Following the majority vote to leave the EU, there was some speculation that the government would drop plans announced in the 2015 Summer Budget to reform the taxation of non-domiciliaries (popularly known as non-doms). This speculation was quashed by an announcement in the autumn statement that the proposed new rules are to go ahead. We look at what is going to change, how the tax position for non-doms is to be tightened and if you are affected, what you should do now.
What is a “non-dom”?
Domicile is a crucial legal concept in UK tax and succession law which can affect an individual’s liability to pay tax both during their lifetime and on their death. Broadly, each individual acquires a “domicile of origin” at their birth (generally, but not always, acquiring the same domicile as their father). This domicile can be altered if an individual takes up residence abroad with the settled intention to remain there for the rest of their life. This new domicile is known as a “domicile of choice”. An individual born in Britain to a British father who goes to live abroad can therefore become a non-dom for UK tax purposes as, if they acquire a domicile of choice elsewhere, they are no longer domiciled in the UK. Similarly, someone born abroad to a foreign father, unless they acquire a domicile of choice in the UK, will be a non-dom also.
How do you currently lose non-dom status?
A person can lose their non-dom status if they are deemed to be domiciled in the UK for tax purposes. This will currently occur after an individual has lived in the UK for 17 out of the last 20 tax years and applies for inheritance tax purposes only. Deemed domicile status does not depend on an individual’s actual domicile, meaning that they can retain their domicile of origin abroad but be deemed UK domiciled for inheritance tax purposes.
What are the tax advantages of being a non-dom?
The main advantages are:
- if you are a non-dom only your assets in the UK are subject to inheritance tax (IHT) while your foreign assets are not liable as they are excluded property for IHT purposes. Conversely, someone who is a UK domiciliary is liable to IHT on their worldwide property.
- In addition as a non-dom you are broadly only charged to income tax (subject to payment of an annual charge) on income actually remitted to the UK and not on your foreign income which is not remitted here. By comparison a person domiciled in the UK is liable to tax on their worldwide income whether remitted here or not.
Why is the government changing the rules?
It is perceived as a matter of fairness. The government is concerned that the tax position of non-doms who are long-term UK residents is too favourable as the current deemed domicile rules only apply to make a non-dom liable to IHT on their worldwide assets. They are not liable to pay other taxes on the same basis as domiciled UK taxpayers. Some concern was also expressed during the 2015 general election campaign about individuals born in the UK, with a UK domicile of origin, who move abroad and acquire a domicile of choice elsewhere, but retain that non-dom status when living in the UK and so qualify for favourable tax treatment.
A further concern centres around the fact that non-doms have in the past sought to avoid a charge to IHT on their real property in the UK by owning the property through an offshore trust or company structure.
How are the rules changing?
Two consultations on proposed legislation have been issued since the summer budget and state that three main changes will be included in the 2017 Finance Bill:
- UK properties owned by non-doms through a trust and/or company structure will be brought within the charge to IHT by providing that the interest in the offshore structure will no longer be excluded property (which is not liable to IHT), to the extent that the value of the interest is derived, directly or indirectly, from residential property in the UK.
- Non-doms will become deemed UK domiciled for ALL tax purposes once they have been resident here for 15 out of the last 20 tax years. This is a reduction for IHT purposes from the existing 17 out of 20 years and is an extension of the deemed domicile rules from IHT to all UK taxes.
- Individuals born in the UK with a UK domicile of origin, who acquire a domicile of choice elsewhere, will become deemed UK domiciled for all tax purposes when living in the UK. For IHT purposes there will be a grace period so they will only become deemed domiciled for these purposes if they have been resident for at least one of the two tax years immediately preceding the event giving rise to an IHT charge.
What should non-doms do now?
- Given that the IHT advantages of an offshore company and/or trust structure to hold UK property for non-doms are to end, and these structures can be expensive to run as well as attracting an ATED charge, some affected individuals may now consider dismantling these entities. The government has confirmed that there will be no incentives given to encourage this.
- Those individuals who will become deemed domicile under the new rules to be introduced next year should take advice as to the best way to arrange their affairs .For example, it is still possible for a non-dom (who is not deemed domiciled) to set up a trust to ensure that their overseas assets are protected from an IHT charge once the individual becomes deemed domiciled in the UK. Given the timescales involved, if action is to be taken it should be carried out as a matter of urgency.
Please contact Anthony Fairweather if you wish to review your circumstances in the light of these changes.