Budget 2016: Non-domicile taxation

Individuals who are resident and domiciled in the UK are taxed on their worldwide income and gains. Individuals who are resident but not domiciled in the UK (‘non-doms’) may claim the remittance basis so that they are only taxed on their foreign income and gains to the extent that those funds are remitted to the UK. Long term ‘non-dom’ UK residents are able to claim the remittance basis but are usually required to pay a remittance basis charge (‘RBC’) of between £30,000 to £90,000 per annum for the privilege, depending on the number of years that they have been resident in the UK.

UK doms are subject to inheritance tax (‘IHT’) on their worldwide assets. In contrast, non-doms are usually only subject to IHT in relation to UK property subject to special anti-avoidance rules. For example, ‘non-doms’ who are long term residents are deemed to be UK domiciled for IHT purposes after being resident in the UK for 17 of the last 20 tax years and are then liable to IHT on their worldwide assets.

Some UK doms may acquire ’non-dom’ status by leaving the UK to settle in a foreign country on a permanent basis. Often, if they return to the UK, their UK domicile status reverts on their return but, in a small minority of cases, they may assert that they retain their ‘non-dom’ status for some time.

Some non-doms settle offshore trusts. Provided the trust does not have any UK source income and the individual does not remit the trust income to the UK, the trust income may not be subject to tax in the UK. Further, ‘excluded property trusts’ may not be subject to UK IHT.

As announced at Summer Budget 2015, from April 2017 non-doms will be deemed UK domiciled for all tax purposes after they have been UK resident for 15 of the past 20 tax years. Additionally, individuals who were born in the UK and who have a UK domicile of origin will revert to their UK domiciled status for tax purposes whenever they are resident in the UK.

Non-doms who set up a non-UK resident trust before becoming deemed domiciled in the UK will not be taxed on income and gains retained in the trust. 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 of their non-UK based assets as being the market value of that asset on 6 April 2017 for the purposes of calculating the gain that would become liable to UK tax under the arising basis in future years.

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.

The announcement in the Budget would initially seem like good news for non-doms. This may, however, lead to additional administrative procedures as gains accruing before 6 April 2017 will, presumably, still be taxable but on a remittance basis.

Non-doms will need to review their tax arrangements before April 2017. Some long term residents may wish to leave the UK before the new rules take effect and advice should be sought in this regard.

Those that wish to remain and those coming to the UK should seek advice as to how the new changes will affect them. There will be no ‘one size fits all’ answer. Some may wish to wind up existing offshore trusts, others may wish to set up new ones.