FOREIGN DOMICILED PERSONS CHANGES ANNOUNCED AT SUMMER BUDGET 2015
On 8 July 2015 the government announced a number of reforms to the taxation of foreign domiciled persons (‘non-doms’). These changes will affect non-doms (ie 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).
This note sets out the detail of these proposals. A detailed consultation document will be published after summer recess to seek views 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. This note sets out the detailed parameters of the proposed changes and signals some of the areas that will be explored in consultation.
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.
Individuals who are domiciled in the UK are subject to Inheritance Tax (IHT) 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 3 years after they have lost their UK domicile under general law (‘the 3 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 eg 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 here for IHT purposes, they can only lose that deemed domicile by being non-UK resident for 4 tax years (‘the 4 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 here for lengthy periods of time and who therefore appear to have a settled presence in the UK. 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 here 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.
The government is proposing 2 changes which will restrict non-doms from being able to claim non-dom status for an indefinite period of time. These 2 rules are respectively referred to as the:
- deemed domicile rule for long term resident non-doms (‘15 year rule’)
- returning UK dom rule
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.
„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 here.
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:
- they have not spent more than 15 tax years here, and
- 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 5 year rule in paragraph 17 above which requires 5 years’ non-UK residence.
If (b) applies but not (a) they are subject to the 3 year rule in paragraph 3 and will remain UK domiciled for IHT purposes until more than 3 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 5 year and 3 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 5 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 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.