Ending Non-Dom Tax Status
Written by Roger Harding
With effect from 6 April 2017 a non-domiciled individual who has been resident in the UK in 15 of the previous 20 tax years will be deemed domiciled in the UK for all tax purposes. The change effectively brings to an end the “non-dom” tax status for these “longer term” residents. The option of paying tax on foreign income and gains on the remittance basis will no longer be available.
Under current legislation an individual was only deemed to be UK domiciled for Inheritance Tax (IHT) purposes after living here for 17 of the previous 20 tax years. The new proposed legislation will shorten this timescale by 2 years and include income tax and capital gains tax (CGT) in addition to IHT.
The good news is that a non-dom will not be taxed on income tax and CGT of an offshore trust established before the 15 year point is reached. With the exception of residential property (see below), “excluded property trusts” set up before deemed domiciled status is reached will continue to benefit from the IHT exemption also.
The deemed domicile status does not affect the general law principle of domicile status.
UK Residential Property
The Finance Act 2013 introduced the Annual Tax on Enveloped Dwellings (ATED) for ownership of UK residential property by a company, partnership that includes a company partner or collective investment vehicle.
Typically many non-doms own shares in companies (usually offshore companies) that in turn own UK residential property. Because UK IHT is only charged on property directly held by non-doms, ownership via a company shareholding provides an IHT advantage. The company shares are easily settled into an excluded property trust so that even if a non-dom becomes deemed domiciled for IHT purposes, as the shares are not owned directly, no IHT arises.
The Summer 2015 Budget proposes changes to these rules so that trusts or individuals owning UK residential property via an offshore company (or similar opaque vehicle), will pay IHT in the same way as UK domiciled individuals. The changes only affect the ownership of UK residential property and not any other assets, including UK commercial property, held within such structures.
It is intended that the charge will be based on ATED rules but will apply regardless of the value of the property (ATED applies to properties valued at £1m and above at present, falling to £500,000 with effect from 1 April 2016). Relief applicable to ATED will not however, also apply so, for example, property rented to tenants on commercial terms will be within the IHT charge.
IHT will apply on the occasion of any chargeable event, i.e.:
1. Death of an individual who owns the shares – wherever he/she is resident
2. Gift of shares into trust
3. Ten year anniversary of the trust
4. Distribution of shares out of the trust
5. Death of the donor within 7 years of gifting the company holding UK residential property to another individual
6. Death of the donor or settlor where he/she benefits from gifted UK property or shares within 7 years prior to death. The gift with reservation of benefit rules will also apply to the shares of a company owning UK residential property in the same way as rules generally apply to UK domiciled individuals.
Consultation will be launched shortly with comments invited from affected and interested parties.
The changes to the general non-dom status and the proposed measures in respect of UK residential property represent a major change in policy and cause for concern amongst those affected.
There is a window of opportunity between now and April 2017 for those non-dom’s who become, or are about to become deemed domiciled to structure their offshore assets to keep them out of the reach of the UK Treasury. Please contact us if you think you will be affected and we would be happy to discuss the options available to you.
We will keep you updated on any further developments following the consultation process on the IHT measure affecting UK residential property.
Contact the Author
After starting my tax career with HMRC, I qualified with ATT (Association of Tax Technicians), working in the accountancy practice of Deloitte. Having gained experience in personal and business tax, property taxation, corporate tax structuring and compliance, I brought my expertise to Gordon Dadds in 2013. I am a fan of all sports, but avidly follow football, rugby and golf.