Personal Tax: Non-Dom Changes in 2017

Personal Tax: Non-Dom Changes in 2017

Madeleine Aldir 17.03.2017

Each year, the Spring Budget brings several changes into light, and this year is no different. In this blog we discuss the new changes that have been introduced for Non-UK Domiciliaries.

Here is a summary of key points and what action you should take to keep on top. These new changes were drafted in January 2017, announced in the Spring Budget and will be implemented effective 6th April 2017.

  1. The new deemed domicile 15 out of 20 years (15/20) rule

For the first time, long term non-doms will be taxable on a worldwide basis. More specifically, any non-dom individual who has been a resident in the UK for at least 15 out of the last 20 tax years will become ‘deemed’ UK domiciled for income, capital gains and inheritance tax issues.

Prior income and gains will remain taxable if remitted into the UK, with both offshore and UK assets being subject to UK Inheritance Tax. It is important to note that a non-dom does not have to have had 15 consecutive years of residence in order to be caught by the deemed domicile rule.

  1. Rebasing offshore assets for individuals who become ‘deemed’ UK domiciled under the 15/20 rule

Where a non-dom transfers or gives away offshore assets before they are deemed UK domiciled, the original transfer will remain excluded property for IHT purposes even where the individual is deemed UK domiciled on death.

However, any subsequent capital gains made on the disposal of assets (whether UK or offshore) would automatically invoke a charge in UK capital gains tax, if the individual becomes deemed UK domiciled.

In order to achieve this, assets will need to be revaluated on April 2017 for capital gains tax purposes. It is important to note that assets held within overseas structures such as trusts or companies will not benefit from this uplift.

  1. A two-year grace period to separate or ‘cleanse’ offshore mixed fund bank accounts

Individuals that become deemed UK domiciled will still be taxed on the remittance basis, on unremitted income and gains that arose in previous years.

If the offshore bank account contains a mix of unremitted overseas income and tax-free (clean) capital, the income is generally remitted first for tax purposes. This does mean that non-doms may find it tricky to access their clean original capital without triggering unwanted tax charges.

In the meantime, the Government is introducing a temporary window of two tax years, whereby individuals can rearrange their mixed funds overseas to separate them by moving into separate offshore accounts (e.g. tax-free capital, income, gains).

  1. Reforms and protections for offshore trusts

Gains and foreign income arising within a trust structure before an individual was deemed UK domiciled, will not be assessed. This is providing that no property has been added to the trust and the settler is neither UK domiciled nor a formally domiciled resident. This means that such foreign income and gains will only be taxable when matched to a benefit received.

UK income of offshore trusts or their underlying entities will be taxed on the settlor in the same way as it is at present.

  1. The proposals to charge UK inheritance tax on UK residential property that are held indirectly through an offshore entity

The Government intends to extend the charge to UK IHT on UK residential property held indirectly by non-doms through an offshore entity. This includes holding within a company, overseas partnership or trust. This rule applies to both non-dom individual shareholders/partners and trusts with non-dom settlers. It also applies to all chargeable events, such as death or a 10 year trust anniversary.

This charge can be avoided if the UK property owned by an offshore company can be treated as ‘excluded property’. This applies where the owner is not UK domiciled or if the trust was set up before the settler was deemed UK domiciled.

  1. Making Business Investment Relief more accessible

Business Investment Relief or BIR was introduced in 2012 to allow non-doms to bring their foreign income and gains to the UK for investment into UK businesses without triggering a remittance tax charge. The changes to BIR include:

  • The anti-avoidance rules now only apply to the actual company or group in which the investment has been made, not so-called ‘involved companies’
  • You can now buy existing shares from other shareholders rather than subscribing for new shares in the company
  • Hybrid companies can be classified where the company is both trading and a stakeholder company in other trading companies
  • The grace period where a breach has occurred is now 2 years and the time period for a business to commence trading is now 5 years.

What should you do to keep on top?

  • All non-doms, whether they will become deemed domiciled on 6 April 2017 or later, should review their worldwide assets and their ongoing financial needs both in the UK and offshore. This includes reviewing UK residential property structures for the IHT regime and loans to trusts
  • Those who wish to settle an offshore trust may wish to consider doing so before 6 April 2017 in order to obtain the applicable protections going forward
  • General planning should be considered before 6 April 2017 such as making gifts to family members, and reviewing arrangements with the trustees and their advisors
  • For deemed domiciled individuals who will benefit from rebasing of assets for CGT, they should consider retaining the assets until 6 April 2017
  • For non-doms choosing to leave the UK before 6 April 2017, urgent advice should be sought
  • BIR may be more lucrative to non-doms and individuals considering investments in the UK.

If you are a CTA qualified 'non dom' Tax Advisor and would like to discuss the types of opportunities available to you on the market, please don't hesitate to get in touch. 

Madeleine Aldir's picture
Senior Consultant | Tax Recruitment
maldir@morganmckinley.co.uk