Following the announcement of the General Election, many of the planned reforms to the taxation of non-UK domiciled individuals (non-doms) and to structures holding UK residential property were dropped from the Finance Bill 2017.
Since the surprise announcement, we have been discussing the potential impact with clients and considering the most appropriate approach for them to take. In our view, it is very likely that the proposed reforms will be introduced in a later Finance Bill this year (in substantially the same form), taking effect retrospectively from 6 April 2017 or from some future date.
As a number of taxpayers acted on the basis of government announcements that the proposed legislation would take effect from 6 April 2017, it is likely that account will be taken of the 6 April 2017 date when (if any) legislation is re-introduced.
Re-cap on the key changes
The draft legislation introduced the following changes for non-doms:
1. The introduction of a deemed domicile rule for non-doms who had been UK resident for 15 out of 20 tax years. This would mean that long term UK resident non-doms would no longer be able to claim the favourable remittance basis of taxation. To soften the blow, a couple of reliefs were included:
- The ability to "cleanse" non-UK mixed funds so that the non-dom could identify and remit the underlying clean capital free of UK tax.
- A general rebasing of assets directly held by the non-dom as at 6 April 2017 for capital gains tax and certain income tax purposes.
Those relying on these reliefs to make tax free remittances should, in our view, delay doing so until the position is clearer.
2. The IHT year count for deemed domicile was to be aligned so that non-doms would also become deemed domiciled for IHT purposes after they had been UK resident for 15 out of 20 tax years, reduced from 17 out of 20.
3. Changes to the taxation of UK resident settlors of non-UK trusts.
- We suggest that settlors take no action that could potentially "taint" existing trusts under the rules contained in the draft legislation so that they do not potentially put themselves in a worse UK tax position.
- (Of course the proposed new "anti-conduit" rules affecting onward gifts of trust distributions had already been removed from the draft legislation published on 20 March and we do not know if these will also be re-introduced at a later stage.)
4. The extension of IHT to non-UK companies holding UK residential property and to the benefit of "relevant loans" where the borrowed funds were used to acquire or maintain UK residential property.
5. Those born in the UK with a UK domicile of origin (but having since left the UK and acquired a foreign domicile of choice) would be deemed domiciled during any future periods of UK residence.
All of these proposed changes have been dropped from the Finance Act 2017 in anticipation of the General Election.
If you require further information on anything covered in this briefing please contact your usual contact at the firm on 020 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2017