The Government finally released these details on 5th December 2016 with the publication of the relevant provisions of the Finance Bill 2017. There are 2 issues of importance.
1. Deemed domicile once resident in UK for 15 out of 20 years
As from 6th April 2017 non-UK domiciled individuals will become deemed UK domiciled for all UK taxes once they have been resident in the UK for 15 of the past 20 tax years – thereby aligning the income tax and CGT treatment with the current deemed domicile rules for inheritance tax (IHT). The 15/20 test is based on the number of years that an individual has been resident in the UK, and will include years of residence in the UK where the individual was under the age of 18. To determine whether or not an individual is resident in the UK in a particular tax year for the purposes of the 15/20 test, for 2013/14 and later tax years the statutory residence test (SRT) will apply. For tax years prior to 2013/14, an individual’s residence will be determined in accordance with case law rules and HMRC practice in force during the relevant tax year.
An individual can lose their deemed-UK domiciled status for income tax and CGT purposes if they become non-UK resident and remain non-resident for at least 6 consecutive tax years. However, an individual will only need to leave the UK and remain non-UK resident for four consecutive UK tax years to lose their deemed UK domicile for IHT purposes. If an individual does break their deemed domicile status in this way but subsequently comes back to the UK, they will be eligible to claim the remittance basis until the 15/20 test is met once more, assuming they retain their non-UK domiciled status under general law.
2. Deemed domiciled for returners with UK domicile of origin
Individuals born in the UK with a UK domicile of origin who have acquired a non-UK domicile of choice under general law will become immediately deemed domiciled for income tax and CGT purposes if and for so long as they are UK resident after 5 April 2017. By concession there will be a grace period for IHT purposes only, designed to prevent such ‘returning’ individuals who only plan to stay in the UK for a short time from being unfairly impacted. Therefore, returning non-doms will not be treated as deemed domiciled in the UK unless they have been resident for at least one of the two years prior to the year in question.
Consequences of becoming deemed non-dom
Individuals will be subject to income tax and CGT on their worldwide income and gains and the remittance basis will no longer be available to them (subject to the £2,000 de minimis rule). Foreign income arising and foreign gains realised prior to the tax year in which the individual becomes UK resident and deemed domiciled, in respect of which the remittance basis is claimed, will continue to be subject to UK tax only if they are brought to the UK. This will mean that ongoing care is needed in respect of funds from prior years which have not been subject to UK tax.
What should our non doms clients do?
Probably two of the most helpful measures coming in as one time opportunities as part of the package of changes are cleansing and rebasing. These were confirmed and expanded in the draft legislation published on 5 December.
This enables those who will become deemed domiciled under the new rules to elect which assets they wish to be rebased to their market value at that date, effectively wiping out any accumulated gain.
This is restricted in its application but is of potentially very significant benefit to those who are able to take advantage of it. There are four main conditions which must be met for it to apply:
- The assets were located outside the UK throughout the period from 16 March 2016 or, if later, the date the individual acquired the asset, to 5 April 2017;
- The assets were held directly by the individual on 5 April 2017;
- The individual paid the remittance basis charge in any tax year before the 2017/18 tax year; and
- The individual remains deemed domiciled under the 15/20 year rule at all times until the disposal of the assets.
The fact that assets held directly outside the UK between 16 March 2016 and 5 April 2017, as well as assets acquired up to 5 April 2017 are now included means that more assets will be able to benefit from this opportunity. It also means non-doms who will become deemed domiciled in April 2017 should actively consider holding onto assets standing at a gain on 5 April to benefit from rebasing.
Cleansing of mixed bank accounts
Another helpful measure confirmed in the draft Finance Bill provisions is the cleansing opportunity. This effectively enables any non-dom who has been taxed on the remittance basis, and not just those who are subject to the new deemed domicile rules from April 2017, to segregate funds from within a mixed account. So, for example, an account containing a mixture of income, capital and gains can be separated out into its component parts, so that in future the most tax efficient parts can be remitted first. It is important to note that cleansing only applies to cash.
Individuals – next steps
Individuals should consider the following planning points before April 2017.
- Review which assets should be rebased – including potentially those standing at a loss as this can be set against onshore gains and remembering that assets that are rebased cannot also be contributed to trust;
- Liquidating structures such as companies in advance of April so that assets are held directly and can benefit from rebasing (of course other tax impacts should be considered);
- Redeeming or triggering a rebasing of non-reporting status fund investments;
- Collating records on mixed funds;
- Transferring assets e.g. between spouses offshore if one will benefit from rebasing and the other will not;
- Ensuring that if the remittance basis charge hasn’t been paid in previous years it is paid for this tax year if that will enable someone to benefit from rebasing/cleansing – of course it will be necessary to balance the cost of the charge and the benefit of rebasing/cleansing;
- Consider holding assets until 6 April 2017 such that they are rebased and then selling them and cleansing the sale proceeds.
We are planning to contact our clients who are likely to be affected by these changes. However if you are at all concerned in the meantime, please contact your Account Manager or email us at email@example.com