As we approached the election earlier in the year, I had a slide with a picture of the towering volumes of James Kessler QC’s ‘Taxation of Foreign Domiciliaries’ next to the caption “Endangered species?”
Of course, I was not referring to the author, but the privileged tax status offered to Non-Doms.
Once the electorate returned a majority Conservative Government it seemed that this particular financial conservation issue was resolved. But the Summer Budget proved to be a bit of a windy and damp affair for our internationally mobile friends.
George Osborne announced three further revisions for Non-Doms in the Summer Budget. These were as follows:
- The tax benefits will only be available for IHT, income tax and capital gains tax for the first 15 tax years of residence in the UK only;
- Certain UK-born individuals who move abroad will be prevented from claiming the status if they come back to the UK; and
- UK residential property beneficially held by Non-Doms through offshore companies or trusts, will become subject to IHT.
Does this mean the Non-Dom joyride is over?
The public and press jury has been out on the Non-Dom status (and the accompanying benefits) for a number of years. The status was a keenly debated issue in the election which was overly dominated by tax matters.
It has to be said, one cannot pick and choose one’s domicile. You are born with a particular domicile generally inherited from your father. This can, in certain circumstances, be covered over with a domicile of choice. The first of these is sticky and tenacious whereas the second requires physical residence in a Country along with the intention to remain there.
This provides two main results:
- A person with a non-UK domicile of origin is in a strong position to argue that they remain non-domiciled despite having spent a long time in UK (perhaps all their life) as HMRC would need to show that the person held an intention to stay in the UK indefinitely; and
- Those with a UK domicile of origin who emigrate overseas may obtain a domicile of choice in their new home. However, this will be quite precarious and their status will revert back to the UK domicile of origin if they become resident in the UK or even a third jurisdiction.
Non-Dom tax status – the sell by date?
For IHT purposes, a Non-Dom would usually start from the position that he is only subject to UK IHT on his UK assets. However, for IHT purposes only, one currently becomes ‘deemed domiciled’ after being resident in the UK for 17 out of 20 tax years. The practical effect is that all of his worldwide assets become subject to IHT. There are some current exceptions where one is domiciled in India, Pakistan, Italy or France where, due to the existence of capital tax treaties, the effect of the deemed domiciled provision can, for all intent and purposes, be removed.
For income tax and capital gains tax purposes one could currently remain non-UK domiciled until such time that one became UK domiciled under general law. For example, a person decides he will remain in the UK until death. The main benefit for income tax and capital gains tax was the ability to utilise the remittance basis. In short, this enables one to leave their foreign income and gains overseas without a UK tax charge. UK income and gains, and foreign income and gains brought to the UK, would normally be subject to UK taxes. Since 2008, there have been various ‘levies’ in place which make longer term residents pay for the privilege mentioned above.
From April 2017, Non-Dom status for both inheritance tax and also for income tax and capital gains tax will “expire” after one has been resident in the UK 15 tax years.
What is clear is that their domicile status under general law will not be effected. This means that they can continue to pass on their Non-Dom status to their children (i.e. born after their 15th year of UK residence) who can then claim the tax benefits of being Non-Dom.
It also seems that individuals who are UK domiciles under general law and who have been UK resident for 15 years and then move abroad will not become Non-Dom for IHT purposes until at least 5 years following their departure.
Some individuals who have lived in the UK for 7 or 12 years must pay charges of £30,000 and £60,000 in order to opt into the Non-Dom tax regime. These charges will remain unchanged. The £90,000 charge (which applies to those resident for 17 years) will fall away once the 15 year limit on Non-Dom status comes into force.
UK born persons moving abroad
There is no proposal to prevent any individual who is born in the UK from claiming Non-Dom tax status. However, the practical result of the changes above (e.g. the 15 year-rule) means that such individuals will lose the benefit of their tax status probably before they take their GCSEs!
The Chancellor has clearly set his sights on those who have a UK domicile of origin, leave the UK and subsequently acquire a domicile of choice overseas.
From April 2017, where such persons return to the UK, it will be expressly the case that they will be treated as UK domiciled. It is our understanding that this would usually be the case under general law anyway, as a domicile of choice must be supported by both physical residence and intention to remain in the relevant jurisdiction.
Importantly, however, is that any trusts the person has settled during their period of non-residence abroad will not constitute excluded property. In other words, the trust property will remain within the IHT net.
UK homes owned by offshore wrappers
The Annual Tax on Enveloped Dwellings (“ATED”) and the ATED-related capital gain tax charge are previous examples of the Government’s attempts to discourage UK residents, including many Non-Doms, from holding UK homes or dwellings through offshore companies.
In summary, the reason why one might have been tempted to do this is that the shares in the offshore company could be passed to the next generation without any IHT charge. This was regardless of the fact that the underlying asset was UK bricks and mortar. One would look no further than the ‘situs’ of the foreign shares. Foreign shares settled by a Non-Dom on to a non-UK trust, sometimes called an excluded property settlement, would be outside the scope of IHT regardless of a subsequent change in the individuals domicile position.
From April 2017, it is proposed that Non-Doms and their trusts that own UK residential property through offshore companies will be liable to IHT in the same way as UK-domiciled individuals.
Unlike ATED, there will be no ‘get out’ of the rules by reason of the property’s value or if the property is let out.
There is a suggestion that the Government might consider providing relief for the tax costs incurred by a person who looks at unravelling their structures.
So the UK, which was once such a fine feeding ground for the international worker, businessman and entrepreneur, has narrowed the benefits for Non-Doms once more.
Do these changes mean that the Non-Dom is now on the critical list in UK?
We don’t think so just yet. From an objective point of view, there are still some very attractive benefits for Non-Doms. A 15 year remittance basis is still going to prove popular and measures such as Business Investment Relief show a welcoming hand to international wealth.