The promised consultations on the proposed non domiciled changes were issued last week, and the “excitement” of seeing the link come through was definitely tempered by the puzzlement experienced when seeing it was only 17 pages in total. This bemusement increased after the first read through, as the various consultations promised have all been included in the one document which made the size of it even more surprising.
It appears that HMRC have engaged with certain “stakeholders” already, pre-consultation, to discuss these measures. We will never know whether they took account of any of the stated current concerns or suggestions. Certainly, there have been some changes although at first glance they look potentially worse for the affected tax payers, not better. So, what has changed since my earlier summary?
Resident Non-UK Domiciles
The original suggestion regarding the new deemed domicile for all taxes was that it would extend from a three or four year period to an overall five year period. That has now increased even further to needing to be non-resident for a continuous period of six years (tax years of arrival and departure will count towards this) to lose the deemed domicile.
Years spent resident in the UK whilst under the age of 18 will also count towards the 15 out of 20 years calculation. This means an individual born in UK could become deemed domiciled before they even turn 18.
It is not clear whether the Government is going to accept that a double taxation treaty can override the UK residency or not. Usually, if someone is resident in two countries at the same time under the countries’ own domestic laws, the double taxation treaty gives primary tax rights to one jurisdiction and deems an individual as “treaty resident” in only one country.
Offshore Trusts
The changes announced in the taxation treatment for offshore trusts are potentially going to be a minefield. The government are trying to effectively tax only “taxable benefits” received by individuals, regardless of the trust’s own income and gains and regardless of what distributions of either income or capital have been made. In particular, anyone who has been keeping records of capital payments and trust gains must review the trust and beneficiaries’ positions well before the new rules begin in April 2017. The Government is also suggesting that these new rules could apply to all non-domiciled individuals and not just those who become deemed domiciled.
The government is still considering these proposals and there should be a further announcement with draft legislation in due course.
Returning UK Domiciles
The consultation confirms that whilst UK resident, the UK domicile of origin will revive. Some of the detail will be quite confusing. For example, if there is a split year of residency this will count for income tax and capital gains not for IHT. The Government may consider a “grace period” if an individual falls of this, but doesn’t remain in the UK for an extended period. In summary, the advice has to be don’t die whilst UK resident or be UK resident when a potential IHT charge is due to arise.
Other Potential Changes
The increase to a six year period of non UK residency is also to apply to the IHT spousal election. This increases the amount of time by two years that a spouse who has elected to be deemed domiciled for IHT purposes has to be non-resident to lose it.
At present a UK domiciled individual can acquire a domicile of choice after a potential minimum of three years out of the UK. This will effectively be increased to six years as well.
A non domiciled individual with less than £2,000 of unremitted foreign income and/or gains effectively received the remittance basis automatically and did not have to file a return. This £2,000 de minimus rule may be removed for individuals who become deemed domiciled in the UK under these proposals to align their tax treatment with UK domiciled taxpayers.
Conclusion
It’s hard to be positive about these announcements. Respondents to consultations usually take their time to be constructive and to use their knowledge and experience to influence new tax legislation. Even the word “consultation” denotes collaboration, but these 17 pages of pronouncements don’t really focus on the true problems and the questions asked are not the right ones. Responses have to be in by 11 November and this is a shorter than normal period.
As before, anyone potentially affected by these changes must take advice in good time to allow for a measured response to their own position.
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The information in this article was correct at the date it was first published.
However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.
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