Deemed domicile second tranche of draft legislation

Along with the other draft Finance Bill 2017 legislation, the draft legislation dealing with the introduction of deemed domicile for longer term residents for all taxes, was first published on 5 December 2016 and we commented on it in ICAEW REP 13/17. As noted in our news item, additional and revised draft legislation was published on 26 January 2017 and we have now submitted our comments on that as ICAEW REP 25/17 and ICAEW REP 26/17.

ICAEW REP 25/17 looks specifically at the cleansing provisions. The proposal to allow non-doms to cleanse offshore funds, that is to strip out unremitted income and gains leaving clean capital that could be brought into the UK without incurring a tax charge, was welcomed, but the interpretation of the legislation by HMRC will signficantly limit its usefullness. Specifically:

  • not accepting that pre 6 April 2008 foreign income and/or gains can be cleansed
  • specifying that there has to be one single instruction to cleanse given to the bank albeit that it can cover transfers to numerous accounts (this is a practical issue as banks may not be amenable to receiving a single instruction covering more than one transfer and it is also likely to catch out foreign domiciliaries
  • not accepting that cleansing can take place where the mixed fund is in the name of a relevant person other than the taxpayer.

In addition the current draft legislation invalidates the cleansing exercise if an excessive nomination of income and gains is made. This makes it impossible to take a pragmatic approach, which would be to over nominate in terms of foreign income and foreign gains to leave behind what you are sure will be clean capital. To avoid being caught it will be necessary to transfer a conservative estimate of the clean capital out such that this will not result in a successive nomination. This is a potential trap that we believe should be omitted from the legislation. It would be better to remove the provision and give HMRC the power to challenge a nomination if it felt that the nomination would lead to an underpayment of tax.

ICAEW REP 26/17 looks at the draft legislation generally. Most of the comments from our first representation still stand, the substantive comments in this new representation are on the income tax provisions as published on 26 January 2017.

We are very concerned about the introduction date of 6 April 2017 given that the draft legislation is still work in progress; the draft legislation for the income tax amendments was issued on 26 January 2017, just 69 days before going live. To introduce such complex legislation with such haste is wrong in principle and in our experience could lead to problems further down the line.

Our representation goes into great detail about the areas where the drfat legislation does not work as intended.