On 8 July 2015, the UK government announced a number of reforms to the taxation of foreign domiciled persons (non-doms). These changes will affect non-doms (i.e. those not domiciled in the UK under general law) who are resident in the UK for lengthy periods. In addition, changes will also be made to the qualifying rules governing those who have a UK domicile at birth (known as a UK domicile of origin).
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 remitted to the UK. To access the remittance basis, longer term UK resident non-doms need to pay an annual remittance basis charge.
Individuals who are domiciled in the UK are subject to inheritance tax on gifts and on death on their worldwide assets. If they emigrate and settle permanently in another country, thus acquiring a foreign domicile under general law, nevertheless they remain deemed domiciled for inheritance tax purposes in the UK until three years after they have lost their UK domicile under general law (the three-year rule) even if they have been non-UK resident for many years. Non-domiciled individuals pay IHT only in respect of their UK assets. However, an individual who is not domiciled in the UK can become deemed-UK domiciled for IHT purposes in certain circumstances e.g. if they have been resident in the UK for 17 out of the last 20 tax years. Then they pay UK IHT on their worldwide assets. Once they have become deemed domiciled in the UK for IHT purposes, they can only lose that deemed domicile by being non-UK resident for four tax years (the four-year rule).
The non-dom regime has been criticised by those concerned that a small group of very wealthy people have benefited from non-dom status in circumstances that have not looked fair to people who are not able to make the claim. These claims tend to be made in respect of people who have been in the UK for lengthy periods of time and who therefore appear to have a settled presence.
These criticisms have brought into question the fairness of the wider regime, which is intended to make the UK an attractive destination for people from overseas who come to live for a period of time but who intend to leave at some point in the future. The government remains committed to a competitive tax regime that attracts talent and investment into the UK. The vast majority of those who claim non-dom status stay in the UK for less than 15 years but there are a small number who stay for much longer periods and are long-term residents of the UK.
What the government intends to achieve
The government believes that long term UK resident non-doms should pay UK tax on their personal worldwide income and gains, regardless of whether the amounts are received in the UK or overseas.
The government also believes that those who have a strong connection with the UK having a UK domicile of origin at birth should not be able to access the remittance basis regime if they return and become UK resident, even if they have lost that UK domicile as a matter of law.
From April 2017, those who have been resident in the UK for more than 15 out of the past 20 tax years will therefore be treated as deemed UK domiciled for all tax purposes. This will mean that they will no longer be able to use the remittance basis and they will be deemed domiciled for inheritance tax purposes. In addition, those who had a domicile in the UK at the date of their birth will revert to having a UK domicile for tax purposes whenever they are resident in the UK, even if under general law they have acquired a domicile in another country.
This is part of a package of reforms to the rules that affect non-doms including a proposal to ensure that UK inheritance tax (IHT) is paid on UK residential property, even when the property is held indirectly through an offshore company or similar structure.
These reforms mean that the £90,000 remittance basis charge payable by those who have been resident for 17 out of 20 years will be redundant as such persons will be taxable on an arising basis after 15 years. The £30,000 and £60,000 remittance basis charges remain unchanged. The government will consult on the need to retain a de minimis exemption beyond 15 years where total unremitted foreign income and gains are less than £2,000 pa (ITA 2007 s809D(2)).
Reforming the non-dom regime
The government is proposing two changes which will restrict non-doms from being able to claim non-dom status for an indefinite period of time. These two rules are respectively referred to as:
- the deemed domicile rule for long term resident non-doms (15-year rule); and
- the returning UK dom rule.
1. Long term resident non-doms – the 15-year rule.
This introduces a “deemed-domicile” rule for long-term residents who nevertheless remain foreign domiciled under general law. The 15-year rule will not affect their domicile position under general law, only the UK tax treatment. Nor will it affect the domicile of the individual’s children whose domicile under general law and deemed domicile for tax purposes will be tested separately by reference to the child’s own individual circumstances.
Individuals who have been UK resident for more than 15 of the past 20 tax years but are foreign domiciled under general law will be deemed domiciled for all tax purposes in the UK. The government will consult on whether split years of UK residence count towards the 15 years for this purpose or whether complete tax years of UK residence are required.
This will mean that 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.
At this point inheritance tax will also be paid on worldwide personal assets.
The new rules will be effective 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. For those who leave the UK before 6 April 2017 but would nevertheless be deemed domiciled under the 15-year rule on 6 April 2017 the present rules will apply.
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 (the five-year rule). In practice once they cease to be UK resident, their deemed tax domicile is likely only to be relevant for inheritance tax purposes. There will therefore be a longer “inheritance tax tail” for non-doms who leave the UK than at present for IHT purposes where a four-year rule currently applies. The government will consult on whether other provisions need to be changed such as IHTA 1984 s267ZA 3 (spousal election to be domiciled in the UK) and the effect of the change in relation to certain old estate duty treaties.
