Deemed domicile consultation appears, disappears and reappears

The Treasury consultation document, Reforms to the taxation of non-domiciles came and went briefly on 22 September and has now reappeared. Apart from changes of dates, including the deadline for responses, nothing has changed, not even the typos

Deemed domicile after residence in 15 out of the preceding 20 years

The Consultation Document sets out the proposed test of having been resident in (not “for” or “throughout”) a year, so any split year would count as one of the 15 years. Therefore to break the deemed domicile an individual would have to be non-UK resident for six years.

The 20 year clock would start in the first year of UK-residence for all, including minors, so a 20 year old who was not UK-domiciled under general law could be deemed UK-domiciled before reaching the age of 21.

Deemed domicile would only apply to the individual concerned: the fact that their parent(s) were deemed domiciled would not make them deemed domiciled as well.

But not for UK-born ex UK-domiciliaries

A particularly harsh aspect of the proposals is that anyone who was both born and originally domiciled in the UK will not be subject to the 15 year rule. They will be deemed UK-domiciled in any year in which they are UK-resident, regardless of whether they have acquired non-UK domicile as a matter of law. The condoc does not close the door to any relaxation of this rule, but only where the period of UK-residence is clearly intended only to be temporary, e.g. attending a sick or dying relative, on a working secondment or forced to remain in the UK by circumstances beyond control.

Remittance basis charge

The remittance basis charge (RBC) would not be abolished under the present proposals but fifteen out of twenty years’ residence would make a taxpayer ineligible for remittance basis, so there will be no £90,000 RBC for anyone who has been resident for 17 out of 20 years in 2017/18. However, the charge remains in place for 2015/16 and 2016/17.

Capital loss election not needed

Under the present rules, a non-dom who claims remittance basis cannot claim relief for overseas capital losses unless he makes an election under TCGA 1992 s 16ZA. Deemed domiciles would be taxable and relievable on offshore gains and losses alike, without claim and regardless of any past election.

Trusts

There is no proposal to remove the IHT status of a trust set up by a non-dom that holds non-UK property: these ‘excluded property trusts’ would remain tax-favoured if the settlor became deemed domiciled in the UK.

Will changes favour UK-domiciled settlors?

There is no proposal to abolish the settlor-interested and transfer of assets abroad (ToA) legislation either. This will create a dilemma for would-be settlors who might be better off claiming to be UK-domiciled regardless of whether in strict law terms they are. The proposal is that all distributions to UK-resident beneficiaries from offshore settlements created by non-doms should be taxed as income distributions: there is no suggestion that matching rules would apply to any such distributions, meaning that income, gains and possibly even the original capital would all be liable to being taxed as income when distributed to a UK-resident beneficiary.

Therefore a settlor of an offshore trust who did not claim to be non-domiciled might find it more tax effective to accept a settlor-interested charge restricted to actual income or gains instead of seeing the entire property of the trust subject to the recipient’s marginal income tax rates when received by a UK-resident beneficiary.

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