IMPORTANT NON DOM UPDATES
NON UK DOMICILED INDIVIDUALS – IMPORTANT UPDATE
Further to the Summer Budget on 8 July 2015 and an extended period of consultation, there are now more details available and draft legislation has now been published with a view to the new rules taking effect in April 2017.
The new rules (as they are currently drafted) are summarised below.
UK DOMICILES OF ORIGIN
It has been confirmed that individuals born in the UK with a UK domicile of origin will no longer be able to claim non-UK domicile (‘non-dom’) status for tax purposes while they are living in the UK, even if they had previously left the UK and acquired a domicile of choice in another country.
NO MORE LONG-TERM NON-DOMS
Further, it has now been confirmed that non UK doms will be deemed to be UK domiciled, for all tax purposes, once they have been resident in the UK for at least 15 of the past 20 tax years (the ’15/20 test’).
Individuals who become deemed domiciled will, whilst UK resident, be taxable on their worldwide income and capital gains on an arising basis with no option to use the remittance basis. They will also be subject to inheritance tax on their worldwide estate.
An individual who has acquired deemed domiciled status would only lose that status if he or she becomes non-UK resident and remains so for at least six years.
While the latest announcements significantly restrict the ability of non-doms to benefit from a preferential system/tax treatment, they also offer opportunities for effective planning. We set out the key points below.
TRANSITIONAL ARRANGEMENTS AND PLANNING: REBASING
Individuals becoming deemed UK domiciled on 6 April 2017 under the 15 out of 20 year rule will be able to benefit from rebasing of their foreign situated capital assets, to their market value on 5 April 2017, for CGT purposes. This is effectively a tax free uplift for foreign assets and where the original funds used to purchase the asset were clean capital, the entire gains can be remitted to the UK, tax free.
Rebasing will apply to a disposal automatically unless the taxpayer makes an election for the rebasing not to apply.
WHO QUALIFIES?
Rebasing will only apply to individuals who have paid the remittance basis charge in relation to any year before 5 April 2017 and who become deemed domiciled under the 15 out of 20 year rule on 6 April 2017.
Rebasing will not be available for individuals who become deemed domiciled after 6 April 2017.
Individuals born in the UK with a UK domicile of origin are specifically excluded from benefiting.
WILL REBASING APPLY TO ALL FOREIGN ASSETS?
The foreign asset must not have been situated in the UK at any time in the period 16 March 2016 and 5 April 2017.
Rebasing will only apply to unrealised gains in assets held directly. Assets held within overseas structures such as trusts or companies will not benefit from the uplift.
Planning point:
Many non doms reverted to using the Arising Basis when the Remittance Basis Charge was introduced. These people will be prohibited from Rebasing unless they elect to use the Remittance Basis in either 2016/17 or an amendment is made to an earlier year to make a remittance basis claim. If you are going to be deemed UK domiciled on 6 April 2017, consideration should be given to whether it is worth paying a remittance basis charge in order to benefit from the tax free uplift on your foreign situs assets.
TRANSITIONAL ARRANGEMENTS AND PLANNING: CLEANSING OF MIXED FUNDS
BACKGROUND
Many non-doms may have existing mixed funds where it would be beneficial to segregate out the various components of that fund. A common scenario is having a single, non UK bank account containing a mixture of capital, income and gains arising from different sources and spanning several tax years. Where these funds are held in a single account rather than segregating each source/year individually, this would constitute a mixed fund.
The new rules will allow qualifying individuals to rearrange and separate their mixed funds held in non-UK bank accounts into their constituent parts e.g. the income, capital gains, and ‘clean’ capital elements. This would potentially be of benefit to any individual where the remittance basis has been claimed.
The Government have called this ‘unmixing’ of mixed funds “cleansing”.
WHO QUALIFIES?
Any non-dom who has claimed the remittance basis at any point between 2008/09 and 2016/17 inclusive.
There is a two year period, beginning on 6 April 2017, during which the ‘cleansing’ must be done.
Individuals born in the UK with a UK domicile of origin are specifically excluded from benefiting.
WHAT DOES CLEANSING APPLY TO?
- Money held outside the UK.
- Deposits held in overseas bank accounts.
- Similar non-UK accounts capable of being split into different accounts.
- Money from the disposal of non-UK situs assets (e.g. investment fund).
WHAT IS THE IMPACT OF THE CLEANSING OF MIXED FUNDS?
The current remittance basis rules governing mixed funds (i.e. most commonly non-UK sited bank accounts consisting of a mixture of so called ‘clean’ capital, income and capital gains) dictate that taxable income and capital gains of a given tax year are treated as remitted (and therefore become taxable in the UK ) before non-taxable ‘clean’ capital. The current rules also prevent the separation of these elements into different offshore accounts. Therefore, unless separate accounts have been used for each source of income, Non-doms will find they are unable to make remittances of money to the UK without incurring a UK tax charge as their offshore ‘clean’ capital is ‘trapped underneath’ their foreign income and gains.
This opportunity to cleanse mixed funds will only be available during the period 6 April 2017 and 5 April 2019 and will apply to nominated transfers of money only from a mixed account to another account.
Cleansing will not be available where an individual is unable to determine the component parts of their mixed fund. The mixed fund rules have always required a remittance basis user to track and monitor their offshore funds in order to benefit from the remittance basis, and this will remain the case even under transitional arrangements.
UK PROPERTY AND TRUST STRUCTURES
From 6 April 2017, all UK residential property, including properties owned through a UK Trust and/or Company structure will now fall within the UK’s Inheritance Tax (IHT) net. This means, as a UK situs asset, the value of the UK property (less associated debt) will automatically be an asset in an individual’s death estate, or a Chargeable Lifetime on settlement of a new Trust.
For individuals who own UK property through such a structure, it is recommended they seek advice to determine any benefit in continuing the structure, and the tax effects of winding the structure up.
TRUSTS SETTLED BY NON UK DOMICILED INDIVIDUALS
Various pieces of anti-avoidance legislation exist in the UK, to bring into UK taxation, income and/or gains received by a non resident trust, by UK resident settlors and beneficiaries. It was previously possible, due to the wording of some of the legislation, for UK resident settlors of non UK Trusts, to avoid taxation in the UK on Trust income because of their non UK domiciled status.
Whilst the new deemed domiciled rules will change this, new legislation is being inserted to introduce the concept of a “protected trust”. Broadly, this is a Trust settled by a non-domiciled individual which is not settled further, directly or indirectly, after 5 April 2017.
The trust legislation which attributes gains of the trust, to beneficiaries receiving a capital payment or benefit from the trust, is being adjusted so that it will no longer be possible to avoid this by arranging to make capital payments to non UK resident beneficiaries before UK resident beneficiaries. Furthermore, the definition of the word ‘family’ will be widened to avoid distributions being made to distant relatives in order to reduce the tax burden.
PLEASE NOTE THAT THIS IS FOR GENERAL REFERENCE ONLY AND SHOULD NOT BE ACTED UPON WITHOUT ADVICE, IT IS NOT AN ADVICE NOTE AND THEREFORE YOU SHOULD TAKE ADVICE SPECIFIC TO YOUR OWN TAX SITUATION.