Non-UK Domiciled Taxpayer Changes
Further to our article on 15 September 2016 (link), and despite calls to delay their introduction, HMRC have now issued draft legislation clarifying many of the fast approaching changes to the taxation of long term non-UK domiciled individuals.
As expected, these changes are generally as originally proposed, but there are some new clarifications, both welcome and not!
The 15/20 deemed domicile rule
From 6 April 2017, any UK non-domiciled individuals, who have been resident in the UK in at least 15 of the last 20 tax years, will be deemed to be UK domicile for all taxes. They will therefore not be able to access the favourable remittance basis of taxation, and will be taxed on worldwide income, gains and on their worldwide estate on death.
Prior income and gains untaxed due to the remittance basis rules, will continue to be taxable when remitted.
The 15 year clock may be reset by leaving the UK for 6 years, although there are more restrictive rules for non-domicile individuals who were born in the UK and have a UK domicile of origin.
Rebasing of offshore assets
There is a one off opportunity only for those individuals becoming deemed domicile on 6 April 2017 to uplift the base cost of their non UK situs assets to the value at 6 April 2017, thereby only being charged on the gain that arises after that date. Assets held within company or trust structures will not benefit from this rebasing. There are a number of specific conditions that need to be fulfilled to qualify, including the requirement to have paid the Remittance Basis Charge in any year prior to April 2017.
Cleansing of mixed funds.
A major issue for non-domicile individuals currently is the ordering of remittances to the UK for mixed funds, i.e. where relevant foreign income and gains have been added to the same account as clean capital and are treated as remitted first. There is an opportunity, over a two year period only, to segregate your clean capital to enable that to be remitted first going forward.
There is specific protection for offshore trusts to maintain the exclusion of the assets held by them from the charge to inheritance tax subsequent to the settlor becoming deemed domicile. This protection will, however, be lost, if that settlor (or another trust of which he is settlor) adds property or funds to the trust after 6 April 2017. Also after 6 April 2017 it will no longer be possible to “wash out” chargeable gains by making distributions to non-resident beneficiaries first.
IHT on residential property
Our previous note set out the proposed rules in some detail. There have been various clarifications, mainly some targeted anti-avoidance which make it much more difficult to manage exposure to Inheritance Tax on UK residential property.
Business Investment Relief
It is expected much more use will be made of this relief to avoid tax on remittances for funds used to invest in qualifying businesses.
Action needed before 6 April 2017?
Non-UK domiciled individuals who can settle an offshore trust may wish to consider doing so before 6 April 2017 in order to obtain the IHT protection on offshore assets beyond 6 April 2017.
Trustees of existing trusts should consider making distributions to non UK resident beneficiaries ahead of 6 April 2017 while the opportunity remains to wash out gains, and to a limited extent, in certain circumstances, offshore payments to UK residents.
For those able to benefit from rebasing, it may prove prudent to retain assets they would otherwise consider selling beyond 6 April 2017.
Cleansing of funds from 6 April 2017 can allow access to clean capital, and although there is a two year window, earlier segregation combined with the possible use of trusts may be beneficial.
The payment of offshore dividends or bonuses before 6 April 2017 may be beneficial for those claiming the remittance basis for the final year.
Structures holding UK residential property should be reviewed to consider the effects of the ATED charge and IHT exposure.
These changes represent a significant change in the taxation of non-UK domiciled individuals, and there are some planning opportunities that would require action now. In any event we would strongly recommend anyone effected by these changes now, or in the future, review their financial arrangements urgently.