Posted by Nick Day on 16 Feb 2017

Deemed UK Domicile Reforms 2017

We have previously posted articles about the Government’s ongoing approach and changes to the taxation of UK tax resident non-domiciled individuals including the new UK deemed domicile etc. reforms being introduced from 6 April 2017.

Summary of Proposed 2017 UK Domicile Reforms

To recap in brief, the Summer Budget 2015 and subsequent Treasury releases have announced three wide-ranging changes that will impact non-domiciled individuals and these are:

  • To treat non-domiciled individuals as deemed UK domiciled individuals for UK tax purposes from 6 April 2017 where they have been UK tax resident for 15 of the past 20 tax years.
  • To treat anyone born in the UK with a “UK domicile of origin” as a deemed UK domiciled individual when they resume UK tax residence if they have previously left the UK and acquired a domicile of choice in another country.
  • To bring UK residential property within the scope of UK inheritance tax (IHT) should it be owned via an offshore structure.

UK domiciled individuals pay tax on the arising basis on worldwide income and gains and so those deemed UK domiciled from 6 April 2017 will pay UK tax on worldwide income/gains and not on the “remittance basis” from this date.

Transitional Provisions for Non-Doms

The latest Consultation document on transitional provisions was issued by the Treasury in December 2016 and draft legislation has now been made available, stating that the provisions will apply so that:

Capital Gains Tax Rebase for UK Deemed Domiciled Individuals

Those who become deemed UK domiciled on 6 April 2017 under the “15 out of 20 years” rule will in broad terms be able to rebase the capital gains tax cost of their directly held foreign assets to their market values on 5 April 2017.

The Treasury have advised via the current consultation process that this re-basing will be available only to individuals who have paid the Remittance Basis Charge (RBC) in the past. The proposals could be altered but if this does not happen, it would mean that those that have not paid the RBC before will not be eligible for the re-basing rules. The re-basing rules also will not be open to those becoming deemed domiciled who were born in the UK with a domicile of origin in the UK. At present it would appear that only individuals that become deemed domiciled in April 2017 will be able to take advantage of the re-basing and not those becoming deemed domiciled in later years.    

This re-basing will apply on an asset-by-asset basis. However, if assets were previously bought using non-UK foreign income or gains, these elements included within sales proceeds on the ultimate sale of the assets will still be liable to UK tax on the remittance basis.

Rearrangement of Offshore Mixed Funds (Capital Gains & Income Tax)

Non-domiciled individuals who have previously claimed the remittance basis (but not necessarily paid the RBC) will be allowed a temporary two year grace period from 6 April 2017 in which to rearrange their offshore mixed funds, to effectively separate those funds out into their various constituent parts of “clean (non-taxable) capital”, offshore income and offshore capital gains, etc.

The different constituent parts can then be kept in separate offshore accounts and the individual will have discretion over what to remit and therefore whether to make taxable remittances to the UK. However, this opportunity will not be open to those who become deemed domiciled by virtue of being born in the UK with a domicile of origin in the UK.

Inheritance Tax (IHT) Rules for Deemed UK Domiciled Individuals

The deemed UK domiciled rules will be adjusted so that individuals who become deemed UK domiciled under the “15 out of 20 years” provision will lose that status just for UK IHT purposes once they become non-residents of the UK for more than four consecutive years rather than three consecutive years under the current rules.

Residential Property Held via Offshore Structures

UK residential properties owned via offshore structures will no longer be viewed as “excluded property” for UK IHT purposes and this will apply whether the offshore structure is owned by an individual or a trust.

The use of offshore close companies and foreign partnerships to protect an individual from UK IHT on UK residential properties will also be stopped.

The proposed changes should mean that the value of UK residential property is charged to UK IHT when it is passed on by an individual, no matter how that residential property is held. However, any debts that relate exclusively to the UK residential property will be deductible against the value of that property charged to IHT.

Residential Property Held via QNUPS

Properties held by a UK Registered Pension Scheme or a Qualifying Non-UK Pension Scheme are separately defined as excluded property and other protected retirement schemes are also currently excluded from the charge to UK IHT. It is not known whether these exclusions will be affected by the proposed new rules, but the Treasury has not indicated to date that they will be.

Offshore Trusts

The government confirmed at the 2015 Summer Budget that non-doms who have set up an offshore trust before they become deemed domiciled in the UK will not be taxed on trust income and gains that are retained in the trust or its underlying entities and such excluded property trusts will have the same IHT treatment as at present.

Those individuals who will become UK deemed domiciled from 6 April 2017, and who have assets that are currently ‘excluded property’ for UK IHT purposes should consider establishing an excluded property trust and transferring those assets into the trust before 6 April 2017 in order to protect those assets from UK IHT after the individual becomes deemed UK domiciled.

The various pieces of anti-avoidance legislation relating to capital gains tax, IHT and income tax will be amended to ensure that this protection is maintained, but that payments to deemed-domiciled individuals are treated as taxable payments.

Business Investment Relief (BIR) Rules for Non-Doms

The Business Investment Relief (BIR) rules introduced in April 2012 have enabled non-domiciled individuals to invest their non-UK income/gains in UK businesses without being penalised from a UK tax perspective and the Government is consulting on how it might maintain BIR to continue to encourage further investment in UK businesses.

Advice in Response to Reforms

We recommend that a thorough review is made of offshore assets and funds held by current non-domiciled individuals who will become deemed UK domiciled from 6 April 2017 to ensure that they benefit from these transitional provisions.

Summary of UK Domicile Reforms from April 2017

These are of course brief snap-shot comments on the proposed new rules and no substitute for tailored advice based on your personal circumstances. If you believe you will be impacted by the new rules our highly qualified team here at Tax Innovations are well placed to help you review your affairs.

Contact Tax Innovations

If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com