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Non-Dom Changes from April 2017

This information has been prepared by Sykes Anderson Perry Limited as a general guide only and does not constitute advice on any specific matter. We strongly recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of any information or advice given or omitted. The information herein does not constitute investment advice. Always consult an IFA if before taking any investment decision.

From April 2017 there will be a number of changes in the way non domiciled people are taxed in the UK which are summarised below. Now is a good time to review your tax affairs before the changes take effect.

The UK has traditionally applied a two-tier tax system, whereby “non-domiciled” individuals (“non-doms”) are taxed in a different manner to those whose domicile is within the UK.

Domicile is a word which can cause confusion. For UK tax purposes it means where your family background is. In general you obtain your domicile of origin from your parents and this can only change if you acquire a domicile of choice by living somewhere else with the intention of permanently remaining there.

It is quite rare for the UK authorities to recognise that a domicile of choice has been acquired. This has led to some scenarios which might seem perverse to many people where an individual has been living in the UK for most / all their life but because their parents were from a different country, they benefit from the non-dom regime.

The advantage of being a non-dom is that you can elect to have a more limited income tax charge in the UK. Rather than being taxed on your worldwide income as it arises, you can pay tax on a “remittance” basis so that your non-UK income is taxed only to the extent it is brought to or used in the UK. Further, when it comes to inheritance tax, only the UK assets of a non-dom are subject to this charge in the UK. If you are domiciled in the UK your worldwide assets fall within the charge.

This system has played a part in attracting wealthy foreigners to the UK but is perceived to be unfair in some quarters and, as a result, the Government is now seeking to address this. They are not proposing to abolish the regime, as had been suggested by some, but they are aiming to limit the period for which someone may benefit from the system.

Deemed domicile

For inheritance tax purposes only, there has been a provision in tax law which deems you to be UK domiciled once you have resided in the UK for a long period. Currently you must have resided in the UK for 17 of the last 20 tax years to acquire this deemed domicile.

The UK Government has decided to extend the “deemed domicile” provisions to income tax and capital gains tax. They are also altering the period to 15 out of the previous 20 tax years.

This will take effect from April 2017

This means that once an individual has been residing in the UK for at least 15 of the last 20 years, they will be treated as domiciled in the UK for tax purposes. They will have to pay income tax and capital gains tax on their worldwide income and gains on an arising basis. Their worldwide assets will fall within the scope of UK inheritance tax. The reliefs and exemptions which apply to UK domiciled individuals will need to be considered.

There are transitional provisions which may still provide planning opportunities for people who become deemed as UK domiciled in April 2017. Firstly, provided certain conditions are satisfied, there will be an option of re-basing assets for capital gains tax purposes, which can mitigate the tax payable on capital gains following April 2017.

Furthermore, it has always been the case that individuals can remit clean capital (funds which result from inheritance / gifts, or from income / gains which arose prior to the individual becoming UK resident) without any tax charge. When these funds became mixed with income and / or gains and were remitted to the UK, the UK tax rules provided that you were deemed to remit the income elements first so that the remittance was taxable. This will continue to be relevant going forward – if a non-dom has unremitted income or gains from previous tax years, they will be taxed if they remit these to the UK in future years. The transitional provisions give individuals the right to “un-mix” the funds during the 2017-18 tax year so that they can make sure they are remitting clean capital to the UK in the future.

Individuals should seek advice as soon as possible so that there is time to implement any pre-April 2017 actions.

Inheritance Tax – Residential Property

As well as the impact of the changes to the deemed domicile rules above, there are further changes to inheritance tax provisions.

Typically non-domiciled individuals have used overseas companies in order to hold UK property. This then means they are holding non-UK assets i.e. overseas shares rather than UK assets. This has meant that these are outside the scope of UK inheritance tax.

From April 2017 these structures will become subject to UK inheritance tax to the extent that the value is derived from UK residential property.

This is a very significant change to UK tax law. Although it was announced over one year ago, the Government has only very recently released its consultation paper on the subject and the draft legislation.

At the moment no transitional arrangements are suggested so the impact will be substantial.

Our recommendation is that individuals with these structures should review these now in order to establish what steps can / ought to be taken. It is not sensible to wait for the legislation to be finalised as this is unlikely to provide much time prior to April 2017 to action any re-structuring.

Very careful consideration is required here as re-structuring is likely to have implications for other taxes, most notably stamp duty land tax and capital gains tax.

What to do now?

Please feel free to contact us so that we can discuss your position in more details and consider the possible steps available to you.

September 2016