Arabella Murphy and Claire Roberts (Maurice Turnor Gardner) answer questions on the recent government consultation, looking at what is proposed, including the reform to non-UK resident trusts.
The publication of the government’s consultation paper on the reforms to the taxation of non-domiciles was possibly the most eagerly anticipated event since the start of the Rugby World Cup – if not by the general public, certainly by those who advise international families. After a false start earlier in the month (which saw the paper released and immediately withdrawn), the paper was re-released on 30 September.
What is the government’s aim?
The government’s current policy regardinghe taxation of non UK domiciliaries is that it:
‘wants to attract talented individuals to live in the UK who will help to contribute to the success of this country by investing here and creating jobs. The longstanding tax rules for individuals who are not domiciled in the UK are an important feature of our internationally competitive tax system, and the government remains committed to that aim. However, it is only right that those people who choose to live in the UK for a very long time pay a fair share of tax, and those who are born in the UK with a UK domicile of origin cannot move abroad and return as a “non-dom”.’ (David Gauke, financial secretary to the Treasury, in the foreword to the consultation)
The proposals therefore affect two categories of non-UK domiciliaries:
How will ‘long term residents’ be taxed?
From 6 April 2017, non-UK domiciliaries will be ‘deemed domiciled’ for all UK tax purposes once they have been resident for more than 15 of the past 20 tax years. Individuals in this category will cease to be eligible to use the remittance basis and, from the beginning of their 16th tax year of tax residence in the UK, will become subject to income tax, capital gains tax and inheritance tax on their worldwide income, gains and assets. There is no requirement for the individual to be resident in year 16 at all for the deemed domicile rules to apply.
The overall result is that the remittance basis can no longer be claimed indefinitely. The fact that the 15/20 year rule will replace the existing 17/20 year rule for inheritance tax purposes also means that individuals will be subject to inheritance tax on their worldwide estates one year earlier (i.e. from the start of their 16th consecutive year of tax residence, rather than their 17th).
Importantly, when an individual who has become deemed domiciled ceases to be UK resident, they will continue to be deemed domiciled for inheritance tax purposes for six years following their departure, rather than four years under the current rules. (This will not be relevant for income or capital gains tax purposes.)
A person who becomes deemed domiciled in the UK will potentially be subject to tax both on the arising basis (for new income and gains anywhere in the world) and the remittance basis (for foreign income and gains arising before they were deemed domiciled). The government recognises that the need to analyse historic income and gains may cause practical difficulties, and is considering how to address this.
How will the 15 years of tax residence be calculated?
Tax residence will be assessed both under the statutory residence test and (for tax years prior to 2013/2014) the old common law rules.
The consultation makes clear that a tax year will count as a tax year of UK residence if an individual is resident at any point in it, including ‘split years’ for income tax purposes. A year in which an individual is treated as non-resident by virtue only of a double tax treaty will still count towards the 15 years.
Because of the way tax years are calculated, it is possible that an individual arriving part-way through a tax year could be deemed domiciled for all UK tax purposes after only 13 years and a couple of months of physical presence.
Will it still be possible to reset the deemed domicile ‘clock’?
An individual who has lived in the UK for 15 consecutive tax years and then leaves the UK for six or more consecutive tax years will be able to return to the UK and claim non-domiciled status again for another 15 years (assuming he or she retained a foreign domicile as a matter of general law).
This will not apply to ‘returning UK domiciliaries’, who will never be able to ‘reset the clock’, regardless of time spent outside the UK.
What about the remittance basis charge?
The £90,000 charge which currently applies from year 17 of UK residence will become obsolete, because those who have been tax resident for 17 years will no longer be eligible to use the remittance basis. The £30,000 and £60,000 charges will remain unaffected, but could of course be increased in the future.
How will children be affected?
Each child’s position will be tested in accordance with his own period of residence (and not by reference to his parents). A child born in the UK could therefore become deemed domiciled between the ages of 13 and 15 (depending on their date of birth).
How will ‘returning UK domiciliaries’ be taxed?
From 6 April 2017, returning UK domiciliaries will be treated as UK domiciled for all tax purposes once they resume UK tax residence, irrespective of their actual intentions. As a result, such individuals will not be able to use the remittance basis and will be deemed domiciled in the UK for inheritance tax purposes during any period of UK residence. This particularly affects any offshore trusts they have set up while non-UK domiciled. In cases of short temporary residence, the effect of this rule could be unfairly harsh, and the government is considering whether (for inheritance tax purposes only) a short grace period, perhaps of two years, would be fairer.
