Reforms to the taxation of non domiciliaries - further consultation

A further consultation on the taxation of non domiciliaries was published in August 2016. As well as giving feedback on the September 2015 consultation, further points were raised. 

The main thrust of the proposed changes is for all UK residential property to be subject to inheritance tax (IHT) regardless of how it is owned and for all non domiciliaries to be deemed domiciled after 15 out of 20 years in the UK for all taxes. Currently residential property owned by an offshore trust or company escapes the IHT net and deemed domicile only applies to IHT, and after 17 years out of the last 20 in the UK.

As part of the consultation we have attended several meetings with HMRC and HM Treasury to obtain greater clarification of the proposals, which in some respects were incomplete in the consultation. We also proposed an alternative approach regarding existing trusts, where settlors becoming deemed domiciled for income tax and capital gains tax will result in tax charges from long standing trusts.

The key points made in our response are:

  • Inheritance tax changes
    • There should not be a situation where a non UK domiciliary pays more tax than a UK domiciliary in the same position
    • The issues around valuation still need addressing; is the property valued or are the shares in the company holding the property and what discounts apply for partial ownership?
    • The provisions covering the deductibility of loans in respect of a property are inadequate; for example a loan by the shareholders of the company to allow the company to buy a property could not be deducted as it would be by a connected party
    • The interaction with tax treaties still needs to be addressed
    • Despite an indication in the past that there may be a relief for unwinding existing structures to de-envelope residential property, no such relief is included in the consultation and no response has been given to the paper submitted by CIOT, supported by ICAEW on 21 June 2016 (Appendix 2)
    • We suggest as an alternative to complex legislation changes that the annual tax on enveloped dwellings is increased to achieve the same fiscal target.
  • Deemed domicile
    • Rebasing should be available to individuals deemed domiciled by law in the five years to 6 April 2022, not just those deemed domiciled on 6 April 2017
    • Rebasing should extend to assets held by trusts and corporates not just individuals
    • The rebasing requirement to own the asset at the date of summer budget 2015 seems unnecessary
    • It is unjust that disposals of assets between summer budget 2015 and April 2017 will be taxed on an arising basis for returning temporary non-residents
    • We appreciate that the discussions in the consultation meetings were not final but would like to make clear that the “one shot” proposal for cleansing mixed funds would be too restrictive
    • Given the need to carry out mixed fund analysis and sell chattels, the suggested window of opportunity for cleansing should be lengthened to two years
    • Treating UK born individuals with a UK domicile of origin who have changed their domicile either by dependency or choice as UK domiciled as soon as they return to the UK is unjust. We have particular concerns with respect to minors whose parents removed them from the UK and they acquired a UK domicile of dependency. There should be a carve-out for such individuals
    • The short grace period for such individuals allowed for IHT is inadequate.
  • Protected trusts
    • An alternative framework for income tax and capital gains tax charges has been proposed and discussed in the meetings with HMRC and HMT (Appendix 3 and summarised in para 106 to 111 in the response) as we have significant concerns about the proposals in the consultation document (though they are better than the proposals in the September 2015 document which would have introduced a dry tax charge)
    • Not all offshore trusts are located in non or low tax jurisdictions and the double taxing issues of those trusts in tax paying jurisdictions needs to be addressed.

In addition to the consultation on the proposed tax changes, suggestions were invited for improving business investment relief. Our comments included

  • The current rules are too complex and so act as a deterrent;
  • The anti-avoidance provisions are disproportionate in their severity and reach (the “involved company” definition for example);
  • The current investment opportunities are too narrow and the incentives to invest insufficient.
  • If the government is making domilcile a question of when and how long people live in the UK, then leaving the UK should allow people domiciled in the UK whether by birth or by residence under the new rules, to surrender that domicile on leaving if they show no intention of returning.