Summer Budget 2015: significant changes to UK tax for non-domiciled individuals

Posted by on

In his Summer Budget, the UK Chancellor announced major changes to the taxation of UK resident, non-UK domiciled individuals ('non-doms') which will have a significant impact on non-doms who have been UK tax resident for more than 15 years (and those approaching 15 years) and non-doms who own UK residential property, however it is held.

From 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 - meaning they will be subject to UK tax on their worldwide income and gains on an arising basis and to UK inheritance tax on their worldwide assets;
  • an individual 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 tax 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.

The details of these measures will be consulted on after the Summer.

Background

Currently, a non-dom may make a claim to be taxed on the remittance basis so that he is only liable to UK tax on his foreign income and gains if they are remitted to the UK  (essentially brought to, or enjoyed in, the UK). In addition, regardless of whether or not a non-dom claims the remittance basis he is only liable to UK inheritance tax on his UK assets (until he has been UK tax resident for 17 out of the last 20 tax years) and it may be possible for him to hold his UK assets in such a way that no liability to UK inheritance tax will arise (for example, through a non-UK company).

Under the existing regime, a non-dom who has been UK tax resident for seven out of the previous nine tax years has to pay a remittance basis charge (RBC) of £30,000 if he wishes to claim the remittance basis,  a non-dom who has been UK tax resident for 12 out of the last 14 tax years has to pay a RBC of £60,000 and a non-dom who has been UK tax resident for 17 out of the last 20 tax years has to pay a RBC of £90,000.

Deemed domiciled for all tax purposes after 15 years

From April 2017, a non-dom who has been tax resident in the UK in 15 out of the last 20 tax years will be treated as if he is UK domiciled for all tax purposes. This means that he will no longer be able to benefit from the remittance basis of taxation in respect of his foreign income and gains. Once a non-dom has been UK tax resident in 15 out of the last 20 tax years he will be subject to UK tax on his worldwide income and gains on an arising basis and will be subject to UK inheritance tax on his worldwide assets (currently, a non-dom does not become subject to UK inheritance tax on his non-UK assets until he has been tax resident in the UK for 17 out of the last 20 tax years).

A non-dom will have to be non-UK tax resident for at least five complete 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 (for all tax purposes) again. Once a non-dom has become non-UK resident the fact that he is still treated as deemed domiciled for five tax years will only normally be relevant for UK inheritance tax purposes as, as a non-UK resident individual, he will generally only be liable to UK income tax on UK source income and to UK capital gains tax on UK residential property.

Where a non-dom has set up an offshore trust before becoming deemed domiciled under the new rules, foreign income and gains which arise in the trust will not automatically be taxed on the non-dom once he has become deemed domiciled. He will be subject to tax on any benefits, capital or income that he receives from the trust wherever they are received.

The non-dom's domicile status under general law will not be affected. This means that, provided under general rules he remains non-domiciled, his children will continue to be treated as non-domiciled.

The RBC for non-doms who have been tax resident for seven out of the previous nine tax years and the RBC for those who have been tax resident for 12 out of the last 14 tax years will remain unchanged. The RBC for non-doms who have been tax resident for 17 out of the previous 20 tax years will become redundant, as once a non-dom has been tax resident for 15 out of the last 20 tax years they will be treated as deemed domiciled.

Individuals with a UK domicile of origin

All individuals receive a domicile of origin at birth. Normally, an individual's domicile of origin will be his father's domicile at the time of the individual's birth. Currently, an individual with a domicile of origin in the UK can leave the UK, acquire a domicile outside the UK and then later return to the UK to take up residence and enjoy the tax advantages available to non-doms. In addition, non-UK assets held in a trust set up by the individual while he was non-domiciled are protected from UK inheritance tax after the individual returns to the UK, even if he becomes UK domiciled again.

From April 2017, an individual 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 tax resident. He will not be able to benefit from any favourable tax treatment in respect of trusts set up by him while he was non-domiciled. If he is a beneficiary of the trust, this means that he will be subject to tax on all income and gains of the trust as they arise. The trust assets (including the non-UK assets) will also become subject to UK inheritance tax following his return to the UK.

These measures will affect all non-doms who have a UK domicile of origin and return to the UK from 6 April 2017, whether they return before or after 6 April 2017.

UK domiciled individuals who leave the UK

A UK domiciled individual who leaves the UK permanently, after 6 April 2017, and acquires a domicile in another country but who has been tax resident in the UK for 15 out of the last 20 tax years will also continue to be treated as deemed domiciled for tax purposes for five tax years after he leaves. However, after five years he will no longer be subject to UK inheritance tax on his worldwide assets and will be able to place those in trust to protect them from UK inheritance tax in the longer term. However, if the individual has a UK domicile of origin the trust will lose its inheritance tax advantages during any period when the individual is tax resident in the UK, and for three or five years after the individual leaves the UK again, depending on how long he has been back in the UK.

UK inheritance tax on UK residential property

From April 2017, 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. 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 inheritance tax.

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 inheritance tax.

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 inheritance tax will arise;
  • a charge to inheritance tax 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 inheritance tax 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 inheritance tax will arise if the non-dom survives the gift by seven years.

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 inheritance tax advantages of hold 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. However, de-enveloping now could potentially give rise to significant costs which would not have been as great had the property been de-enveloped earlier. The government says it is aware of, and will consult on, these concerns.

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

Non-UK assets held by a non-dom (who has not become deemed domiciled under the 15 out of 20 tax year rule discussed above) and non-UK assets held within a trust established by a non-dom (and not deemed domiciled individual) will remain outside the charge to UK inheritance tax.

Authors

This site uses cookies to help us improve our services and your browsing experience. For further information about cookies, including about how to change your browser settings to no longer accept cookies, please view our privacy policy.