Long-awaited changes to non-domicile rules, designed to take effect in April, have been put on hold because of pressure to enact revenue-raising legislation ahead of the UK general election in early June. Advisors are unhappy.

(Updates with added reaction)

The snap election to be held in the UK on 8 June has derailed the arrival of a new tax regime for non-domiciled residents, creating unnecessary worry and overturning months of planning, although the tax regime is likely to change eventually, lawyers and advisors say.

The decision by Prime Minister Theresa May to hold the election on 8 June this year instead of wait until 2020 – tempted by the prospect of winning a large parliamentary majority – means the Finance Bill 2017 collection of measures has had to be drastically pared down to have a chance of reaching the statute book. 

Among the jettisoned measures were new rules on the UK’s non-dom regime (such as ending permanent non-dom status) and changes to IHT on UK residential properties. While both measures have been controversial in some quarters, advisors had at least hoped that passing the measures would create some certainty. Now that has been thrown up into the air.

“It is unbelievable that such important provisions have been dropped at the 11th hour, after the painful amount of work that has gone into the process to finalise the legislation.  It is even more disappointing for those non-domiciled individuals who were readying themselves for the changes and arranging their affairs in the run-up to the end of the (5 April 2017) tax year,” Nimesh Shah, partner at Blick Rothenberg, accounting, tax and advisory firm, said.

“The government should be taking their time with such important tax legislation and it would have made sense to leave this until after the election. To rush it through in this slapdash way before the election is unsettling for taxpayers,” Shah said.

Shah expects that a second Finance Bill will be published after the election and the majority of the dropped changes will be re-introduced and backdated to have effect from 6 April 2017.

“Non-domiciled individuals will now face a period of limbo, waiting for the outcome of the election and publication of the second Finance Bill. This will be the second time in three years that we will have two Finance Acts in a year, adding to yet more tax legislation,” Shah added.

The Chartered Institute of Taxation had warned about the risks of rushing through the Finance Bill as a result of the snap election. Dawn Register, partner, BDO, said: “It appears that with Theresa May calling a snap election, there are deep concerns that there is not enough parliamentary time to properly scrutinise the sheer volume of tax changes. Therefore the CIOT is looking for the government to focus solely on measures essential to maintain the government’s revenue raising capacity. From our perspective, the most significant measures which need longer parliamentary debate include making tax digital, the requirement to correct and dealing with non-doms.”
 

“We welcome a government decision to follow the guidance from the CIOT. There is simply not enough time or capacity to properly scrutinise these complex measures. Small businesses and lots of taxpayers will be relieved at this decision, who will have had huge concerns about costs and extra work for compliance, especially when Brexit and the election add to the uncertainty. This provides all involved with essential respite to organise their affairs,” Register said.

“We would however add that this Bill is likely to be reignited in the future, and therefore will provide people with extra time to get informed advice,” she added.

Under the slated changes to the non-dom regime, those persons who have been UK tax resident for more than 15 out of the previous 20 years would be deemed to be UK domiciled so they no longer qualify for the “remittance basis” and become subject to income tax and capital gains tax on their personal worldwide income and gains. (Under the “remittance basis” until the changes, a non-dom could avoid tax on worldwide income so long as he or she paid an annual levy, which rose as the non-dom period increased.) Another planned change was to give non-doms who had claimed the remittance basis and paid the remittance basis charge an opportunity to rebase the cost of their assets to their value at 5th April 2017. 

The other change,to inheritance tax, mean IHT would become due on their worldwide assets. It would also give protections to offshore trusts set up by such individuals from income tax, capital gains tax and inheritance tax where they meet the qualifying conditions. 

The changes were due to kick in from 6 April this year.

Mark Davies, a UK-based advisor to non-doms and those in similar situations, said: “This U-turn means that trusts set up by non-doms prior to 5th April 2017 will protect the settlor from capital gains tax and Inheritance tax but will not shelter the income in an offshore trust in which a settlor can still benefit. In most circumstances a UK resident non-dom settlor will still need to claim the remittance basis and pay the remittance basis charge until the changes are brought in.”

“Non-doms who intended to fund their lifestyle in the UK by taking advantage of the rebasing election or the cleansing provisions will now need to wait until next year. This may mean that plans to sell rebased assets may now need to be deferred,” he said.

“The government’s decision to halt many of the provisions of the Finance Bill after the date that they were due to take effect is shambolic. Many non-doms would have taken advice and either left the UK, restructured or accepted the additional tax. Now those most prepared, may find that their planning is now defunct. For instance some may have retained assets in their personal name, sold them post 6th April 2017, expecting to be able to claim the rebasing election. This would mean that only the gains post 6th April 2017 would become taxable and the proceeds would be a source of funding in the UK. But now this does not work,” he said.

“Many non-doms may have already incurred substantial tax charges from restructuring, in particular, their holdings of residential property in the UK in advance of the proposed introduction of the changes,” Imogen Buchan-Smith, senior advocate at Wilsons, the private client law firm, said in a statement.

“As part of a restructuring a number of non-doms may have incurred CGT and SDLT charges in the hundreds of thousands of pounds as, on balance, these charges would have been less than those involved in retaining existing structures under the proposed reforms. As well as the tax charges incurred, many non-doms may have also incurred substantial advisory fees relating to these changes – for tax accountants, lawyers and valuers,” she continued.

There is now huge uncertainty as to whether these measures and, perhaps, substantial costs have been necessary. One of the attractions of the UK for High Net Worths and Ultra High Net Worths has been the certainty and relative stability of its tax policies. The last six months has eroded that reputation,” Buchan-Smith added.