Advising non-doms after the Summer Budget clampdown
John Goodchild explains the tax position of non-dom clients, and their families, after the Chancellor’s Summer Budget crackdown
The Budget on 8 July announced a raft of provisions designed to increase the tax paid to the Exchequer by non-domiciled individuals (non-doms) and their families.
Significant changes will be made to the treatment of UK resident non-doms, who after 6 April 2017 will lose the “remittance basis” of taxation in relation to foreign income and gains and become liable to inheritance tax (IHT) on a worldwide basis once they have been UK tax-resident for 15 out of 20 years.
There will be even more draconian rules after that date for individuals with a UK “domicile of origin” who become tax-resident here.
There is also going to be an extension of IHT to UK residential property owned by offshore structures created by non-doms regardless of whether they are UK tax-resident or not.
‘Decisive blow’
The proposed new legislation is the latest step and the decisive blow in the government’s battle to impose tax on UK residential property owned by offshore structures created by non-doms.
The war on offshore structures owning such property commenced with the Budget of 2012 when ATED, a penal rate of stamp duty land tax (SDLT) and a special charge to capital gains tax (CGT) on “ATED-related gains” were announced.
The proposed new “look-through” rule which will charge UK residential property to IHT if it is owned by an offshore company, an offshore company and trust structure or an offshore partnership and which will take effect on 6 April 2017 is the final, and conclusive, chapter in the war.
Further reading: How one family drama turned into an IHT crisis
Once the proposed new look-through rule takes effect there will be no IHT advantage for non-doms to hold UK residential property in such structures and effectively ends the debate about the merits and disadvantages of owning such property through an offshore structure.
From April 2017 onwards such structures can only bring disadvantages in terms of liability to ATED (at its ever increasing rates) and the penal rate of SDLT applicable when the acquiring company is not relieved from ATED.
The proposed new IHT look-through rule presents owners of existing structures with a dilemma. While their structures will cease to provide a shield against IHT with effect from 6 April 2017 unscrambling them may well give rise to liabilities to CGT and SDLT. The government has said that it will consider the costs involved in “de-enveloping” during the consultation process, but we shall have to wait and see what relief if any, they provide.
Families will obviously need to reconsider their strategies for dealing with IHT in relation to valuable UK residential property and will need careful advice on the consequences of unwinding existing structures.
Home to roost?
The new rules are, again, the latest instalment in a campaign against UK resident but foreign domiciled individuals which has been on-going for a number of years.
There are two proposals. The first is the introduction of a “deemed domicile” rule for the purposes of income tax, CGT and IHT that will apply once the individual has been tax resident for 15 out of a 20-year period. The second is a special deemed domicile rule for individuals with a UK “domicile of origin” who are tax-resident in the UK on or after 6 April 2017.
Once non-doms have been caught by one of the two new rules they potentially have to become non-resident for five years in order to escape IHT on foreign assets.
The 15/20 year rule will probably result in “UK tax residence” in any given year (under the present statutory rules and for the years before 6 April 2013 under the opaque law that applied before then) becoming a real battleground, with non-doms fighting hard to keep their years of UK tax residence below 15 out of 20 years.
For those individuals who cannot achieve that there are three other possible strategies:
• Leave the UK before 6 April 2017;
• Preserve residence status in another country with a view to being able to claim “treaty relief” against UK income tax and CGT (treaty relief against IHT being more problematic due to the relatively few treaties in existence); or
• Use offshore trusts
The government statement on 8 July suggested that non-doms caught by the 15/20 year rule will be taxed on income and gains within trust structures by reference to benefits that they receive from the structure.
This suggests that it may be advantageous for individuals to transfer assets to trusts rather than own them personally since offshore trusts will offer some scope for deferral of income tax and CGT. The “receipts basis” mentioned in the government statement would not be as advantageous as the present “remittance basis” but it would be better than taxation on an arising basis.
In addition, if foreign assets are transferred to a trust before the 15/20 year rule bites those assets would be beyond the scope of IHT.
‘Draconian treatment’
The returning individual with a UK “domicile of origin” who is or becomes UK resident on or after 6 April 2017 faces more draconian treatment.
Not only will such individuals suffer broadly the same treatment as non-doms caught by the 15/20 year rule but they would also be taxed on all income and gains of offshore trusts on an arising basis.
There would also be a serious knock-on effect for trusts created while the individual was domiciled outside the UK and non-resident as such trusts would permanently come within the scope of IHT.
Consequently, anyone who might have a UK domicile of origin will need careful advice on their domicile and on the statutory residence rules before they visit the UK for any length of time.
