What now for non-doms?
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George Osborne’s emergency budget was always likely to target non-doms to an extent. Although never likely to completely abolish the non-dom status as the Labour party had promised to do, the Conservatives have introduced some provisions which are extremely punitive to both resident and non-resident individuals who are not domiciled in 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 inherit a non-dom status which they manage to not lose – even if they have never lived in the country of their domicile.
The advantages are that these individuals are outside the scope of UK inheritance tax except in relation to UK based assets and they have the option to be taxed on a “remittance” basis. This means that much of 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 is reduced. Once someone has resided in the UK for 15 years, they will not be able to claim the remittance basis and their worldwide assets will be within 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” and the holding of UK residential property via offshore companies.
There must be a risk that this has an impact on the prices of high end London properties which are almost exclusively owned by non-domiciled individuals.
What can be done now?
It is important to note that these provisions will not take hold until 2017. So the question must be, “what now” for individuals. 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 is also 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. Usually these structures will involve a nominee shareholder and there will be no public information about the true owner of the company. Does the UK Revenue have sufficient resources to investigate and discover all these details?
What about long-term residents of the UK? Will they stay in the UK once they lose the right to claim the remittance basis? The Government will assume that, once an individual has resided here for at least 15 years, they will feel like the UK is their home and so they are unlikely to leave because of tax reasons. There will be a lot of tax planning by individuals in their 14th / 15th years of residency though.
Some individuals will probably decide that they can become non-resident. The statutory residence test sets our clear parameters in terms of days which can be spent in the UK whilst remaining non-resident. Although these are not particularly generous, at least people will have certainty.
Those who have acquired a deemed domicile in the UK will retain this until they have been non-resident for five years. The current literature does not give any detail about what will happen to people with UK domiciles of origin who have been residing outside the UK for the long-term. These individuals will still have some uncertainty as to whether they have established a domicile of origin in another country – this is unhelpful.
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 be the deemed domicile rules for inheritance tax purposes. This is due to the tax treaties these countries have in place with the UK which override any subsequent deemed domicile rules. This is a complex area but those with French, Indian, Pakistani or Italian backgrounds should take specific advice on the potential benefits.
The fact though that the non-dom status has not been abolished is helpful as the UK can continue to use the regime as a way of attracting individuals to move here. However, more thought is required now for people in this position. Those approaching the 15 year threshold will need to consider their position very carefully.