HMRC have launched a consultation: 'Reforms to the taxation of non-domiciles: further consultation'. This provides updates on the changes to the non-dom regime which were originally announced last year together with some draft legislation.
A wide reaching review of the taxation of non-domiciled individuals was announced in the Summer Budget 2015. This was followed by a consultation in September 2015 which focused on the proposal to end permanent non-dom status through the introduction of a ‘deemed domicile’ rule.
This consultation provides an update on that proposal, as well as:
- Details of the proposal to charge IHT where UK property is held through an offshore structure such as a company.
- A request for views on how Business Investment Relief could be changed to encourage greater investment by non-doms in UK businesses.
The whole package of reforms will be legislated together in Finance Bill 2017.
As previously announced the permanent non-dom status for UK resident individuals is being abolished from April 2017.
Instead an individual will be "deemed UK domiciled" for all UK taxes if:
- They are non-dom and UK resident for more than 15 of the past 20 tax years.
- They were born in the UK with a UK domicile of origin and later become UK resident (a returning non-dom).
Individuals will be able to lose their deemed domicile status if they are non-resident for at least six years.
Although this consultation does not propose any further fundamental changes, HMRC have decided following earlier consultation that:
- Residence status will have to be determined using the rules in place for the relevant year (and not just the statutory residence test).
- Years spent in the UK during childhood will count.
- Years where an individual can claim split-year status will not be disregarded.
- The £2,000 de minimis rule for unremitted income and gains will remain.
Transitional measures will also be introduced to deal with a range of issues, including rebasing of foreign assets.
No changes are proposed to the previously announced policy to treat an individual as being deemed-domiciled in the UK when they are living here if they were born in the UK and had a UK domicile of origin.
IHT implications of deemed domicile rules
- Bringing the IHT deemed domicile rules in line with the above would increase the period of time which non-doms leaving the UK are treated as being deemed domiciled for IHT to six years.
- HMRC acknowledge this was not the policy intention.
- They will therefore change the rules so that deemed domicile status will fall away for IHT once individuals have been non-resident for more than four consecutive years.
- This broadly maintains the existing treatment of departing non-doms for IHT purposes.
- HMRC intend to ensure that any individual who becomes deemed-UK domiciled will not pay UK tax on any income or gains retained in offshore trusts that they settled before they became deemed UK-domiciled.
- This will not, as previously suggested, be achieved through the creating of a new regime linked to benefits received from the trust.
- Instead amendments will be made to existing anti-avoidance rules to protect trusts.
IHT on UK residential property
As previously announced HMRC will bring residential properties within the charge to IHT where they are ‘enveloped’ within an overseas structure. This will:
- Apply both to non-dom individuals and trusts with non-dom settlors or beneficiaries.
- Apply where UK residential property is held by an offshore close company or partnership
- Be effective for all chargeable events which take place after 6 April 2017
Further detail is provided on how the charge will be applied:
- The definition of ‘residential property’ will be based on that used for the purposes of non-residents CGT, with amendments as needed (e.g. so that main homes are not excluded).
- A property will be within the charge to IHT if it has been a dwelling at any time in past two years preceding a transfer.
- In line with current IHT rules any relevant debts such as mortgages will be taken into account.
- A targeted anti-avoidance rule will be included so that arrangements are disregarded if their whole or main purpose is to avoid or mitigate a charge to IHT.
- Given the potential difficulties in identifying where a liability has arisen and securing payment under the new rules expanded powers are proposed for HMRC.
Despite specific representations by the CIOT, HMRC confirm that no incentive will be introduced to encourage individuals to de-envelope in advance of these changes coming in.
Business investment relief
HMRC are consulting on ways in which Business Investment Relief can be changed and expanded to make it easier for remittance basis users to bring their money from overseas to invest in UK businesses.
No specific proposals are made, but instead views are sought on how the system can be made more effective and simplified to increase take up.
The consultation will run until 20 October 2016.
Our subscriber guide: Non-domicile status & tax
Consultation document: Reforms to the taxation of non-domiciles: further consultation