Summer Budget 2015: non-dom status to end after 15 years of UK residence

In addition, those who are born in the UK to UK resident parents will not be able to claim non-dom status if they leave the UK but then return and take up residency in the UK.

The government also intends to bring all UK residential property held directly or indirectly by non-doms into charge for inheritance tax purposes, even if held through an offshore company.

Tax expert Janet Hoskin of Pinsent Masons, the law firm behind Out-law.com, said: “This is a major change which effectively ends the concept of non-domicile for tax purposes after 15 years of UK residence. It will impact on not just those in the UK who claim non dom status but also those with a UK domicile of origin who leave the UK”.

'Domicile' is a concept distinct from both nationality and place of residence in a given tax year, and effectively means where a taxpayer has his or her permanent home. The rules are complex and defined through a long line of case law. Individuals who come to the UK from other countries will usually have non-dom status unless they intend to live here permanently and indefinitely.

Individuals who are resident and domiciled in the UK are taxed on their worldwide income and gains. Non-doms are able to claim the remittance basis of taxation, which does not tax foreign income and gains as long as they are not brought ('remitted') to the UK. To access the remittance basis, longer term UK resident non-doms need to pay an annual remittance basis charge. The Coalition government increased this charge from April 2015 to £60,000 for those who have been in the UK for 12 years or longer, and £90,000 for those who have been in the UK for 17 out of the previous 20 years. The charge for people who have been resident in the UK for 7 of the past 9 tax years has remained at £30,000.

As a result of the changes announced, from their 16th tax year of UK residence long term residents will no longer be able to access the remittance basis and will be subject to tax on an arising basis on their worldwide personal income and gains.

A technical paper says that these reforms mean that the £90,000 remittance basis charge payable by those who have been resident for 17 out of 20 years will no longer be needed as such persons will be taxable on an arising basis after 15 years. However, it states that the £30,000 and £60,000 remittance basis charges will remain unchanged.

“The key intention of the government is to continue to offer a favourable regime to those coming to the UK for shorter periods - up to 15 years out of 20 - but to end any benefits after that,” Janet Hoskin said.

It is intended that the new rules will apply from 6 April 2017 irrespective of when someone arrived in the UK. There will be no special 'grandfathering' rules for those already in the UK.

“An important point of detail to note is that the technical paper says they will consult on how to apply these rules to those from all countries – some specific double tax treaties currently give favourable IHT treatment to those from some countries, to whom the existing IHT deemed domiciled rules don’t apply,” said Hoskin.

The technical paper said that once the non-dom who has become deemed domiciled under the 15 year rule leaves the UK and spends more than five tax years outside the UK they will at that point lose their deemed tax domicile.

“For those currently in the UK whether with a UK domicile of origin, or who have been here for 15 years, it will now take longer before one’s UK domicile can be lost - with 5 years of non residence required before being outside of UK IHT net," Hoskin said

It is intended that a consultation document will be published after the summer on the best way to deliver these reforms, and a further consultation will follow on the draft legislation, which is intended to form part of the 2016 Finance Bill.

The chancellor also announced that the government intends to bring all UK residential property held directly or indirectly by non-doms into charge for inheritance tax (IHT) purposes, even when the property is owned through an indirect structure such as an offshore company or partnership.

Under current rules IHT is only charged on UK property directly held by non-doms, so by owning a UK property through an offshore vehicle, a non-dom can remove that property from the scope of inheritance tax. This is sometimes referred to as “enveloping” the property.

Once a non-dom becomes UK domiciled or deemed domiciled for IHT purposes, their worldwide assets are subject to UK IHT unless they have been settled into an “excluded property trust” prior to the individual becoming domiciled or deemed domiciled here.

The government intends to amend the rules on excluded property so that trusts or individuals owning UK residential property through an offshore company, partnership or other opaque vehicle, will pay IHT on the value of such UK property in the same way as UK domiciled individuals.

Hoskin said: “The IHT tax benefits of excluded property settlements will remain but not for UK residential property, whether lived in or let out. Also these settlements are to lose income tax and CGT advantages. Previous rules introduced on 'enveloped properties' are now being extended to catch the IHT benefits – but without the financial limits or reliefs that are available under the existing rules – and with further anti-avoidance rules”.

Properties held through companies and other structures are already subject to the annual tax on enveloped dwellings (ATED) and to higher rates of stamp duty land tax when purchased. However there is an exemption from ATED for let properties.

HMRC say its research suggests that the most common reason for enveloping properties is IHT planning undertaken by non-doms. It said that under the present IHT regime many non-doms would not consider de-enveloping primarily because the cost of ATED does not outweigh the current benefits of the envelope and in the case of let property ATED does not apply anyway.