Please enter your username and password here:Forgot Password?
Please enter your details here:
Already registered? Login here.
Please enter your username and password here:Forgot Password?
Please enter your details here:
Already registered? Login here.
Expat Briefing Editorial Team, 17 July, 2015
In a previous article for Expat Briefing, we surmised whether a victory for the Labour Party in the May 2015 general election would signal the end of non-domiciled tax status in the United Kingdom. As it transpired, it is the first Conservative Government for 20 years that is hammering a sizeable, if not quite the final, nail into the non-dom coffin.
Remind Me – What’s A Non-Dom?
The whole area of UK tax residence is a legal minefield which has been subject to differing interpretations by the Government and the courts down the years. Thus, it is not always easy to define who is resident in Britain for tax purposes and who isn’t. But, very broadly speaking, UK residents who have their permanent home (‘domicile’) outside the UK are considered to be non-domiciled, and therefore may not have to pay UK tax on foreign income if that income is not remitted to the UK (hence, this regime is also called the “remittance basis” of taxation). To complicate matters, an individual’s domicile may also depend on where their father was born. As a government guide to tax on foreign income explains: “Your domicile’s usually the country your father considered his permanent home when you were born. It may have changed if you moved abroad and you don’t intend to return.”
Conversely, Individuals who are resident and domiciled in the UK are taxed on their worldwide income and gains.
Why Are The Non-Dom Rules Controversial
For a number of years, governments tolerated the non-dom rules because they were seen to encourage entrepreneurial talent to the UK, providing a net benefit to the Treasury from the additional businesses and jobs created. However, critics of these tax rules contend that they are anachronistic and unfair, allowing a wealthy elite to avoid large sums in tax. What’s more, there is a perception that the rules are being bent, as those claiming non-dom tax status often appear to be settled in the UK on a more or less permanent basis. This critical opinion of non-doms has hardened since the financial crisis, leading to the imposition by the former Labour Government of an annual charge for the privilege of claiming the remittance-basis of taxation. This charge was subsequently increased by the Conservative-led Coalition Government in power from 2010 to 2015.
Given that the Conservatives were critical of Labour’s pre-election pledge to all intents and purposes abolish the non-dom regime, the announcement by Chancellor of the Exchequer George Osborne in the new Government’s first Budget that he would effectively terminate permanent non-dom status for reasons of fairness raised a few eyebrows. Here’s what he said:
“[T]he non-domicile tax status is a long standing feature of the UK tax system, in place since 1914, that plays an important role in allowing those from abroad to contribute to our economy, before returning to their permanent home – and many countries have some version of this tax status.”
“Simply abolishing it altogether, would, as [former Labour Treasury spokesman] Ed Balls correctly noted, probably cost the country money. Many of these people make a considerable contribution to our public life and to tax revenues.”
“But there are some fundamental unfairnesses in the non-dom regime that I am putting a stop to today. It is not fair that people who are born in the UK to parents who are domiciled here, can later in life claim to be non-doms and live here. It is not fair that non-doms with residential property here in the UK can put it in an offshore company and avoid inheritance tax. From now on they will pay the same tax as everyone else.”
“And most fundamentally, it is not fair that people live in this country for very long periods of their lives, benefit from our public services, and yet operate under different tax rules from everyone else.”
“Non-dom status was meant to be temporary, but it became permanent for some people. Not any longer. I am today abolishing permanent non-dom tax status. Anyone resident in the UK for more than 15 of the past 20 years will now pay full British taxes on all worldwide income and gains.”
“All these non-dom measures will come into effect in April 2017, and they will raise GBP1.5bn in extra tax for the Exchequer over this Parliament. British people should pay British taxes in Britain – and now they will.”
The Detail – The Deemed Domicile Rule
The following information is taken from a technical briefing on the new measures, published by the Treasury alongside the Budget on July 8, 2015.
The technical briefing confirms that individuals who have been UK resident for more than 15 of the past 20 tax years but are foreign domiciled under “general law” (i.e. case 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 April 6, 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 April 6, 2017 but would nevertheless be deemed domiciled under the 15 year rule on April 6, 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 5 tax years outside the UK they will at that point lose their deemed tax domicile (‘the 5 year rule’).
In order to have parity of treatment between UK-doms and non-doms, UK-doms who leave after 5 April 2017 having been here 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.
If at a later date (having spent more than 5 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 (see 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 here simply because either parent is deemed domiciled in the UK 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.
Inheritance Tax Consequences
In practice once a non-dom ceases to be UK resident, their deemed tax domicile is likely only to be relevant for inheritance tax (IHT) purposes.
Currently, individuals who are domiciled in the UK are subject to 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 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 4 tax years (‘the 4 year rule’).
According to the technical note, there will therefore be a longer ‘inheritance tax tail’ for non-doms who leave the UK than at present for IHT purposes where as noted above a 4 year rule currently applies. The government will consult on whether other provisions need to be changed.
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 Returning Non-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 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.
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 here, the returning UK domiciliary will not benefit from any favorable tax treatment in respect of trusts set up while not domiciled here (whether inheritance tax treatment or otherwise).
Alex Henderson, tax partner at professional services firm PwC, described these measures as a “game changer” for those affected.
“Non-doms who have been in the UK since 2002 will come within the full UK tax regime in 2017. All their overseas interests will need to be translated and understood in the UK, which can take weeks or months of work,” he observed.
Henderson added that non-doms who face tax rises or complications as a result of the changes have a simple choice: get their affairs in order or prepare to leave the UK.
“The 15 year limit, which could be 13 unless you come on 6th April and leave on the 5th, isn't very long if, for example, you're wanting to educate your children in the UK.”
Aside from understanding the technicalities of the new rules, some tax experts warn that while these measures might be politically popular, they might not make a great deal of economic sense if wealth creators are deterred from settling in the UK.
“These changes make the UK significantly less attractive to overseas high net worth individuals who contribute substantially to the UK’s tax base,” said Simon Baylis, Partner at Moore Stephens. “The new ‘15 out of 20 years’ rule is likely to push a considerable number of high net worth individuals out of the UK. Most will not see moving to a more favorable jurisdiction as a major problem – they are already highly internationally mobile.”
The argument that non-doms are already highly mobile appears to be supported by research from Pinsent Masons, which show that a small percentage of UK non-domiciled individuals were born in the country, suggesting that the rest may have looser links to Britain.
According to Pinsent Masons, in the 2012-13 tax year (the latest figures available), 110,700 taxpayers claimed non-domiciled status on their UK tax returns. Of these, 1.51 percent indicated that they were born in the UK but had never been domiciled there. In the same year, the number of taxpayers claiming non-domiciled status for the first time was 25,000.
"These figures suggest that those coming to the UK as non-doms are likely to be very open to relocating elsewhere. The vast majority were not born in the UK, and may not have strong existing links when they arrive here,” Paul Noble, Tax Director at Pinsent Masons said.
"While we are seeing large numbers of wealthy people come to the UK and paying tax on a non-domiciled basis, we have also seen large numbers move away in the last five years, showing that they can and do move where the opportunities take them, taking their spending and investment with them."
These changes are quite technical and complex, and the Government intends to consult the public on its new proposals at the end of the summer in an attempt to ensure that the new regime operates smoothly.
However, as Alex Henderson suggests, those people who are potentially affected by these rules would be wise to study their possible impact now, rather than wait for the outcome of the consultation and draft legislation.