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Non doms tax: the consultation
HMRC first began consulting on the reform of the taxation of long-term UK resident non doms in 2015. Legislation was originally intended to be included in the first Finance Bill of 2017 but this was shelved due to lack of parliamentary time as a consequence of the June 2017 general election. Most, but not all, of the amended legislation is comprised in a Bill before Parliament which is expected to pass into law when it receives Royal assent in November 2017.
Until 6 April 2017, all UK resident non-doms could elect to be taxed on the remittance basis on their non-UK income and capital gains. This meant that they were only taxed on non-UK income and gains to the extent that they brought them into, or otherwise enjoyed them in, the UK. However, to access the remittance basis, it was necessary in certain circumstances to pay the Remittance Basis Charge. No charge was payable in the first 7 years of UK residence but if you had been resident in the UK for more than 7 years out of the preceding 9, the charge was £30,000, if resident for 12 out of the preceding 14 years or for more than 15 out of the preceding 20 years, the charge was £60,000 and if you had been resident in 17 out of the preceding 20 years the charge was £90,000.
With effect from 6 April 2017, only UK resident non-doms who have been UK resident for 15 or fewer years in the preceding 20 years can claim the remittance basis. It remains the case that no charge is payable in the first seven years of UK residence and if you have been resident in the UK for more than 7 years out of the preceding 9, the charge is still £30,000, but the £60,000 charge is payable only if you have been resident for 12 years out of the preceding 14 years.
However, there has been an additional change which does not merely affect long-term UK residents, but any individual who is currently not domiciled in the UK but was born in the UK with a UK domicile of origin and subsequently becomes resident in the UK.
Such a person will now be treated as deemed UK domiciled for all tax purposes for any year in which he or she is UK resident. This will mean that individuals who were born in the UK but have ceased to be UK domiciled – perhaps because their parents emigrated during their childhood – will be treated as deemed UK domiciled as soon as they become UK resident.
This in turn means that multinational employers who post to the UK non-UK domiciled employees who were domiciled in the UK at birth, may immediately expose them to UK deemed domicile. One effect being that they will receive no relief from UK tax on their overseas earnings, and another being that any non-UK assets they may have may immediately come within the UK inheritance tax net.
Individuals who become newly deemed domiciled for income tax and capital gains tax (CGT) purposes as a consequence of the new rules will be entitled to rebase their foreign assets to market value at 6 April 2017, provided certain conditions are met.
The rebasing relief applies only to personally held assets and not to assets held in other structures, e.g. trusts and companies.
Rebasing relief may apply if the assets were held for the period from 16 March 2016 to 6 April 2017, but only if the individual had paid the remittance basis user charge in any year prior to 2017/18. It should be noted that there is a 4-year time limit to make a claim for the remittance basis. It is by no means too late to do so if the cost is justified by any savings from rebasing relief.
It has been common for many years for non-UK domiciled individuals to create settlements to hold offshore assets either before they arrived in the UK or at some point before they became domiciled in the UK for inheritance tax purposes under the old 17-year rule.
As mentioned above, it will not be possible to rebase assets to market value if they are held within a trust, even one settled by a non-dom who becomes deemed dom on 6 April 2017 under the new rules.
In the absence of specific rules, deemed domiciled settlors will pay tax on trust income and capital gains as they arise unless they are excluded from benefiting from the trust assets, which is rarely the case.
The current Finance Bill introduces the concept of “protected settlements”. The new rules provide that the settlor of a protected settlement will not pay capital gains tax on chargeable gains or suffer an income tax charge on foreign income arising to a non-UK resident settlement if that settlement meets the relevant conditions. The trust’s UK source income will remain taxable in the UK on the settlor as previously.
Protected settlement status can apply only for as long as the settlor is deemed domiciled but not otherwise domiciled in the UK. In other words, protected settlement status for income tax and capital gains tax purposes will be lost if the settlor acquires a UK domicile of choice.
Protected settlement status will apply to any offshore trust settled by a non-dom before 6 April 2017 for any year from 2017-18 if the settlor is not otherwise UK domiciled. If a UK resident settlor becomes UK domiciled for any other reason, for example by acquiring a UK domicile of choice, protected settlement status will be lost.
Protected settlement status does not apply to trusts where the settlor is an individual who was born in the UK and had a UK domicile of origin at his or her birth.
Protected settlement status will also be lost if the trust is ‘tainted’. A settlement will cease to be a protected settlement if there is any addition of property to the settlement, either by the settlor or by the trustees of any other trust of which the settlor is a settlor or beneficiary in any tax year after 2016/7.
Once a non-dom’s clean capital, income and gains (or any combination) have become “mixed funds”, e.g. by being paid into the same bank account or being used to acquire a new asset, they cannot be segregated subsequently. This means that when mixed funds are remitted to the UK, the tax rules apply in a manner that ensures that the greatest tax liability arises at the earliest possible time.
There will be an opportunity during the 2017/8 tax year for newly deemed doms to “cleanse” mixed funds by reorganising bank accounts and other assets representing mixed funds into their constituent elements, if they have at some time paid the remittance basis user charge. This could be a complicated and time-consuming exercise in some instances and it is essential that there is sufficient detail in the financial records to make that exercise possible.
As experienced tax consultants, ETC can provide tax compliance, management and planning advice across all areas of non dom tax status and liability.
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For advice, contact one of our chartered tax specialists.