Stronachs Logo

While non-domiciled individuals (“non-doms”) have traditionally received favourable tax treatment in the UK, a number of reforms were announced in the 2015 summer Budget to widen the scope of the UK tax net.  Last week’s Finance Bill contains a number of provisions which bring these changes into force from 6 April 2017.

Pre-6 April 2017 Rules

At present, non-doms generally only pay tax on assets located within the UK or which are remitted to the UK.

For Inheritance Tax (“IHT”) purposes, non-doms who were previously UK domiciled are treated as deemed-domiciled until they have lost their UK domicile for three years. In the interim, they pay UK IHT on their worldwide assets. Non-doms will also become deemed-domiciled for IHT purposes if they have been UK resident for 17 out of the last 20 tax years. This status can only be lost after four years of non-residency.

For Income Tax purposes, non-doms can elect to pay tax on a remittance basis. In practice, this means that they only pay Income Tax on income they actually remit to the UK. An annual fee must be paid to secure this status.

Post-6 April 2017 Rules

As noted above, from next month the net will be cast wider so that more non-doms will be caught by UK Income Tax, Capital Gains Tax (“CGT”) and IHT. The changes hope to ensure that, generally speaking, persons born in the UK who return to reside here will be caught by UK tax, regardless of whether or not they have in the interim acquired a domicile of choice elsewhere.

While some of the new provisions are relatively niche, the main thrust of the changes could have a significant impact on many people living in and around Aberdeen. The key developments are summarised below.

Deemed Domicile – Income Tax and Capital Gains Tax

The rules concerning deemed domicile are undergoing a significant revamp. For Income Tax and CGT purposes, non-doms will now fall within the scope of UK tax if either of the following conditions are met.

1. Condition A:-
• Born in the UK;
• UK domicile of origin; and
• UK resident in the relevant tax year

2. Condition B:-
• UK resident for 15 out of the last 20 tax years; and
• UK resident in the relevant tax year

Importantly, if a person is not UK resident after 5 April 2017, Condition B will not be met, even if they would otherwise meet the criteria. A non-dom leaving the UK prior to this date will therefore not be deemed domiciled. Any non-doms who remain or become UK resident after 5 April will need to carefully consider the new rules to determine if they are now, or are likely to become, deemed domiciled.

Where non-dom remittance basis users become subject to CGT under Condition B, they can generally rebase their assets at their value on 6 April 2017. The exception to this is where the asset was not situated in the UK during the non-dom’s ownership in the period from 16 March 2016 to 5 April 2017. The asset value will revert to the original base cost, however, if deemed domicile status is lost before the asset is disposed of. If a non-dom does not wish re-basing to apply, for example if the asset has fallen in value since it was acquired, an election must be made.

The new deemed domicile rules will also apply to Trustees where the trust was established after 6 April 2017, either during lifetime or under a Will. However, non-doms who set up trusts before becoming deemed domiciled will not be subject to Income Tax or CGT on the trust’s income and gains unless they receive a benefit from the trust.

Employers with non-dom employees should also take note as there are a number of changes being introduced which may impact upon how payments are made to employees.

Deemed Domicile – Inheritance Tax

The deemed domicile rules are also being extended for IHT purposes. The changes largely align the IHT position with the rules regarding Income Tax and CGT. Non-doms meeting either of the conditions below will now be subject to IHT.

1. Condition A:-
• Non-doms who are “formerly domiciled residents” in the relevant tax year:
i. Born in the UK;
ii. UK domicile of origin;
iii. UK resident in the relevant tax year; and
iv. UK resident for at least one of the two previous tax years

2. Condition B:-
• UK resident for 15 out of the last 20 tax years; and
• UK resident in at least one of the 4 tax years ending with the relevant tax year

As with Income Tax and CGT, where non-doms who would be caught by Condition B leave the UK before 6 April 2017, they will not be caught as long as they do not return to the UK.

The IHT regime for offshore trusts established by non-doms is also being updated. Where overseas assets are transferred into trust by a non-dom who meets Condition A, if the non-dom is UK resident in any tax year the assets will not be treated as excluded property for that tax year. The intention here is to ensure that any trusts established abroad by persons born in the UK are brought within the scope of IHT if that person becomes resident in the UK again.

Benefits from Non-Resident Trusts

New rules are being introduced concerning the UK taxable value of benefits derived from offshore trusts for Income Tax and CGT purposes. These rules apply when trust funds are loaned to a beneficiary or where a beneficiary is given the use of land or moveable assets.

For loans, the taxable benefit is the difference between any interest actually paid on the loan in that tax year and the amount which would have been paid had interest been payable at the official rate.

Where land or a house is rented to a beneficiary by the Trustees, the taxable value is the difference between the rental value of the land and the sums actually paid over by the beneficiary to the Trustees. Certain expenses can also be deducted, such as repairs and insurance premiums.

Where moveable assets are made available to a beneficiary, a formula approach is instead used to calculate the taxable benefit.

Any such benefits should be taken into account when submitting Tax Returns for the year 2017/18 onwards.

Overseas Assets Representing UK Residential Property

At present, overseas assets owned by non-doms are not subject to IHT. This has led to many non-doms holding UK residential property in offshore structures, such as trusts, close companies and partnerships, to defeat UK IHT law. Until now, the non-doms’ interest in these structures was excluded property and therefore exempt. The Finance Bill closes this loophole.

UK residential property held in an offshore trust will now be subject to IHT even if the settlor was non-dom at the time the property was transferred into the trust. Similarly, shares held in a close company or an interest in a partnership will be caught if the value of the shares or the interest is attributable to UK residential property.

Conclusion

The new rules are both wide-ranging and complex. With further reforms anticipated in a future Finance Bill, advisors of non-dom clients must keep their clients’ tax situation under careful review.

If you wish to discuss matters in more detail, please do not hesitate to contact any member of the Stronachs Private Client Team.

Chambers UK 2018

Contact Info

ABERDEEN OFFICE
28 Albyn Place, Aberdeen AB10 1YL
Tel: +44 1224 845845

 

INVERNESS OFFICE
Camas House, Pavilion 3, Fairways
Business Park, Inverness IV2 6AA
Tel: + 44 1463 713225

The Legal 500 logo