As anticipated HMRC has now published its guidance on the deemed domicile changes which are effective from 6 April 2017.
A summary of what has changed
From 6 April 2017 all non UK domiciliaries who have been resident in the UK for 15 out of the previous 20 years will be deemed UK domiciled for all taxes. Previously, deemed domicile only applied to inheritance tax and that was after 17 out of 20 years resident in the UK.
Anybody born in the UK with a UK domicile of origin will be treated as UK domiciled as soon as they return and become resident in the UK, even if they have acquired a domicile of choice elsewhere.
The change in the domicile status of former non UK domiciliaries not only affects income and gains, which are now taxed on an arising basis, but also has an impact on accumulated income and gains from prior years which have not been subject to UK tax. Provisions have been introduced to smooth the transition, including the ability to cleanse mixed funds within a fixed two-year window. This means that funds made up of a mix of income, gains and original capital can be cleansed to give a pot of capital that can be remitted to the UK without a tax charge and a pot of income and gains that would trigger a tax charge if remitted.
There is also an impact on any offshore trusts set up while the settlor was non UK domiciled. Without protection the settlor would become liable for all the income and gains in the trust on an arising basis; but provided the gains and foreign source income remain within the trust there will be no tax charge for a protected settlement.
The HMRC guidance
The Tax Faculty assisted with a review of the draft guidance at the end of last year and we are pleased to see that many of our suggested amendments have been adopted. The legislation is not easy to follow, so any help HMRC can give to provide clarity is welcome.