In order to have parity of treatment between UK doms and non-doms, UK doms who leave after 5 April 2017 having been in the UK for over 15 years will also be subject to the five-year rule even if they intend to emigrate permanently and settle in a particular place on the day of their departure. The government will consult on the detail of the various interactions between the new five-year rule and the existing three-year and four-year rules.
If at a later date (having spent more than five tax years abroad) the non-dom returns to the UK for a period but still intends eventually to leave the UK and therefore remains foreign-domiciled under general law they will be able to spend another 15 years as a resident for tax purposes before becoming deemed domiciled again. (This will not apply to returning UK doms who are subject to different rules set out below).
The deemed domicile of the long term resident non-dom has no effect on the domicile status of the children, whose actual and deemed domicile position is looked at independently. Thus they will take their father’s domicile under general law at the date of their birth and if they are long term residents within the new rules will become deemed domiciled in the UK. But they do not become deemed domiciled simply because either parent is deemed domiciled nor do they lose deemed domicile just because a parent does.
Once deemed domiciled in the UK under the 15-year rule, non-doms will not be able to claim reliefs such as the remittance basis for overseas chargeable earnings under ITEPA 2003 s22. There will be consultation on the employment-related securities provisions.
Non-doms who have set up an offshore trust before they become deemed domiciled in the UK under the 15-year rule will not be taxed on trust income and gains that are retained in the trust and such excluded property trusts will have the same IHT treatment as at present (subject to the announcement made at Budget 2015 on UK residential property held through offshore companies and similar vehicles). However, such long term residents will, from April 2017 be taxed on any benefits, capital or income received from any trusts on a worldwide basis. The government will consult on the necessary changes to the transfer of assets regime and capital gains tax trust provisions. The government recognises that this is a significant change to the current rules and that changes to trust taxation are complex and will need to be considered carefully.
Certain transitional provisions relating to trusts were introduced for non-doms in 2008 (in particular rebasing). The interaction of these rules with the new regime after the non-dom becomes deemed domiciled in the UK will be subject to consultation.
2. The UK domiciliary (“the returning UK dom”)
The government wishes to make it harder for individuals who have a UK domicile at the date of their birth to claim non-dom status if they leave the UK and acquire a domicile of choice in another country but subsequently return to the UK.
Some individuals who have a UK domicile at the date of their birth (i.e. a UK domicile of origin) may emigrate. They may successfully be able to show that under general law they have acquired a domicile of choice overseas as they intend to settle in the foreign country. Under current rules and in particular the three-year rule in IHTA s267(1)(a) referred to above, they will remain UK deemed domiciled for IHT purposes for at least three years after they have formed the intention to settle permanently (and do settle) in the foreign country even if they have been non-UK resident for many years before reaching that decision. Once they have lost their UK domicile and deemed domicile for IHT purposes they can set up trusts and obtain favourable treatment for excluded property trusts and their worldwide estate will fall outside IHT. These rules will not change except that UK doms who leave after 5 April 2017 will also be subject to the five-year rule set out above.
However some of these individuals later return to the UK for some years and still maintain they have a foreign domicile of choice. In these circumstances, the new rules will mean that they are taxed as UK domiciled for tax purposes on their return irrespective of their domicile status under general law.
Irrespective of their actual intentions, such an individual (the returning UK dom) will become UK-domiciled for tax purposes once they become UK resident. In addition, while UK resident after their return, the returning UK domiciliary will not benefit from any favourable tax treatment in respect of trusts set up while not domiciled in the UK (whether inheritance tax treatment or otherwise). The government will consult on the detail of these proposals.
On departure the returning UK dom can lose their UK tax domicile in the tax year after departure but only if both the following conditions are satisfied:
- (a) they have not spent more than 15 tax years in the UK; and
- (b) they have not acquired an actual domicile in the UK under general law during their return.
If (a) applies but not (b) they are subject to the five-year rule above which requires five years’ non-UK residence.
If (b) applies but not (a) they are subject to the three-year rule and will remain UK-domiciled for IHT purposes until more than three years after they have acquired (or reacquired) a foreign domicile of choice as a matter of law.
If both (a) and (b) apply they are subject to both the five-year and three-year rules and can lose UK tax domicile only on the later of those events.
This measure will affect all returning UK doms from 6 April 2017, including those who returned prior to April 2017. The five-year rule will affect UK doms leaving after 5 April 2017. It will also affect trusts set up while such individuals were not UK domiciled if they are UK resident on or after 6 April 2017. In these circumstances, an individual will be taxed on all income and gains arising in such trusts under the same rules as any other UK domiciliary. The IHT treatment of such trusts will also be the same as for UK tax payers who have never lost a UK domicile.
The government intends to consult further on the interaction of the various deemed domicile rules for both UK doms and non-doms and also in relation to the tax treatment of trusts.
When will the changes be introduced?
The government will consult widely with stakeholders and interested parties on the detail of these measures. This consultation will be published after the summer recess. The changes will be legislated in Finance Bill 2016 and introduced from 6 April 2017.