An update on the new rules for Non-UK Domiciles

Written by Paul Windsor on 20 April 2016

It had been expected that the Finance Bill 2016, which was published on 24th March, would contain the draft legislation regarding the taxation of individuals who are resident in the UK for tax purposes but who are domiciled elsewhere (non-doms).

The only reference in the detailed budget notes accompanying the chancellor’s speech stated: “The government will legislate all non-dom reforms in Finance Bill 2017. Budget 2016 confirms that non-doms who become deemed-domiciled in April 2017 can treat the cost base of their non-UK based assets as being the market value of that asset on 6 April 2017. Individuals who expect to become deemed UK domicile under the 15 out of 20 year rule will be subject to transitional provision with regards to offshore funds to provide certainty on how amounts remitted to the UK will be taxed.”

We will still have to wait for the definitive legislation, however we can now be fairly certain that there will be three basic changes to the non-dom rules from 6th April 2017:

1. A non-domiciled individual who has been resident in the UK for more than 15 out of the previous 20 tax years will be “deemed” to be domiciled in the UK for all UK tax purposes – income tax, capital gains tax and inheritance tax. This means that a long-term non-domiciled individual will no longer have the option to be taxed on a remittance basis in respect of their overseas income and capital gains, and their worldwide assets will be subject to UK inheritance tax.

2. Individuals who were born in the UK (to UK domiciled parents) and who subsequently acquire a ‘domicile of choice’ in another country, will not be able to claim the non-domicile status if they return and become resident in the UK. This will apply, for IHT purposes, only if the individual has also been resident in one of the previous two tax years.

3. UK residential property owned either directly or indirectly (for example through offshore trusts/company structures) by non-domiciled individuals (includes non-UK residents) will be subject to UK inheritance tax.

The Government has stated that this measure is not expected to have any significant macroeconomic impacts; however it clearly discourages non-domiciled individuals from remaining in the UK or coming to the UK, and the loss of their wealth is bound to have a harmful economic effect.

Draft legislation still awaited for trusts

One area that the original consultation document left particularly uncertain is the treatment of overseas trusts settled by individuals who are affected by the new rules. The Government has indicated that long-term residents who had set up an offshore trust before they became deemed-domiciled as a result of being resident in the UK for 15 of the last 20 years, will not be taxed on income and gains that are retained in the trust, however the details are still unclear.

For our full budget notes please click here.