11 November 2015

Deemed domicile post 6 April 2017


Judith Ingham
Partner | UK

The favoured tax status of foreigners planning not to stay in the UK on a long term basis (so called 'non-doms') became a hot topic in the run up to the UK General Election in May 2015, and one of George Osborne's early acts as Chancellor was to announce changes to the regime.

These do not go as far as the total abolition favoured by his opponents, but do mean that the headline tax benefits of non-dom status will only remain available to those who have been in the UK for up to 15 years – once an individual has been resident during 15 out of the last 20 tax years, he will have to pay income tax and capital gains tax on all of his worldwide income and gains in the same way as a UK domiciled taxpayer. The new 15 year 'deemed domicile' period will also apply for inheritance tax, shortening by a year the current period for which a non-dom's non UK assets are protected from tax on his death.

The new rules will also make it impossible for taxpayers born in the UK to a UK domiciled father to lose their UK domicile by spending time abroad, and then enjoy the favoured tax status on their return to the UK.

It is intended that the new rules will take effect from 6 April 2017. The legislation implementing the changes mentioned above will be included in the bill which will become Finance Act 2016, giving those non-doms who want to reconsider where they are based time to plan. However, the final form of legislation which will potentially soften the impact of the regime seems unlikely to be available until well into 2016, which may in reality mean that those long term non-doms who want to stay in the UK have little time to take advantage of it.

The 'sweetener' takes the form of a proposal that, where a taxpayer has transferred assets to a trust before becoming deemed domiciled under the new rules and the income and gains generated by those assets are retained within the trust, he will not be taxable on them. This means that, where a non-dom has surplus assets from which no benefits need to be taken, transferring them to a trust could give effective protection against the changes. However, if benefits are received from the trust, tax will potentially be payable, though quite how the new benefits tax charge will work is still to be determined. The initial proposals were felt to impose an unreasonable burden on those who did not have good records of historic income and gains, having not thought they would be needed for UK tax purposes. The modified version currently under discussion envisages that the charge will not be linked to historic income and gains, which seems likely to penalise those who have kept records and can demonstrate that benefits are provided out of trust capital.

The likely delay in finalising the details will make it important for long term non-doms who want to stay in the UK beyond April 2017 to be ready to review their planning in Autumn 2016 so as to take best advantage of the new trust rules.

We will be providing regular updates as the proposals develop.  

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