KEY POINTS
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The non-dom consultation was published on 30 September
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This will have a huge impact on non-domiciled individuals who have been resident in the UK for at least 15 of the last 20 years
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Individuals will need to consider the impact for income tax, capital gains tax and inheritance tax
In the Summer Budget it was announced that there would be significant changes to the way non-domiciled individuals (“non-doms”) are taxed in the UK. The consultation document (“condoc”) outlining the initial proposals was published on 30 September. The consultation period is very short, closing on 11 November, and the legislation will be included in Finance Bill 2016.
The condoc is relatively light on detail but the key principles of the reforms are made clear. Essentially, the government plans to introduce a deemed-UK domiciled status for individuals who have been resident in the UK for at least 15 out of the last 20 tax years, beginning on 6 April 2017.
Once an individual has a deemed-UK domicile, they will retain their new domicile status for as long as they remain in the UK. Should an individual leave the UK, they will still retain their deemed status until they have been non-UK resident for at least 6 full tax years. Should 6 tax years pass before they return to the UK as a UK resident then they will have another 15 years until they are deemed-UK domiciled once more. This ‘6 year rule’ could have serious implications for inheritance tax (“IHT”) purposes as during an individual’s period of absence they will remain exposed to IHT in the UK on their worldwide estate.
One of the major changes is that the current system for taxing offshore trust distributions to non-doms by reference to the income and gains within the structure is to be scrapped. Instead, non-doms who have been UK resident for 15 years by 2017 will be taxed on the value of the benefits received from the trust. We don’t know what this means yet but it seems likely that all trust distributions will be subject to income tax rather than the current possibilities of income tax, CGT or, on occasions, no tax at all. The condoc also hints that the government is considering applying this new system to non-doms who haven’t yet reached 15 years of UK residence; perhaps this is seen as a good opportunity to reform a very complex tax regime. However, the government are still considering these issues and are yet to provide more detail on how this would be implemented universally.
The condoc also confirms that the government does not propose to change the rules which will apply to excluded property trusts for IHT purposes whereby a trust will remain an excluded property trust even when the settlor becomes deemed-UK domiciled. It would appear that this is a sensible compromise to encourage non-doms to remain in the UK.
However, it’s very important to be aware that this compromise won’t apply to those who were born with a UK domicile of origin and then acquired a domicile of choice overseas and later return to the UK. For those people, that the government regards as “boomerang” non-doms, their UK domicile of origin will be revived as soon as they become UK tax resident again, with no protection for any offshore trusts they established when they acquired non-UK domiciles of choice. The effect of this is that all income and gains of the trust will be taxable on an arising basis if the settlor who is returning to the UK is regarded as having retained an interest in the trust.
The other major effect is that any trusts settled with non-UK assets by the individual while they were non-UK domiciled will cease to be excluded property trusts. This means that the worldwide assets of the trust will suffer IHT charges every 10 years and when assets leave the trust in some circumstances.
The overall policy objective is to tax every payment or benefit that a non-dom receives from an offshore trust on a worldwide basis once they are deemed domiciled. On a plain reading of the condoc this would appear to mean that in some cases deemed domiciled individuals will be taxed more heavily on trust distributions than a UK domicile receiving an identical trust distribution. This is because the condoc does not say the new regime for taxing trust distributions will apply to those people who have never been non-UK domiciled.
It will also be interesting to see how the new regime will treat distributions from overseas trusts where the settlor was non-dom but is now deceased. There is nothing in the condoc to suggest the tax treatment of distributions in such situations will change from the current regime. If so, that could leave newly-deemed UK domiciles in the odd position of being taxed on every distribution from a trust they settled personally, even if it was settled with clean capital before they became UK tax resident, and having the potential to receive tax free distributions from a trust settled by a non-domiciled relative.
We expect that all non-doms will have to review their options very carefully and decide whether it is feasible to restructure their affairs to allow them to remain in the UK, consider leaving before they become deemed domiciled with a view to returning later or leave permanently. Those who want to remain in the UK will focus on the creation of excluded property trusts and other structures that preserve some benefits of the current regime in the window available to them before they become deemed domiciled.