If you have any non-doms among your clients, there is a lot of planning to do before some major changes arrive in April. Chances are most advisers have clients that will be affected. There are millions of non-doms in the UK but it is not always obvious who they are unless you ask.
Over the summer, HM Treasury published a consultation document setting out details of the new rules for non-doms due to take effect from the start of the 2017/18 tax year on 6 April.
The big change – announced in the 2015 Budget – was that non-doms who have been resident in the UK for 15 out the previous 20 years will be deemed to be UK domiciled for the purpose of all UK taxes: the so-called “15/20” rule.
If you want some light reading on this subject, go to the Treasury website and read Reforms to the taxation of non-domiciles: further consultation. It seems almost certain the main features of the proposals will be introduced. Of course, however, nothing is completely sure with the world turned upside down post-Brexit.
You might want to briefly revisit what domicile is and why it matters. It is a complicated legal concept that is at least partly based on UK case law.
Broadly speaking, your domicile is the country you regard as your home or in which you have a permanent home. It is not the same as residence, nationality or citizenship. You mostly start off with – and generally retain – the domicile of your father. But this can change, generally by your choice, though it can take time. Domicile is important because it is one of the main determinants of what UK tax you are liable for.
Non-doms have been a privileged breed in UK for many years but the tax privileges have recently been eroded. Soon they will change some more.
Troubled waters ahead
One of the valuable privileges for non-doms is that they only pay UK tax on investment income and capital gains they remit to UK: the remittance basis. From 2017/18 onwards, however, they will not be able to take advantage of the remittance basis after they have been resident in the UK for 15 out of the last 20 years.
Under the new rule, they will be subject to UK income tax and CGT on their worldwide assets. They will also be subject to inheritance tax on their worldwide assets.
So what can be done about this planning-wise? Well quite a lot, actually – at least in the short term.
People who have capital gains will not have to pay UK CGT before becoming deemed domiciled on 6 April. So they may be able to rebase their overseas assets at the market value on 5 April. If they want to rebase in this way, they will need to have paid the remittance basis charge before then. However, that is no small bill: £30,000 to £90,000 depending on how long they have been UK resident.
Then there is the possibility of non-doms being able to clean up any of their overseas bank accounts that contain a mix of capital, income and/or capital gains. Such so-called “mixed funds” cannot normally be brought back to the UK without incurring a tax liability under the remittance rules.
The proposal is that all non-doms should be able to rearrange their mixed funds by separating out the component parts in the tax year 2017/18. The capital element will then be available for bringing into the UK tax free. That said, it seems this special treatment will only apply to bank accounts. Other assets will have to be sold and the proceeds placed in bank accounts before sorting them out.
The position of non-resident trusts is pretty complicated and will change. Those affected need to get seriously expert advice.
But there is good news for inheritance tax. The Government is currently not proposing to change the excluded property trust rules. So it should still be possible for a non-dom to settle non-UK assets (but not residential property) into a non-UK resident trust and the assets be permanently outside the scope of UK IHT.
This needs to be done before the settlor becomes deemed domiciled in the UK and it is important they do not add any further assets into the trust after that point.
One bit of bad news for non-doms’ IHT is that shares in an offshore close company will no longer be excluded property to the extent the company owns or gets value from UK residential property.
Non-dom tax is a complicated area, so most advisers will need to work with specialist accountants, lawyers and such. This is no place for amateurs. But there are some valuable one-off opportunities here and clients will thank you for pointing them out in time.
Danby Bloch is chairman at Helm Godfrey