Client Affairs
GUEST ARTICLE: Proposed Changes To UK Treatment Of Non-Doms - A Look At The Fine Print

This article goes into detail about the UK government's proposed changes to the country's non-domiciled system, which dates back more than two centuries.
Last week UK finance minister George Osborne unveiled his
Autumn Statement of measures on tax and public spending, the
third major announcement on tax and fiscal policy since spring of
this year. Of interest – or alarm – to wealth managers and their
clients are issues around non-domicile status, taxes on forms of
property, and the constant noises around tax avoidance. This
article examines the fine print and is by John Goodchild, partner
and head of private wealth at Pemberton
Greenish, a law firm focusing on areas such as tax, estate
planning and property. This publication is pleased to share
such views; as ever, it does not necessarily endorse all the
views expressed and invites readers to respond.
The UK government’s proposed changes to the treatment of UK
resident non-domiciled individuals and the manner in which it is
setting about implementing the changes has created a period of
unhelpful uncertainty for such individuals and their advisors.
One of the things that needs to be borne in mind is that the
taxation of non-doms has been a volatile area in recent years.
There was a massive overhaul of this area in 2007/8 with
significant changes to the “remittance basis” and the
introduction of the “remittance basis charge” and with the latest
announcements non-doms might feel that they are being singled out
for victimisation. One of the criticisms of the current
proposals is that the way the government is going about
implementing them is creating uncertainty and anomalies.
The announcements on 8 July, of course, sketched out the main
policy areas:
- a new “deemed domicile” rule, based on 15 years’ tax residence
in 20 years for the purposes of income tax, capital gains tax
(CGT) and inheritance tax (IHT);
- penal rules for individuals born in the UK with a UK “domicile
of origin” who resume tax residence in the UK; and
- a “look through” rule that will apply to charge
residential property held by non-UK entities to inheritance
tax;
It also passed some comment on the future tax treatment of
trusts.
A consultation document was published on 30 September and lasted
just six weeks (which is half of that recommended for major
changes in legislation). That document had some draft legislation
attached to it but the government was not able to release
more.
Some draft legislation is expected with the government’s Autumn
Statement but that does not give enough time for the government
to reflect on the responses to the consultation on what is a
complex area of law.
The government’s proposal is to introduce some of the legislation
in the Finance Bill 2016 and some of it in the Finance Bill 2017.
As is well known, all changes are intended to be effective
from 6 April 2017, which is now just some 16 months away, and so,
non-doms and their advisors will be struggling to achieve the
clarity that they need in order to make their plans.
So it has been suggested by the Institute of Chartered
Accountants in England and Wales that the legislation should be
enacted as one complete package and deferred until April
2018. Apart from the apparently defective process there are
also concerns about the substantive proposals.
One of the major criticisms is that the consultation document has
proposed a basis of taxing non-doms in relation to offshore
trusts which is unfair and which will further complicate the
already complicated area of the income tax and capital gains tax
anti-avoidance rules that presently apply.
The government stated that it proposes taxing non-doms on the
value of “benefits” received from offshore trusts regardless of
the gains and/or income within the offshore trust. There is some
confusion as to whether the government intends that only to apply
to non-dom “settlors” of trusts. In any event, all of the
professional bodies in the UK have criticised this and they have
put together a joint paper in which they suggest that the
government overhauls the income tax and CGT anti-avoidance rules
so that there is a coherent and simplified code that applies to
offshore trusts.
A second area of major criticism is the special treatment
proposed for individuals born in the UK with a UK “domicile of
origin” who have lived abroad and acquired a foreign domicile but
become tax resident in the UK after 5 April 2017.
This proposal is harsh and submissions have been made that a
longer period of residence in the UK should be necessary
(three tax years has been mentioned) before tax privileges
are lost. It is also felt that the removal of privileged status
for trusts is too draconian and will lead to real problems for
offshore trustees. It has been suggested that pre-July 2015
trusts should be grandfathered and that trusts from which the
returning non-dom is excluded should also continue to enjoy their
current protected status.
Other areas of criticism of the proposals are:
- the government’s intention that “split” tax years with a
UK resident element should count towards the 15 year “deemed
domicile” test;
- the potentially unclear treatment in certain cases of
individuals who leave the UK before 6 April 2017; and
- that the period that individuals need to be non-UK
resident in order to fall out of “deemed domicile” for IHT
purposes should be less than six years.
There is also consensus that there should be appropriate
transitional provisions and no anti-forestalling
legislation. The main concerns of professionals are that
there should be fairness and logic in the final version of the
proposals and that non-doms should be afforded sufficient time
and clarity so that they are able to plan their affairs before
the proposals take effect.