At last, the long wait is over... but not quite. The government published a further consultation document ('con doc') on 19 August relating to the proposed changes to the taxation of non-doms. The con doc poses a number of specific questions but also provides a bit more detail on the future changes, while leaving many other questions unanswered.
What comes out of the con doc?
A change is gonna come
Despite some rumours to the contrary, the government is committed to introducing the changes with effect from 6 April 2017.
The 15/20 year rule
Non-doms who have been resident in the UK for 15 out of 20 tax years will become deemed domiciled in the UK for all tax purposes ('the 15/20 year rule'), subject to some mitigation, as set out below.
There will be no exceptions to the 15/20 year rule for non-dom minors who grew up in the UK, nor in respect of split years of residence in the UK.
To determine UK residence for these purposes, the statutory residence test will not be used for tax years before 6 April 2013. Instead, the (non-statutory) residence rules applying before then will be used to determine an individual's residence for those earlier years.
To shed a deemed domicile, individuals must be resident outside the UK for six tax years, even if they leave the UK before 6 April 2017, but there are some exceptions:
- Those who became temporarily non-resident and realised offshore gains and could have relied on the remittance basis will continue to be able to do so despite becoming deemed domiciled under the 15/20 year rule, provided they "were non-resident before the announcements were made" (presumably 8 July 2015, the date of the Summer Budget). It is assumed the same will apply in respect of certain income receipts also subject to tax on the return of a temporary non-resident, though the con doc is silent on this point.
- For inheritance tax ('IHT'), if a non-dom who is deemed domiciled under the 15/20 year rule leaves the UK, he will cease to be deemed domiciled after being non-resident for four consecutive years (presumably tax years). The con doc is silent on the point but it is assumed that if the individual returns to the UK in the fifth or sixth year (and thereby becomes deemed domiciled under the 15/20 year rule), transfers of value made in the fifth or sixth year would be within the scope of IHT.
- Where a non-dom spouse elects to be deemed domiciled for IHT purposes in order to benefit from the spouse exemption (typically on the death of a UK domiciled spouse), he or she will continue to be able to lose the deemed domiciled status for IHT after a four year period of non-residence.
Those who become deemed domiciled under the new rules on 6 April 2017 may rebase their overseas assets as long as they were directly held on 8 July 2015, the date of the Summer Budget. On a subsequent disposal, only the post-5 April 2017 gain will be taxable (on the arising basis), not the pre-6 April 2017 gains, which can be remitted to the UK without a tax liability, provided the asset in question was originally acquired with clean capital. If the asset was acquired with untaxed foreign income or gains, then the income or gains will be subject to tax if remitted to the UK. To benefit from this rebasing, the taxpayer must have paid the remittance basis charge ('RBC') "in any year before April 2017". (Query whether this means "in respect of any tax year before April 2017" because the RBC for tax year 2016-17 need only be paid by 31 January 2018.)
Rebasing will not apply to assets held in trust, or to non-doms who become deemed domiciled after 6 April 2017.
All non-doms, including those becoming deemed domiciled under the 15/20 year rule who have offshore funds comprising a combination of clean capital and (untaxed) foreign income and gains will have a grace period of "one year from April 2017" (presumably running from 6 April 2017 to 5 April 2018) to rearrange their mixed funds to enable them to separate them into their constituent parts (of clean capital, foreign income and foreign gains) by moving them into separate accounts. At any time thereafter, they can then remit clean capital from the segregated clean capital account without being subject to income tax or capital gains tax (CGT) on remittance (as the current rules entail).
Where the mixed funds consist of an asset (as opposed to a bank or similar account), the individual can sell it during the grace period and segregate the sale proceeds into their constituent parts. The con doc gives an example of a valuable painting. Presumably, the same applies to other sorts of assets, such as offshore collective investments.
There are a few restrictions in relation to mixed funds:
- Those born in the UK with a UK domicile of origin who acquire a foreign domicile of choice then become UK resident cannot use this relief.
- To use this relief, non-doms who have become deemed domicile must have "used the remittance basis of taxation" (though the con doc does not specify that they also need to have paid the RBC).
- Individuals who are unable to determine the component parts of their mixed funds will not be able to avail themselves of this relief.
The proposal to charge a flat rate of tax on benefits received from offshore trusts has been dropped, so they will be taxed by reference to actual trust income and gains.
Non-doms who set up offshore trusts before becoming deemed domiciled under the 15/20 year rule will not be taxed on the trust gains or foreign trust income as long as they are retained in the structure.
For CGT, once the settlor has become deemed domiciled, as long as no benefit is received by the settlor, his spouse (presumably including civil partner) or their minor children (including stepchildren), the gains realised by the offshore trustees will not be subject to CGT under the new rules. However, if the settlor, his spouse (or civil partner) or their minor children receive a benefit, then the settlor will be liable for all trust gains (presumably realised in that and subsequent tax years).
The con doc states that "settlors who become deemed domiciled will not be taxed under section 87" (which matches trust gains with benefits received). Does this really mean what it says? It is assumed that where there is a distribution (or other benefit) received by the settlor who has become deemed domiciled, there will still be scope for imposing a CGT charge in relation to trust gains realised before the settlor became deemed domiciled.
For income tax, the con doc is confused - or, at least, it confuses the author of this briefing! It seems that where a benefit is paid to the (deemed domiciled) settlor, his spouse (or civil partner, presumably), minor children or "other relevant person" (presumably including minor grandchildren, certain closely held companies and trusts) and there is foreign income arising when the settlor is deemed domiciled (though the con doc does not actually say this), then the benefit can be matched with foreign income and the settlor (rather than the recipient) will be taxed on the foreign income so matched.
Reading between the lines, it seems that foreign income that arose in the trust before the settlor became deemed domiciled and that has been segregated will not be matched with benefits under the new rules.
In the absence of benefits being received (as above), a settlor will not be subject to tax on foreign income from structures underlying a trust once the settlor has become deemed domiciled.
If there are additions to the offshore trust (or foreign structure) once the settlor has become deemed domiciled, it will lose its protected status for CGT purposes and (though the con doc is less explicit) for income tax purposes.
Those born in the UK with a UK domicile of origin who acquired a foreign domicile of choice will become deemed domiciled on becoming UK resident and the protections outlined above will not apply to them.
Once a non-dom becomes deemed domiciled, it seems that any foreign losses may be set against UK or foreign capital gains but this does not apply to foreign capital losses realised before the individual became deemed domiciled.
A non-dom's foreign income and gains below £2,000 is not subject to tax unless remitted to the UK. The non-dom does not need to be a remittance basis user to benefit from this. Once the non-dom becomes deemed domiciled, he will still be able to use the remittance basis for foreign income below £2,000 a year.
The consultation will be open up to 20 October 2016 and draft legislation will be published later in the year though there is no indication of when.
With changes to the IHT treatment of UK residential property also coming into effect on 6 April 2017, the first quarter of 2017 will be a busy period. Non-doms likely to be affected by the new regime should review their circumstances and consider seeking advice.
If you require further information on anything covered in this briefing please contact Nick Dunnell ([email protected], 020 3375 7573) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Private Wealth Matters page on our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, August 2016