Tag Archives: Non-Domiciles

Update on the reforms to non-domiciliaries (non-doms)

Leave a reply

The long awaited further consultation document from HMRC has been released for individuals who are resident but not domiciled in the UK. This document provides further detail on the reforms but also importantly seeks responses on certain aspects of the proposed changes.
The main points to note are as follows:Nondom

UK Inheritance tax (IHT) on UK residential property

  • IHT will now be payable from 6 April 2017 on all UK residential property owned by non-doms either directly or indirectly via offshore companies, offshore trusts and overseas partnerships.
  • The mechanism for bringing such UK residential property held in this way into the UK tax net will be to remove these structures from the definition of excluded property – and therefore no longer excluded from IHT.
  • This will apply whether the overseas structure is owned by an individual or a trust. Shares in offshore close companies and similar entities will no longer be excluded property if, and to the extent that, the value of any interest in the entity is derived directly or indirectly from residential property in the UK. There will be no change to the treatment of companies other than close companies and similar entities.
  • The change will be effective for all chargeable events which take place after 5 April 2017, such as on death or the 10 year anniversary of a trust
  • There are questions in the consultation over how to define a residential property for these purposes. HMRC seem to favour the same definition as that of a ‘dwelling’ for Non-Resident Capital Gains Tax purposes; with the exception that no relief will be given for main homes.
  • HMRC raise concerns of being able to keep track over the charge to IHT on certain overseas structures and whether a block on property sales can be imposed until all IHT debts are paid.

Deemed domicile for long term residents

  • Individuals who have been resident in the UK for 15 out of the previous 20 tax years (the 15/20 test) will become deemed domicile in the UK for income tax, capital gains and IHT from 6 April 2017.
  • HMRC confirm that years spent as a child will count towards the 15/20 test. Split years of UK residence will also be included which means that proper planning for arrival and departure should be in place.

Rebasing of foreign assets

  • Individuals who become deemed domicile from April 2017 can elect to rebase their directly held foreign assets to market value at this date; thereby only paying capital gains tax on any increase in value. This will be restricted to those individuals who have previously paid the remittance basis charge in any year prior to April 2017. The rebasing will not be available to a non-dom who becomes deemed domiciled after April 2017 or to those with a UK domicile of origin (i.e. born in the UK).

Temporary window for separating mixed funds

  • The taxation of mixed funds is a complex area and HMRC are aware that it can prevent non-doms from remitting money to the UK.
  • For a period of one year commencing 6 April 2017, HMRC are introducing a temporary window to allow individuals to re-organise and separate their mixed funds into clean capital, foreign income and foreign gains. This will be available to all non-doms, apart from those with a UK domicile of origin.

Non resident trusts

  • There was some discussion in HMRC’s initial consultation to introduce a ‘benefits charge’ (taxing individuals on the benefits they receive from a trust rather than the income), however this has been scrapped.
  • Instead all deemed domiciles will be taxed on chargeable gains arising from a trust if they retain an interest in the trust. This is not extended to deemed domicile settlors where the trust was set up before becoming deemed domicile (unless they derive a benefit from the trust).

Foreign Capital Losses

The treatment of foreign capital losses will need to be changed. In particular a foreign loss election will last only until the individual becomes UK domiciled or deemed-domiciled.

Other changes

  • The annual £2,000 unremitted foreign income de-minimis will remain for non-doms, even after they become deemed domicile.
  • The initial consultation suggested that an individual’s deemed domicile status for IHT purposes would only be lost after 6 years of non-UK residence. This has now been agreed by HMRC to be 4 years and it also applies to the spousal election(which can be made where one party to a marriage or civil partnership is non-domiciled).

It seems that HMRC have listened to some of the responses given to the initial consultation. There are certainly some valuable transitional rules, such as the rebasing of foreign assets and separation of mixed fund accounts which will need to be considered. This is a complex area of taxation and any change to existing arrangements may require consideration of three different taxes. As always, anyone that is potentially affected by these changes must take advice in good time.

Common sense at last? – Some Non Doms will breathe a sigh of relief

Leave a reply

HM Revenue and Customs have made a quiet announcement in a few paragraphs to remove the draconian retrospective effect that the original notice gave in 2014 regarding loans remitted to the UK where they have used overseas assets as collateral.

Although HMRC gave until 5 April 2016 to unwind or replace this borrowing, it was seen as unfair to penalise individuals who had followed HMRC’s stance at the time and had, in good faith, followed their interpretation and organised their affairs accordingly.

HMRC’s announcement in August 2014, changed their interpretation of the legislation and, as mentioned previously, the only transitional relief for those who had already taken out such a loan was a long period of time to unwind or replace the arrangement.

