The British government’s summer Budget announced yesterday includes two momentous measures affecting non-domiciled residents from April 2017.
The first is an end to the indefinite nature of non-dom status. At the moment, a qualifying non-domiciled resident can elect for the remittance basis of taxation, under which they do not pay tax on income and assets kept offshore. After a certain length of time as resident they must pay an annual remittance basis charge (from GBP30,000 to GBP90,000) but they retain the offshore tax exemption. The only exception to this is inheritance tax (IHT), to which they become liable after 17 years of UK residence.
However, from 2017, non-doms who have been UK-resident for more than 15 of the past 20 years will no longer be able to elect for the remittance basis. They will be deemed domiciled and will become liable to UK tax – including inheritance tax – on all overseas assets.
Moreover, the time required to restart a ‘domicile clock’ by leaving the UK will increase from four years to five years. UK citizens who acquire their non-dom status by moving abroad will lose it as soon as they return to the UK. And individuals who are born in the UK will no longer be able to inherit the foreign domicile of their parents.
The second measure is likely to have even more far-reaching effects. At the moment, non-doms who own UK residential property via an offshore company or other structure are not liable to UK inheritance tax on the property. From April 2017, though, they will be liable to pay IHT – as well as the annual tax on enveloped dwellings (ATED) introduced in 2013. It will no longer be possible to shield UK residential property from IHT by holding it through a non-UK company within an excluded property trust or a non-UK company.
The new rule applies to all types of offshore structures, including, it seems, trust/debt arrangements – and even if the property is let. Legislation will be introduced to enable shares in the company holding UK residential property to be ‘looked through’ so that IHT will apply as though the property was held without the company, says law firm Withers.
‘For those individuals who decided to keep their properties in offshore structures and now pay ATED, the news that the structures no longer provide IHT protection will be unwelcome’ commented Russell Cohen TEP of law firm Farrer & Co. ‘Worse still, they may face a capital gains charge on unwinding the structures.’ However the Budget announcement indicates there will be a consultation on the costs of extracting properties from these offshore structures.
Withers points out that the news is not all bad for trust practitioners. Both existing and future excluded property trusts remain valid planning options, and trusts established prior to having been resident for 15 out of 20 years will ensure income and gains realised and retained within the trust will not be taxed, even after the settlor and/or beneficiaries are deemed domiciled under the new test. However, says Withers, longer term non-doms who have already established non-trust offshore structures, such as companies, will wish to review these before 2017.
‘For those who have been willing to view ATED as the price for peace of mind for inheritance tax, it may well be a prompt to restructure’, says the company. ‘The challenge will be to ensure the property can be extracted without triggering significant gains and other charges, although there are some tried and tested means of achieving this.’
The measures are certain to deter some international clients from coming to the UK, said David Bell at private bank Lombard Odier. The Chartered Institute of Taxation called for the reforms to be accompanied by a review of business investment relief to encourage foreign investment in the UK.
‘Non-doms who face tax rises or complications as a result of the changes have a simple choice: get their affairs in order or prepare to leave the UK’, said David Wignall of PriceWaterhouse Coopers.
- The measures will be subject to a consultation, to be published this summer, says Withers. There is thus a transitional period of almost two years for non-doms to restructure their affairs.