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Out-Law News 3 min. read

UK publishes draft plans to end permanent ‘non-dom’ tax status


The UK government has set out how it plans to end ‘non-dom’ tax status for those who have been in the country longer than 15 of the past 20 tax years, and prevent individuals born in the UK from claiming that they are non-domiciled while they are living in the UK.

Draft legislation published for consultation would be included in the 2016 Finance Bill, and would give effect to changes to the rules announced by the chancellor as part of this year’s Summer Budget. A separate consultation on plans to bring non-domiciled individuals who hold UK residential property indirectly through an offshore company or trust within the scope of UK inheritance tax (IHT) will be published shortly.

In his introduction to the consultation, which closes on 11 November, financial secretary David Gauke said that the proposals would not affect “the majority of non-domiciled individuals”, who come to the UK and leave again within a few years.

“These announcements have been carefully targeted to address some unfairness in the current rules in a way that will not deter those individuals who might be considering a move to the UK,” he said. “The reforms will return the system to its intention of supporting those from overseas who come to the UK but who don’t intend to stay here permanently.”

The UK government intends to abolish non-dom status for taxpayers who have been resident in the UK for 15 out of the previous 20 tax years from 6 April 2017. These taxpayers would then be deemed ‘domiciled’ for the purposes of income tax, capital gains tax (CGT) and IHT; and would no longer be able to be taxed on the remittance basis on their non-UK income and gains. In addition, those who are born in the UK, to UK resident parents, will not be able to claim non-dom status at any point that they are resident in the UK.

Currently, individuals who are both resident and domiciled in the UK for tax purposes are taxed on their worldwide income and gains. Non-doms are able to pay tax on the remittance basis, which means that they do not have to pay tax on foreign income and gains as long as they are not ‘remitted’ to the UK. To access the remittance basis, UK resident non-doms need to pay an annual remittance basis charge, which increases depending on how long they have been in the UK.

If introduced in its current form, the draft legislation proposed by the government would implement a ‘deemed domicile rule’ that would prevent long term UK residents from claiming non-dom status. This would be implemented by restricting access to the remittance basis regime for those individuals who meet the deeming tests. For example, once the changes come into force the £90,000 remittance basis charge, payable by those who have been UK resident for 17 out of the last 20 tax years, will no longer be available.

Any year in which the individual is UK resident will be counted as part of the 15 years residence test, even if the individual enters or leaves the UK at some point during that year. This approach is proposed as the most “straightforward” way of dealing with years of arrival and departure. The new test would be introduced so that an individual becomes deemed domiciled for the purposes of income tax, CGT and IHT at the same time, meaning that the current deeming rules for IHT will also have to be changed.

Once a non-dom becomes deemed-UK domiciled, they will be treated in the same way as a UK-domiciled individual with some exceptions. The exceptions will apply to offshore trusts and arrangements caught by the Transfer of Assets legislation, provided they were set up before the individual became deemed-UK domiciled and that the taxpayer, their spouse and their children do not receive any benefit from the trust.

The consultation proposes new rules based on the taxable value of benefits received by the deemed domiciled individual without reference to the income or gains arising in the offshore structure. This would be “a very significant change” to the way that income and gains arising in offshore trusts and their underlying entities are taxed, and will be subject to further consultation once the government has had more time to develop its proposals, according to the consultation.

Tax expert Paul Noble of Pinsent Masons, the law firm behind Out-Law.com, said that the consultation envisaged “potentially huge changes that will have a big impact for trusts, as the taxable value of the trust will not be wholly dependent on the income and gains in it”.

“The rules envisaged look easier to apply, but the detail will come in the draft legislation,” he said.

“The introduction of a deemed domicile rule, as set out in the consultation, would effectively end the open-ended nature of the effect non-domicile claims have for tax purposes. Unfortunately, the consultation document is short on detail and the consultation period is rather limited. This is already a complex area and the danger is that any new rules make it even more complicated, rather than simplifying it," he said.

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