The proposals, which have gone through successive versions, now seem to be close to a final form. It has been confirmed that the changes will take effect from 6 April 2017 but with further changes flagged for 6 April 2018. In a very general sense they reduce the scope of the non dom tax breaks in the UK, in particular by deeming long term UK residents to be UK domiciled if this would not otherwise be the case. Bad for affected taxpayers therefore. However they also contain some transitional provisions which are extremely good for affected taxpayers.
Revised draft legislation published last week substantially reflects the pre-election version and includes:
- Deeming an individual to be UK domiciled for all tax purposes once they have been resident in the UK for 15 of the previous 20 years (the 15/20 rule);
- A new deemed domiciled rule for individuals who were born in the UK with a UK domicile of origin and who, having acquired a domicile of choice elsewhere, return to the UK. Broadly, such individuals will be treated as UK domiciled for tax years in which they are resident in the UK (the ‘returners’ rule).
- Taking away inheritance tax benefits previously associated with the use of corporate structures to hold UK residential property. The new rules treat the interest in the holding entity as subject to UK IHT. Previously it could be exempt in the hands of a non-UK domiciliary.
These changes are bad for affected taxpayers who need to look at steps to mitigate their impact. However a series of transitional rules create completely new planning opportunities for many of the same taxpayers which include:
- For those who become deemed domiciled on 6 April 2017 as a result of the 15/20 rule the rebasing of directly-held foreign assets to their market value on 5 April 2017 for capital gains tax purposes.
- For anyone who has claimed the remittance basis in the past due to having a non UK domicile of origin, the opportunity in 2017-18 and 2018-19 to segregate mixed funds of capital, gains and income, into their different elements and to remit the capital element tax free to the UK (‘cleansing relief’).
- ‘Grandfathering’ or transitional protected status for non-UK resident trusts settled by non-UK domiciliaries prior to becoming UK deemed domiciled. The benefits of protected status include the ability to roll up capital gains and non-UK source income within the trust, free of tax until the receipt of a benefit by the settlor or other beneficiaries.
Somewhat counter intuitively these rules will in some circumstances enable non domiciliaries to improve their UK tax situation.
Whilst, due to continuing political uncertainty in the UK we cannot assume that the provisions will be enacted, the expectation is that they will be. Additional changes to the taxation of trusts (including certain anticipated anti-avoidance provisions) are also expected in a later Finance Bill to take effect from 6 April 2018.
Affected taxpayers all need to think about how to reposition themselves as a result of these changes to minimise the effect of the restrictions in reliefs and to take advantage of the new opportunities.