The government is further considering whether to replace the existing inheritance tax ‘tail’ with a rule that UK domiciled and deemed domiciled individuals will be treated as non-domiciled only when they acquire (or re-acquire) a domicile of choice in another country, or (if later) six years after ceasing to be UK resident.
Individuals born abroad to British parents, who then acquire a foreign domicile, will not be within the ‘returning UK domiciliaries’ rules; however, they are within the ‘long term resident’ rules.
What about non-UK resident trusts?
The consultation paper makes clear that the taxation of non-UK resident trusts established by non-domiciled individuals will be radically reformed.
From an inheritance tax perspective:
From an income tax and capital gains tax perspective:
This is a radical change to the existing rules and adds another layer of complexity to an already overcomplicated regime. On the one hand, the new rules could mean that it is no longer necessary to compute pools of income and gains in offshore trusts. On the other hand, this may mean that benefits received from so-called ‘dry trusts’ (where no income or capital gains are actually generated within the trust) will be taxable – effectively, a tax on capital. The consultation document is silent as to what tax rate will be applied to the benefit.
Who should take urgent action?
With implementation of the proposed changes not due until April 2017, those affected by the changes should have plenty of opportunity to ensure that they have understood the new rules and take appropriate planning steps. In reality, the likely timing for the release of draft legislation (particularly on trusts) may mean that there is no certainty on the new rules for many months to come.
The following classes of individual should start to consider their position in the near future:
What is the timeframe for consultation and implementation?
The consultation will run until 11 November 2015, just six weeks from publication (rather than the usual 12 week period). The new legislative provisions are likely to be introduced in Finance Bill 2016 (published in the spring). The changes will take effect from 6 April 2017.
What about the reforms to inheritance tax and UK residential property?
The 2015 Summer Budget also announced that, from April 2017, foreign companies that own UK residential properties will be within the charge to inheritance tax.
These proposals will be subject to a separate consultation process and the consultation paper is not expected until early 2016, with draft legislation to be published as part of Finance Bill 2017, which would usually become law in July 2017 (but will have effect from April 2017).
For the details of the consultation, see www.bit.ly/1OhCZni.
Arabella Murphy and Claire Roberts (Maurice Turnor Gardner) answer questions on the recent government consultation, looking at what is proposed, including the reform to non-UK resident trusts.
The publication of the government’s consultation paper on the reforms to the taxation of non-domiciles was possibly the most eagerly anticipated event since the start of the Rugby World Cup – if not by the general public, certainly by those who advise international families. After a false start earlier in the month (which saw the paper released and immediately withdrawn), the paper was re-released on 30 September.
What is the government’s aim?
The government’s current policy regardinghe taxation of non UK domiciliaries is that it:
‘wants to attract talented individuals to live in the UK who will help to contribute to the success of this country by investing here and creating jobs. The longstanding tax rules for individuals who are not domiciled in the UK are an important feature of our internationally competitive tax system, and the government remains committed to that aim. However, it is only right that those people who choose to live in the UK for a very long time pay a fair share of tax, and those who are born in the UK with a UK domicile of origin cannot move abroad and return as a “non-dom”.’ (David Gauke, financial secretary to the Treasury, in the foreword to the consultation)
The proposals therefore affect two categories of non-UK domiciliaries:
How will ‘long term residents’ be taxed?
From 6 April 2017, non-UK domiciliaries will be ‘deemed domiciled’ for all UK tax purposes once they have been resident for more than 15 of the past 20 tax years. Individuals in this category will cease to be eligible to use the remittance basis and, from the beginning of their 16th tax year of tax residence in the UK, will become subject to income tax, capital gains tax and inheritance tax on their worldwide income, gains and assets. There is no requirement for the individual to be resident in year 16 at all for the deemed domicile rules to apply.
The overall result is that the remittance basis can no longer be claimed indefinitely. The fact that the 15/20 year rule will replace the existing 17/20 year rule for inheritance tax purposes also means that individuals will be subject to inheritance tax on their worldwide estates one year earlier (i.e. from the start of their 16th consecutive year of tax residence, rather than their 17th).
Importantly, when an individual who has become deemed domiciled ceases to be UK resident, they will continue to be deemed domiciled for inheritance tax purposes for six years following their departure, rather than four years under the current rules. (This will not be relevant for income or capital gains tax purposes.)
