The non-domicile consultation was finally released last week and contains details on the proposed changes which are expected to take effect from April 2017.
There are no significant alterations to the proposals that were originally announced at the Summer Budget and the consultation document merely provides some additional detail. However, some of the points remain outstanding so it will still be difficult to plan with complete certainty until the rules are finalised.
It is concerning that the consultation will be ‘short’, only running for 6 weeks, given how significant the changes are and the impact they will have on the UK's personal tax regime for the years to come. We are urging the Government to extend the consultation period so that professional firms and the institutes have sufficient time to input, and that HMRC considers in detail the various options for the final legislation.
In the consultation that has been released, there are four key areas to the current non-domicile rules which will be subject to change –
- The introduction of a “deemed domicile” rule for all taxation purposes for individuals who have been resident in the UK for 15 out of the past 20 UK tax years;
- The taxation of offshore trusts will undergo radical changes, the details of which are not yet clear, but the existing rules are expected to be significantly relaxed and simplified;
- Individuals who were born in the UK (to UK domiciled parents) and who subsequently acquire a ‘domicile of choice’ in another country will not be able to claim non-domicile status if they return and subsequently become resident in the UK; and
- UK residential property owned either directly or indirectly (such as through an offshore trust/company) will be brought within the scope of UK inheritance tax ("IHT") – this issue will be subject to a separate second consultation and any changes will not take effect until April 2018 (when they were originally scheduled for April 2017).
It is interesting that the IHT changes to UK residential property will be delayed until April 2018 and we suspect that the Government will struggle on how they will enforce this change and collect the tax from overseas persons, similar to the Annual Tax on Enveloped Dwellings ("ATED") and non-resident capital gains tax. Therefore, it appears obvious that the Government needs more time to construct the exact collection mechanism.
There are some interesting points of detail contained in the consultation which were not specifically mentioned at the time of the Summer Budget, such as a non-domiciled individual will be able to ‘restart the clock’ for the new 15-year “deemed domiciled” rule by becoming non-resident for 6 complete tax years. The new 15-year “deemed domiciled” rule represents a marked change to current “deemed domicile” rule for IHT purposes, where a non-domiciled individual is subject to IHT on their worldwide estate once they have resident in the UK for 17 out of the previous 20 tax years. The £90,000 remittance basis charge will be abolished from April 2017, having only been announced last December and being in effect for two tax years (further suggesting that these latest announcements concerning the non-domicile rules were purely a reactionary measure as a result of the election debates).
The most welcome aspect to the proposed changes is the relaxation and simplification of the rules to the taxation of offshore trusts. The exact of detail of these changes has not been published, but assuming that the final rules take the form that the consultation suggests, offshore trusts will be a valuable planning structure for all non-domiciled individuals, and effectively preserve the tax benefit of the non-domicile status beyond 15 years.
One aspect that needs to be addressed in the consultation, but isn’t mentioned, is the urgent need to simplify the existing non-domicile rules. In particular, consideration should be given to simplifying the ‘mixed fund’ provisions and the situation where a person becomes “deemed domiciled” and how they can and at what tax cost bring monies to the UK. There needs to be a provision that is simple, fair and encourages non-domiciled individuals to bring money to the UK, which will naturally benefit the economy and increase revenue for the Treasury.
We remain hopeful that the Government will listen to calls to lengthen the consultation period and delay the commencement changes to allow adequate time to get these rules right, which will shape the UK’s personal taxation regime for years to come, and maintain and enhance the attractiveness of the UK to the international community.
You can read Blick Rothenberg’s summary of the non-domicile consultation here.