Common sense has prevailed and the representations that have been going on for some time have finally borne fruit and the announcement last week has stated that anyone whose loan was brought to or used in the UK before 4 August 2014 will not need to be repay or replace that loan.  Note, it is the date the loan proceeds were brought to/used in the UK, not the date the loan was taken out that is relevant for these purposes.

Any loan proceeds brought to/used in the UK after 3 August 2014 will still fall within HMRC’s change of practice and anyone unsure how they may be affected by these changes should take advice to check their position.

UK Non-Domiciles – a Very Taxing Problem

Leave a reply

One of the major debating points during the recent General Election campaign revolved around Non-Domiciles and their treatment in the UK, especially for tax. In my experience over many years Non-Domiciles face many issues and difficulties on arrival in the UK, not least the taxation effects on their secondments into the UK business world. As we know, the world is a small place – and getting smaller, particularly from a tax perspective.

The populist, tabloid view of UK Non-Domiciles – enhanced over this latter period – suggests that they get a favouritist deal from our friendly UK tax authorities. But how true is that view in reality?

Of course, firstly, if your Non-Domiciled Secondee is only in the UK on a temporary basis, performing duties partly in the UK and partly overseas, then large tax refunds can be claimed using Overseas Workdays Relief (OWR). OWR is available to all UK resident but Non-Domiciled individuals arriving in the UK who have not been resident in any of the previous three tax years in respect of:

  • overseas earnings assessed on the Remittance Basis for their non-UK earnings,
  • provided the full amount of such ‘foreign earnings’ are paid directly into a bank account held outside the UK and are not remitted to the UK.
  • on this basis, such earnings will only be taxed in the UK if and when remitted.

OWR, having previously been given by concession, is now statutory but is only available for the first three years, or part-years, of UK residence. However, the devil is in the detail when dealing with these claims and care must therefore be taken.

Rapidly increasing globalisation and the relaxation of national borders, together with the introduction in the UK of the Statutory Residence Test (SRT) from April 2013 makes the issue of seconding employees internationally a cause for much greater concern amongst employers and professional tax advisers alike, even those not here for the long term.

Secondly, let us consider the economic environment into which they arrive. According to the most recent Government figures almost 5 million UK taxpayers (19% overall) will be either higher or additional rate taxpayers in tax year 2015/16. Nevertheless, this proportion is expected to account for almost 68% of the UK’s total income tax receipts. UK Non-Domiciles traditionally constitute a significant portion of this group and a large section of these remain in the UK for the longer term, helping to generate business, employment and wealth in our Nation.

With this in mind, therefore, how will these Non-Domiciles be affected by the move to and presence in the UK for tax purposes?

Having only newly arrived or indeed being only in the UK for some temporary purpose will not in itself automatically relieve the individual, or his employers, of UK tax liabilities or compliance obligations. Hence, OWR might not be available.

UK tax liability is broadly based on residence, which is a question of fact, now based on the UK’s new SRT; this comprises several tests on an employee’s length and purpose of visits, plus any connections held with UK. Again, the detail involved in determining these tests is complex and makes it far easier for someone moving to the UK, even for a short term stay, to become UK resident. Just like UK Residents, they are then therefore taxable on worldwide income & gains (the Arising basis) and can only NOT be so taxable if they are non-UK Domiciled. Even so, they must choose ‘not to be taxable on non-UK income and gains unless remitted’ (the Remittance basis) and, for longer-term visitors, pay for the privilege!!

To make this choice, a Remittance Basis Charge (RBC) must be paid and this is – from April 2015 onwards – a beast that has very large teeth indeed, with a ‘membership fee’ charged annually ranging from £30,000 for those non-domiciles having been UK resident for more than 7 of the previous 9 tax years, to £90,000 for those with more than 17 of 20 years residence status.

Furthermore, consultations are currently ongoing to consider whether application for RBC ‘membership’ should now only be on a minimum three years’ basis, potentially increasing these costs yet further to a maximum of £270,000. These charges are permanent and are in addition to the tax charges on relevant UK sourced income!

Additionally, RBC claimants will incur further ‘costs’, losing eligibility to both UK Personal Tax Allowances (£10,600 – 2015/16) and UK Capital Gains Tax Exempt Amount (£11,100 – 2015/16). Hence, the cost of being sent to the UK by your overseas employer is no longer something that should be taken lightly or regarded as something of a perk, certainly not without some serious pre-planning and a generous employment package!

Overall, and in conclusion, it is fair to say that being a UK Non-Domiciled employee is far from being the ‘free holiday’ that it is often popularly reported and the pitfalls and minefields are there for employers and professional advisors alike, as well as the individuals themselves.

This is a highly complex area and the risks involved in getting it wrong are as significant as are the costs, with HMRC taking a far greater interest in this high-risk area. Errors made are potentially very damaging and costly to all parties, invariably leading to tax enquiries, penalties and interest from HMRC.