A person who becomes deemed domiciled in the UK will potentially be subject to tax both on the arising basis (for new income and gains anywhere in the world) and the remittance basis (for foreign income and gains arising before they were deemed domiciled). The government recognises that the need to analyse historic income and gains may cause practical difficulties, and is considering how to address this.
How will the 15 years of tax residence be calculated?
Tax residence will be assessed both under the statutory residence test and (for tax years prior to 2013/2014) the old common law rules.
The consultation makes clear that a tax year will count as a tax year of UK residence if an individual is resident at any point in it, including ‘split years’ for income tax purposes. A year in which an individual is treated as non-resident by virtue only of a double tax treaty will still count towards the 15 years.
Because of the way tax years are calculated, it is possible that an individual arriving part-way through a tax year could be deemed domiciled for all UK tax purposes after only 13 years and a couple of months of physical presence.
Will it still be possible to reset the deemed domicile ‘clock’?
An individual who has lived in the UK for 15 consecutive tax years and then leaves the UK for six or more consecutive tax years will be able to return to the UK and claim non-domiciled status again for another 15 years (assuming he or she retained a foreign domicile as a matter of general law).
This will not apply to ‘returning UK domiciliaries’, who will never be able to ‘reset the clock’, regardless of time spent outside the UK.
What about the remittance basis charge?
The £90,000 charge which currently applies from year 17 of UK residence will become obsolete, because those who have been tax resident for 17 years will no longer be eligible to use the remittance basis. The £30,000 and £60,000 charges will remain unaffected, but could of course be increased in the future.
How will children be affected?
Each child’s position will be tested in accordance with his own period of residence (and not by reference to his parents). A child born in the UK could therefore become deemed domiciled between the ages of 13 and 15 (depending on their date of birth).
How will ‘returning UK domiciliaries’ be taxed?
From 6 April 2017, returning UK domiciliaries will be treated as UK domiciled for all tax purposes once they resume UK tax residence, irrespective of their actual intentions. As a result, such individuals will not be able to use the remittance basis and will be deemed domiciled in the UK for inheritance tax purposes during any period of UK residence. This particularly affects any offshore trusts they have set up while non-UK domiciled. In cases of short temporary residence, the effect of this rule could be unfairly harsh, and the government is considering whether (for inheritance tax purposes only) a short grace period, perhaps of two years, would be fairer.
The government is further considering whether to replace the existing inheritance tax ‘tail’ with a rule that UK domiciled and deemed domiciled individuals will be treated as non-domiciled only when they acquire (or re-acquire) a domicile of choice in another country, or (if later) six years after ceasing to be UK resident.
Individuals born abroad to British parents, who then acquire a foreign domicile, will not be within the ‘returning UK domiciliaries’ rules; however, they are within the ‘long term resident’ rules.
What about non-UK resident trusts?
The consultation paper makes clear that the taxation of non-UK resident trusts established by non-domiciled individuals will be radically reformed.
From an inheritance tax perspective:
From an income tax and capital gains tax perspective:
This is a radical change to the existing rules and adds another layer of complexity to an already overcomplicated regime. On the one hand, the new rules could mean that it is no longer necessary to compute pools of income and gains in offshore trusts. On the other hand, this may mean that benefits received from so-called ‘dry trusts’ (where no income or capital gains are actually generated within the trust) will be taxable – effectively, a tax on capital. The consultation document is silent as to what tax rate will be applied to the benefit.
Who should take urgent action?
With implementation of the proposed changes not due until April 2017, those affected by the changes should have plenty of opportunity to ensure that they have understood the new rules and take appropriate planning steps. In reality, the likely timing for the release of draft legislation (particularly on trusts) may mean that there is no certainty on the new rules for many months to come.
The following classes of individual should start to consider their position in the near future:
What is the timeframe for consultation and implementation?
The consultation will run until 11 November 2015, just six weeks from publication (rather than the usual 12 week period). The new legislative provisions are likely to be introduced in Finance Bill 2016 (published in the spring). The changes will take effect from 6 April 2017.
What about the reforms to inheritance tax and UK residential property?
The 2015 Summer Budget also announced that, from April 2017, foreign companies that own UK residential properties will be within the charge to inheritance tax.
These proposals will be subject to a separate consultation process and the consultation paper is not expected until early 2016, with draft legislation to be published as part of Finance Bill 2017, which would usually become law in July 2017 (but will have effect from April 2017).
For the details of the consultation, see www.bit.ly/1OhCZni.
