UK non-dom tax rules

The future of non-doms

It was in the July of 2015 when the UK’s new Government announced in a surprise Summer Budget that it would be bringing ‘an end to non-doms’ with fundamental changes to the way UK resident non-domiciled individuals would be taxed. Since then there has been a lot of debate on the proposed change and how it might work.

The new rules were then included in the Finance Bill published in December 2016, but were dropped following the calling of the snap General Election in May of this year. It has now been confirmed that the rules will be reintroduced following the Summer Recess and should become law by the end of 2017. The proposals are broadly the same as the earlier version we saw, and would still take effect retrospectively from 6 April 2017, with some further changes again from 6 April 2018.

UK taxpayers who are affected must change their tax plans. We will continue to update this page with further news and analysis as developments take place, so please check in again for new information. As the UK political scene remains uncertain, it is vital to keep up to date with what the change to non-dom status means for you, or for your clients.

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What is changing?

The are four main changes you must be aware of.

1. Non-doms will be ‘deemed domiciled’ for all tax purposes once they have been resident in the UK for more than 15 of the last 20 years. Once deemed domiciled, a non-dom will not be able to use the remittance basis, and will be taxed as a regular UK resident on all income and gains. There are some tricky and unexpected ways in which this 15 year period may be calculated, so it is best to seek expert advice on this.

2. As a regular UK taxpayer, they will be taxed on the ‘arising basis’, meaning that they will be taxed (for income, capital gains and inheritance tax) on all assets around the world.

3. People born and domiciled in the UK will no longer be able to claim non-dom status so long as they are living in the UK.

4. Assets held in trusts can offer benefits if established before deemed domicile. Once the individual becomes deemed domiciled, they will be taxed when they, their spouse or children start to receive any benefits from the trust. The exact nature of this largely depends on matters including who receives the benefit and where they are resident.

At the same time, the UK government is introducing new inheritance tax charges for companies owning UK property.

It is worth noting that the above changes are based on what was set out in a consultation document issued in August 2016 and there are rumours that there will be further changes in draft legislation which will be available in December 2016. This is driven in part by responses to the consultation which closed on 20 October 2016.

When will it happen?

The changes will come into effect on 6 April 2017, though there may be further changes to the rules before this deadline.

So should I do anything now/do I need to start doing things for my non-dom clients?

Everyone should assess their status. The actions that are required will depend on how drastically the changes will affect their status, and how complex their wealth planning structures are. Significant changes to trusts and how assets are held will need several months to be properly dealt with, so measures would need to be undertaken as soon as possible. At the very least, we would recommend advisors to conduct a thorough review of their clients’ situation as soon as possible to assess how the changed rules will affect them.

What should I do for my non-dom clients?

First, let them know about the changes. Second, check when they become deemed domiciled. If it looks like your client will be deemed domiciled from April 2017 – in other words, they have spent 15 or more of the last 20 years in the UK under the new rules – then there are some key actions which should be taken.

1. Consider establishing a trust (if one doesn’t already exist) before they are deemed domiciled to defer income tax and capital gains tax.

2. Consider putting any non-UK property into a trust to protect it from inheritance tax.

3. If a trust exists, consider whether the trustees should make distributions from it before they are deemed domiciled, and whether the trust should be restructured.

4. Double check the position when draft legislation is released.

This generally sounds like bad news. Is there any upside?

The new rules offer some upsides for non-doms. Principally, non-doms who become deemed domiciled next year are permitted to rebase the value of assets that have been held offshore since July 2015 with effect from April 2017 – in other words, effectively have them revalued at current rates and potentially brought onshore to the UK without facing any tax penalties. The biggest benefit here is that it can offer an uplift in the value of the assets, which can be brought to the UK, with no capital gains tax due to be paid on the revaluation.

Non-doms are also offered a one year window from April 2017-April 2018 to ‘cleanse’ funds which consist of a mixture of income, gains and capital. The income, gains and capital can be separated out, enabling the non-dom to remit these elements separately, in a tax efficient manner.

What happens if we miss the deadline, or get things wrong?

Some unfortunate consequences will follow! As explained above, if a non-dom becomes deemed domiciled without having first prepared for the change and made plans to protect assets where possible, then income tax and capital gains tax will apply to all of their worldwide income and gains on directly held assets. Their worldwide assets will also be subject to inheritance tax, including any UK property that is owned through a non-UK company.

Does this send a discouraging message to non-doms?

It is hard to avoid the conclusion that, in tandem with Brexit, this sends a discouraging message to those who are only partly tied to the UK. However, as we have outlined, there are some clear options to be taken which will enable non-doms to plan for April 2017, and even those who won’t immediately become deemed domiciled on that date should start thinking about their position well in advance of reaching their 15 year mark.

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