up by a non-dom which holds UK residential property through a non-UK company;
  • a charge to IHT will arise on the death of a non-dom who owns shares in a non-UK company which holds UK residential property;
  • where a non-dom gifts the shares in a non-UK company which holds UK residential property to another individual no charge to IHT will arise if the non-dom survives the gift by seven years.

In valuing UK residential property for the purposes of this new IHT charge any debt charged on the property will be disregarded if the loan was made by a connected person – for example, a shareholder loan made to a non-UK company to enable it to acquire UK residential property.

These changes mean that many non-doms who chose not to ‘de-envelope’, despite the introduction (and increase in) the Annual Tax on Enveloped Dwellings (which was introduced from April 2013), to preserve the IHT advantages of holding UK residential property through a non-UK company may now feel there is no benefit in retaining the company and will wish to de-envelope. De-enveloping now could potentially give rise to significant costs which would not have been as great had the property been de-enveloped earlier. Despite acknowledging this and calls from professional bodies for a ‘de-enveloping’ relief the government has made it clear that no such relief will be made available.

Diversely-held vehicles that hold UK residential property will not be subject to the new IHT charge.

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