23 August 2016

Full steam ahead for non-dom tax reforms

At the Summer Budget on 8 July 2015 (the 'Budget Announcement') the then Chancellor announced 'an end to non-doms' and new rules that would mean that individuals resident in the UK for more than 15 years will have to pay UK tax on their worldwide income and gains in the same way as an individual who is domiciled in the UK. Following an extended period of consultation, more details and draft legislation has now been published with a view to the new rules taking effect in April 2017.

Further, it has been confirmed that individuals born in the UK with a UK domicile of origin will no longer be able to claim non-UK domiciliary ('non-dom') status for tax purposes while they are living in the UK, even if they had previously left the UK and acquired a domicile of choice in another country.

While the latest announcements significantly restrict the ability of non-doms to benefit from a preferential rate of taxation, they also offer opportunities for effective planning. We set out the key points below.

No more long-term non-doms

It is now confirmed that non-UK domicilaries will be deemed to be UK domiciled for income and gains tax purposes once they have been resident in the UK in 15 of the past 20 years (the '15/20 test'). Under this test an individual who has acquired deemed domiciled status would therefore lose that status only if he or she becomes non-UK resident and spends at least six years abroad.

Years of residence

As is currently the case for inheritance tax, split years for residence purposes will not be disregarded for the purposes of assessing deemed domicile. Therefore it will be possible to become deemed-domiciled after spending only a little more than 13 calendar years in the UK, if an individual became UK resident towards the end of one tax year and became non-resident early on in a later tax year.

To determine whether one has or has not been resident for the purposes of the test, years prior to the introduction of the statutory residence test in 2013 will be assessed under the old rules determining residence. Since these lacked the certainty of the statutory residence test, any non-dom who might have spent 13 years in the UK should consult with their advisers promptly to determine their position.

Years spent in the UK while a person is under the age of 18 will count as years of residence for these purposes.

Born in the UK?

Individuals born in the UK and who have a UK domicile of origin will no longer be able to claim non-dom status for tax purposes while they are living in the UK, even if they had subsequently left the UK and acquired a domicile of choice in another country. They will also not benefit from the rebasing or cleansing concessions outlined below.

What about trusts?

The original proposals provided that trusts established by non-doms before they become deemed-domiciled here under the 15/20 test would be protected from the impact of the new rules. This protection has now been modified, so that only trusts which are not used to benefit non-doms are protected.

Specifically, trusts settled by non-doms before they become deemed-domiciled will not be subject to the rules that tax UK domiciled settlors on the income and gains of non-UK resident trust unless and until they, their spouse or minor children, receive a 'benefit' from such a trust. In order to protect assets in trusts from the new regime, deemed domiciled taxpayers will need to segregate assets which they will use to maintain their lifestyles from assets that they will retain purely for investment purposes. Any trust to which assets are added by a deemed domiciled taxpayer will also lose protection.

Accordingly, a modified form of the remittance basis will continue to apply to non-UK trusts settled prior to the settlor becoming deemed-domiciled. It is critical to review existing structures to ensure that they will benefit from this protection and to put in place plans to manage and maintain that protection in future.


During consultation following the Budget Announcement, it was proposed that individuals who become deemed domiciled on 6 April 2017 will be able to choose to rebase their overseas assets for capital gains tax purposes before the new rules take effect from April 2017.

This is effectively a tax free uplift for foreign assets owned since 8 July 2015 and where the original funds used to purchase the asset were clean capital, the entire gains can be remitted onshore tax free.

This is a significant concession for deemed domiciled taxpayers, and means that foreign assets owned on 8 July 2015 should be retained until next April where at all possible. This treatment will not extend to individuals who become deemed domiciled after 6 April 2017.

Cleansing of mixed funds

The 'mixed funds' rules apply where non-doms own assets or accounts funded partially by untaxed income and/or gains and partially by taxed income and/or gains. The rules provide that untaxed (and therefore taxable) income and gains are remitted first and that they cannot otherwise be separated.

