Last Summer George Osborne announced wide scale reform to the taxation of foreign domiciliaries or non-doms with effect from 6th April 2017.
Firstly, measures were proposed against “boomerang non-doms”, these are people born in the UK with an English domicile of origin, who leave the UK and acquire a domicile of choice abroad, but subsequently become UK resident again and then claim non-dom status. The reforms will prohibit them from claiming non-dom status and any structures which they set up whilst resident abroad will be ineffectual for tax planning purposes.
Perversely, these provisions will not apply to the children of boomerang non-doms who were born abroad.
Secondly, there will be changes to how people with a foreign domicile of origin are taxed.
There are two main changes. Currently, those claiming non-dom status become liable to UK inheritance tax once they have been UK resident in 17 out of 20 tax years under the deemed domicile rule. Under the new rules long term resident non-doms will become deemed domiciled for all UK taxes, e.g. income tax, capital gains tax and inheritance tax.
In practice this means that a non-dom will not be able to claim the “remittance basis” and the accompanying remittance basis charge will cease to fill up the Treasury coffers. Once they become deemed domiciled non-doms will be subject to tax on their personal worldwide income and gains like everybody else. However, the Government has said that there will be a measure of protection for offshore discretionary trusts established prior to an individual becoming deemed domiciled. In these circumstances the tax charge on the trust’s foreign income and gains will be limited to any benefit or payment received from the trust, wherever enjoyed; rather than on the foreign income and gains of the whole trust.
The second change defines when the new deemed domiciled rules will be triggered. From 6th April 2017 a person will become deemed domiciled for all taxes after being UK tax resident in more than 15 out of the previous 20 tax years, i.e. in his/her 16th tax year. Currently, individuals are deemed domiciled after 17 out of 20 tax years for the purposes of inheritance tax and this will change to 15 out of the previous 20 tax years to align with the reforms.
So far, almost a year since the announcement of the intention to reform and less than 11 months until these changes come into effect, we have only received draft legislation on the definition of a deemed domiciled person. That’s the easy bit. We have seen nothing about the “measure of protection” for offshore trusts. At last week’s HMRC Event for Tax Advisers, entitled “Reform of Non-domiciled”, we heard how the compliance and technical aspects would work going forwards but were given little detail on any specific provisions. All stakeholders know that the devil will be in the detail, but it would appear that ministers’ attentions are on local elections and Brexit and are not focussed on deciding policy on exactly how deemed domiciled persons will be taxed.
Whilst some taxpayers are content to wait and see, others will choose to vote with their feet. At this event HMRC reported that they had already seen a spike in non-doms leaving the country. HMRC revealed that they will risk assess all foreign domiciliaries who claim that their residency has changed to check that they have really left. Leavers can expect to receive compliance checks and be asked to provide details to substantiate their claim that they are not UK tax resident.
It was also revealed that HMRC intends to write to non-doms to tell them about the new rules and point them in the direction of technical guidance. Common mistakes were described, such as claiming non-dom status when it is not relevant to the taxpayer’s tax bill. Such mistakes will lead to enquiries which can be costly and time consuming to settle. It is a false economy to not seek expert advice even with preparing tax returns.
Brits who leave the UK may still have a UK domicile of origin even if they live abroad long term. It is tough to shake off a domicile of origin so the estate of a Brit dying abroad may still be subject to UK inheritance tax. Obtaining a domicile of choice is difficult to do unless you put down real roots. For returning Brits the position may be far worse. Not only will they become deemed domiciled from their return to the UK but it may also be contested that they never held a domicile of choice abroad because they didn’t, as a matter of fact, stay permanently abroad.
Furthermore, foreign domiciliaries may also have their domicile claims challenged before they become deemed domiciled in the UK. HMRC domicile enquires are focused on demonstrating a taxpayer’s intentions so collecting evidence of intent is vital. HMRC will try to build up a picture of the taxpayer’s lifestyle by understanding their financial arrangements, wills, their interest in charities, membership of clubs and political parties as well as details of the homes and assets they own. HMRC will want to meet with the advisers at an early stage and may request to interview taxpayers about their intentions and lifestyle.
HMRC recognises that this is a technical area and an Inspector will have support internally from tax experts from the earliest stages of an enquiry. A taxpayer being investigated would be astute to seek a similar level of specialist advice.
Finally, HMRC confirmed that the draft legislation will be published at the end of this year at the latest, possibly in combination with the expected consultations on Business Investment Relief and the proposed changes to inheritance tax on residential property held in offshore structures. This is far from satisfactory as uncertainty of tax treatment may mean that non-doms may leave and perhaps more importantly the UK may be discounted as an option by people considering a move.