Reforms to the taxation of non UK domiciliaries

Summary of responses to the 2015 consultation, and a new consultation about IHT on UK residential property

In 2015 the government consulted on proposed reforms to the taxation of non-UK domiciliaries (“non-doms”). It has now published a summary of responses to that consultation plus new consultations on two areas: applying inheritance tax (IHT) to UK residential property, and improving the business investment relief scheme.

Reforms to the taxation of non-doms were announced in the 2015 summer budget, followed by consultation documents in September 2015. ICAEW responded to the consultation in TAXREP 59/15. This first consultation looked at introducing deemed domicile for income tax and capital gains tax (CGT) – currently it applies just for IHT – and changing the rules for when an individual becomes deemed domiciled in the UK. HMRC is planning to go ahead with these changes from April 2017 and has published draft legislation for comment.

The responses to the 2015 consultation and new consultations are in Reforms to the taxation of non-domiciles: further consultation, published on 19 August 2016. The deadline to respond to the new consultations is 20 October 2016.

Deemed domicile

The deemed domicile rule in place for IHT is that an individual becomes deemed domiciled after being present in the UK for 17 out of the last 20 years. They do not have to be complete years, and arrival in the UK on 5 April will count as one year. The consultation envisaged a change to make the rule 15 out of 20 years, but looking at years the individual is classed as UK resident rather than mere presence in the UK. This change is going ahead from April 2017 as outlined in the consultation document.

The response outlines the proposed treatment of some transitional matters relating to the introduction of deemed domicile, including the treatment of assets sold during a period of non-residence, returning non-doms who has left the UK before becoming deemed domiciled under the 17 out of 20 years rule, rebasing foreign assets for CGT purposes and dealing with mixed funds of capital and income.

Non-doms who created offshore trusts before becoming deemed domiciled will not be taxed on trust income and gains retained in the trust; the consultation proposed basing new rules on the taxable value of benefits received by the deemed domiciliary but after consultation this idea will not be pursued. Instead, changes will be made to the application of s86 and s87 of TCGA 1992 to, in effect, apply the charge to deemed domiciliaries in the same way as they apply to UK domiciliaries.

Following the consultation the £2,000 de minimis rule which allows non-doms to have unremitted income and gains of this level, without having to opt for the remittance basis and without having to account for UK tax, will remain in place.

The proposed changes to the deemed domicile rule meant that the UK domicile status would remain with the individual for six years after leaving the UK. This was not the intent and following the consultation changes will be made such that as now the deemed domicile status will fall away after four years outside the UK.

The proposal to treat UK born individuals as immediately UK domiciled when they return to the UK with a two-year period of grace for IHT remains unchanged as do the proposals regarding offshore trusts for these returning UK domiciliaries; income and gains arising in an offshore trust created while the individual was non-UK domiciled will be taxed on an arising basis whilst the individual is resident in the UK and the trust will become liable to UK IHT charges.

The HMRC document included draft legislation for comment, plus explanatory notes.

New consultation: IHT on UK residential property

Under current IHT rules non-doms are only liable to IHT on property situated in the UK. Many non doms own their UK residential property via an offshore structure and thus take the value of the property outside the scope of UK IHT. The proposal is to remove UK residential property owned by offshore structures from the definition of excluded property such that from April 2017 all residential property will be within the charge to IHT whether held directly or indirectly.

One model for the definition of residential property is to use the same definition as the one for non-resident CGT introduced in Finance Act 2015. This excludes care or nursing homes, any building with 15 bedrooms or more purpose built for students and occupied as such, and prison and military accommodation. An alternative is to use the definition from the annual tax on enveloped dwellings legislation but this will require more amendments than the CGT definition.

The consultation considers what valuation should be used for the property and the question of liability and accountability.

Along with other professional bodies ICAEW asked that the government give consideration to allowing some concessions regarding stamp duty land tax if individuals choose to de-envelope their UK residential property. The consultation makes it clear that there is no intention to provide an incentive to de-enveloping.

New consultation: business investment relief

Business investment relief was introduced in April 2012 to encourage individuals who are taxed on the remittance basis to invest their foreign income and gains in businesses in the UK.

The government believes that business investment relief can be amended and expanded to make an even greater contribution to the UK economy and is asking for ways the scheme could be changed and simplified as well as comments on the tax avoidance provisions.

If you have any comments on the consultation please post them below or email