A further significant concession is that a temporary window will be introduced in which deemed domiciled taxpayers will be able to rearrange their mixed funds overseas to enable them to separate those funds into their constituent parts. This window will last for one tax year from April 2017.

The special treatment will only apply to mixed funds which consist of amounts deposited in bank and similar accounts. Where the mixed fund takes the form of an asset (for example a valuable painting), it will not qualify for the special treatment. However, the proceeds of sale of overseas assets sold during the transitional window can be separated.

Cleansing will not be available where an individual is unable to determine the component parts of their mixed fund. The mixed fund rules have always required a remittance basis user to track and monitor their offshore funds in order to benefit from the remittance basis, and this will remain the case even under transitional arrangements.

Legislative quirks

Assets sold during a period of non-residence

Non-domiciled individuals who became non-resident before the Budget Announcement and who sell assets while non-resident would find themselves charged to capital gains tax, if they return to the UK within five years of their departure date. Since deemed-domiciled individuals would not be able to claim the remittance basis, even offshore gains would become immediately chargeable on their return.

The Government has agreed that this would have an unintended effect on a very small number of people, by bringing gains into the charge in the UK where a disposal took place before the announcements were made. To mitigate this, a transitional rule will be introduced that will ensure that the reforms do not have retrospective effect on those individuals who were non-resident before the announcements were made.

Foreign capital losses

Individuals who become deemed-domiciled and taxable on their worldwide income will be able to offset foreign capital losses that arise after that point against capital gains that arise in the UK.

Inheritance tax

Deemed domicile rules that apply after 17 out of 20 years of residence are already in place for inheritance tax. These will now be aligned with the income and capital gains tax rules and will apply after 15 out of 20 years of residence.
Under current rules, individuals who leave the UK remain domiciled for three tax years. For individuals who leave after 6 April 2017, this will be extended to four consecutive years.

Born in the UK?

Individuals born in the UK with a UK domicile of origin are again treated more harshly and will be treated as being domiciled in the UK for inheritance tax purposes after being resident for at least one of the two tax years prior to the year in question. This would provide a short “grace period”, but no longer term protection. Trusts settled by such individuals who become deemed domiciled will also be subject to inheritance tax as if the settlor were UK domiciled when they were established.

Inheritance tax and UK Residential Property

UK residential property owned directly by non-UK domicilaries or non-UK residents has always been subject to IHT but shares in a non-UK company which in turn owns UK property have not. In this way, many owners of houses in the UK have fallen outside the scope of inheritance tax.

At the Budget Announcement the Government's proposed to amend the definition of 'excluded property' so that it does not include the value of any interest (however held) which consists of a house in the UK or did at any time in the preceding two years. This would will bring such interests within the scope of inheritance tax on death, where gifts are made in the seven years preceding death or on the ten year anniversaries of a trust.

While these rules will only apply to residential property – 'dwellings' – but there is still some confusion as to what will constitute a dwelling. What is clear is that there no intention of allowing any exemptions for principal residences (such as applies to non-resident capital gains tax) or any de minimis values or reliefs for property rental businesses (such as apply to ATED).

Deductibility of debt when calculating inheritance tax will be of particular interest to many and the good news is that, despite the draft legislation currently lacking this level of detail, debts relating exclusively to the property, such as mortgages, will be deductible. Where there are other assets held in the same 'envelope' the deduction of debt is likely to be pro-rated, which HMRC suggest is broadly in line with current rules. However debt between connected parties will be 'disregarded' which is not in line with current rules relating to directly owned property.

What now?

While these long-trailed announcements represent a significant tightening of the rules relating to non-doms, there remains significant planning opportunities, particularly in the transition to the new rules. Non-doms who will be affected by the changes and those who are close to 15 years of residency need to review their asset holding structures now to ensure that efficiency is maintained for future years.

To view our Asia version of this analysis, click here.

To view our Swiss version of this analysis, click here.


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