Client Affairs

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

John Goodchild Pemberton Greenish Head Of Private Wealth 27 November 2015

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.

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