On 19th August HMRC announced plans to change the way it taxes non domiciled individuals (‘non-doms’) who live in the UK. These changes will be effective from 6th April 2017. The planned changes are most pressing for those non doms who have lived in the UK for close to 15 of the last 20 years and own assets outside the UK such as land; cash or shares. They are also however relevant to long-term UK resident non doms who will become deemed-domiciled in April 2017 (see below) because they have been resident in the UK for 15 of the past 20 years.
What makes you a non dom?
You will be a non dom if you come from a jurisdiction outside the UK and have not displayed an intention to leave that other jurisdiction permanently.
UK case law has held that a Canadian who came here in 1932 and married an English woman and lived here with his wife into the 1970s had not acquired a UK domicile because he had always said if his wife predeceased him he would return to Canada. He remained a non-dom for UK tax purposes because, in effect, he had not fixed voluntarily his sole or chief residence in the UK with an intention to live in the UK for an unlimited time. This case is still good law.
Background to the planned tax changes effective from 6th April 2017
An individual’s domicile is relevant for 3 UK taxes being inheritance tax (‘IHT’) Capital Gains Tax (‘CGT’) and income tax.
For IHT, for many decades the law has had a deeming rule that makes an individual deemed UK domiciled once that individual has been UK tax resident for 17 out of 20 years. The consequence is once X is IHT deemed domiciled s/he is within the scope of IHT on their worldwide estate whereas before IHT was only relevant to that individual’s UK estate.
The planned changes effective 6th April 2017 include
– extending the deeming rule to make an individual deemed UK domiciled for income tax; CGT and IHT purposes once that individual has been resident in the UK for 15 out of 20 years i.e. it will apply from the start of year 16. Affected individuals will be taxable on worldwide income and gains as they arise and will be within the scope of IHT on their worldwide assets.
– a special window for 1 year from 6th April 2017 for all UK resident non doms to ‘clean up’ their offshore mixed bank accounts/funds comprising cash. This will allow the offshore fund to be reconstituted into its constituent parts being e.g. capital gains; original capital (including gifts e.g. from parents) and income. Once the cash fund has been reconstituted it will facilitate bringing cash into the UK in a way that means the individual can bring clean capital before realised gains and realised gains before taxable income. This will reduce the individual’s exposure to UK taxes when cash from the prior mixed fund is brought here; and
– allowing an individual who becomes deemed UK domiciled on 6th April 2017 to rebase their non UK capital assets to their value on that date. CGT rebasing will not be available to individuals who become deemed domiciled after 6th April 2017.
An IHT planning opportunity for those close to becoming deemed IHT domiciled because they are approaching being UK tax resident for 15 out of 20 years
For IHT purposes non UK assets, called ‘excluded property’, can be kept outside the scope of IHT if the non dom owner settles these assets on trust before s/he has been UK tax resident for 15 out of 20 years. This statutory rule applies regardless of the form of the settlement and even if the settlor is amomg the beneficiaries. In other words s/he can keep non UK assets outside the scope of IHT and still benefit from them. The planning is effective regardless of whether the settlor’s domicile subsequently changes to that of the UK.
This is what I call a ‘blessed route’ meaning it is totally approved tax planning having its foundations in long established thought through tax policy.
About Robert Schon
In 2017 I will I have worked in the area of UK tax law for 40 years. Throughout I have had an interest in non dom planning. I worked in the City for 30 years before setting up this business in 2005 to offer advice on those areas of tax law that mean the most to me. These include tax and estate planning for my local community.