Important Update On UK Taxation Of Non-Doms

At the Summer Budget 2015, the government announced that it would change the tax regime for people who have a foreign domicile (otherwise known as ‘non-doms’). These changes will bring an end to permanent ‘non-dom’ status for tax purposes and mean that non-doms can no longer escape a UK inheritance tax (IHT) charge on UK residential property through use of an offshore structure such as a company or a trust.

A consultation was published in September 2015 setting out the detail of the proposals to deem certain non-doms to be UK-domiciled for tax purposes and today the consultation document has been released. The documentation does confirm what had been widely expected, in that if a non-dom had been in the UK for 15 out of the past 20 tax years then they will be ‘deemed domiciled’ for tax purposes. This essentially means that any non-dom living in the UK can shelter their income for just 15 years as once they are considered ‘deemed domiciled’ they will be taxed on their worldwide income and gains.

Individuals who are non-domiciled in the UK currently enjoy a significant advantage over other individuals for inheritance tax purposes. UK domiciled individuals are liable to IHT on their worldwide property. However, those who are non-UK domiciled are only liable on the property which is situated in the UK. This is the case both for individuals who are resident in the UK and those who are resident elsewhere.

Impact on Holding Residential Property

Any residential property in the UK owned by a non-domiciled individual directly will be within the charge of inheritance tax. However, it is standard practice for such individuals to hold UK residential properties through an overseas company or similar vehicle. Where this is the case, the property of the individual consists of overseas shares which will be situated outside the UK and are therefore excluded from IHT. This is known as ‘enveloping’ the UK property and the effect is that the property is taken outside the scope of tax.

Enveloping properties in this way only provides a tax advantage to individuals who are domiciled outside the UK. It is not available for any other individual, either those who are domiciled in the UK under general law or those who are deemed to be so domiciled under statutory rules because they have been resident in the UK for a long period.

Impact on Inheritance Tax

The government plans to bring residential properties in the UK within the charge to IHT where they are held within an overseas structure. This charge will apply both to individuals who are domiciled outside the UK and to trusts with settlors or beneficiaries who are non-domiciled.

These changes will come into effect from 6 April 2017 and will be legislated as part of the 2017 Finance Act.

The consultation confirms the ability of a non-domicile taxpayer to rebase their non-UK assets in April 2017, meaning that any growth in value of those assets prior to April 2017 can be realised in the future without a charge to UK tax. This is some welcome good news. However, more guidance is needed on this in terms of remitting to the gain/funds into the UK.

Tax Planning Strategies

There is a concession with in the guidance which states that the segregation of funds over mixed funds will be considered. This will allow non-doms who have a mixed capital & income bank account to segregate between the two in opening a clean bank account moving forward. Trusts are likely to still be used however greater anti avoidance will be issued around this area. Proposals are also being put in place on how trust distributions are taxed.

It is important to note that the consultation still is at the consultation stage and is yet to be drafted into legislation. However, the consultation does provide non-doms and advisors with a steer towards post April 2017 planning. All non-doms should review their affairs with a tax advisor immediately.