George Osborne’s emergency budget in July 2015 proposed a number of changes to curb tax allo-wances availabe to non-doms living in the UK. Under the current climate of maximising tax revenue and the view that to legally avoid paying tax is "morally wrong", we now see a new set of rules coming into force that will not only affect the affluent "few" non-doms who live in the UK but also those who are originally from the UK and have married (or not) a partner from another country and then move back to the UK.
The non-dom regime has been a long-standing principle in the UK. It applies to individuals who are not “from” the UK. The details are complicated but, broadly speaking, your domicile status passes from parents to their children. This has meant that someone might be born in the UK and inherits a non-dom status that they manage to not lose – even if they have never lived in the country of their domicile.
In addition, for someone who is born with a UK domicile it is possible to lose this and gain a "domicile of choice" - not an easy thing to do and complicated, but for many British expats it is entirely possible by living, working and marrying abroad. If you manage to do this then it means that UK Inheritance Tax is only payable on UK assets - not on other assets (property, investments, bank accounts, etc) that you may own outside of the UK.
For those non-doms who opt to pay tax on the "remittance basis" the advantages are that these individuals are outside the scope of UK inheritance tax except in relation to UK based assets. They have the option to be taxed on a “remittance” basis or a "fixed fee" each year instead of paying tax at the usual rates on their income. This means that their income from outside the UK is taxed only if it is brought to or used in the UK.
Commercially, the non-dom regime has been a powerful tool for the UK to attract entrepreneurs and wealthy individuals from overseas. The benefits have though been slightly reduced over time. Firstly, for inheritance tax purposes, individuals were deemed to be UK domiciled if they had spent at least 17 of the previous 20 tax years as resident in the UK.
More recently, annual charges have been introduced in respect of the remittance basis meaning that some long-term residents are now paying £90,000 every year in order to be taxed in this way.
The new rules take things significantly further. Firstly the concept of deemed domicile will be extended to income tax and capital gains tax and the qualifying period are reduced. Once someone (who has never held a UK domicile) has resided in the UK for 15 years (it was 17 years), they will not be able to claim the remittance basis and their worldwide assets will be within UK inheritance tax.
For those who had a UK domicile at birth and have successfully managed to lose this, once they return to the UK and become UK tax resident they become immediately UK domiciled. If we compare this to the current (outgoing) rules, a returning UK national who had attained a domicile of choice of a different country could have been UK resident for 17 years before becoming UK domiciled.
For those returning with a non-dom spouse then the situation becomes increasingly complex, it could be viewed that it is designed to "force" the nom-dom spouse (or partner) to make an election to become UK domiciled to benefit from the tax exemption on transfer of assets between spouses on the first to die or face potential tax charges on part of the transfer. Of course this election then subjects the spouses worldwide assets to UK inheritance tax!
Furthermore, legitimate inheritance tax planning structures used by non-domiciled individuals are under attack. In particular the use of “excluded property trusts” (that hold physical property) and the holding of UK residential property via offshore companies.
What can be done now?
It is important to note that these provisions will not take hold until April 2017. So the question must be, “what now” for individuals who are contemplating returning or moving to the UK. Firstly any structures for holding UK residential property will have to be considered. We await some clarification from the Government but there is an indication that they are going to attack existing structures. How they intend to do this without having retrospective effect (a key principle of the rule of law) will be interesting. After all, these structures were set up as legitimate tax mitigation arrangements so to now stipulate that they might be subject to inheritance tax appears unfair at best.
There could be the question as to how this will be policed. How is the government going to find out whether the non-resident, non-domiciled beneficial owner of a company based in a country which has no tax information exchange arrangements with the UK, has died - well the implementation of the Common Reporting Standard (CRS) in 2017 will solve that issue. Briefly the CRS will provide for the automatic exchange of information between governments on the assets held (bank accounts, investments, etc) by an individual in that country, so on the death of an individual these will be paid out and reported to the relevant national tax authorities of the deceased. From the list of countries that have agreed to this every economically significant jurisdiction has now signed up to the OECD initiative.
In terms of new arrivals to the UK, the tax regime is still attractive. 15 years is a long time so there is a good chance that entrepreneurs and wealthy individuals will still see the UK as a good place to base themselves. As ever, they will need to seek advice before moving to the UK to ensure they have the appropriate structures in place. They must also obtain appropriate advice on how the remittance basis works. It is not always as straightforward as people imagine and there are considerable intricacies particularly with regard to earned income (i.e. from employment or your own business).
Individuals from certain jurisdictions should still not be caught by the deemed domicile rules for inheritance tax purposes. This is due to the tax treaty these countries have in place with the UK that overrides any subsequent deemed domicile rules. This is a complex area and it is important (and within your interest) to seek advice on this matter.
In summary, the new rules will affect a number of individuals and not just the wealthy elite - however there are legitimate planning opportunities that are recognised by HMRC in the UK and can help reduce the amount of income, capital gains and inheritance tax levied on the UK resident.
If you are an investor or you have been considering immigrating to the UK, or you are currently living in the UK on a different passport, or you are originally from the UK and are returning after a long absence then now is the time to get your house in order.
For more information please email firstname.lastname@example.org