Major changes are being strategically planned by the UK government to the way non-domiciled individuals are taxed once they have been long-term resident in the UK. The new rules will be effective as of April 2017 and represent the most fundamental tax change non-doms living in the UK have ever faced.
Is it time to consider alternative solutions? Some will leave while others will stay and accept higher taxes. What’s clear is that those approaching 15 tax years of residence in the UK need to plan ahead for these changes.
Other important tax changes affecting non-doms are also being introduced in 2017. These will affect non-doms owning UK residential property through offshore companies and non-doms who were born in the UK with a UK domicile of origin and who return to the UK, even if only on a temporary basis.
Currently a non-domiciled individual is able to claim the remittance basis of taxation. This denoted that non-doms don’t pay tax on foreign income and gains as long as they are not brought (“remitted”) back in the UK. This special regime is available free of charge for the first 7 years. Once the 7 years are exhausted, a remittance basis charge will be applied.
Furthermore, under the current rules a person who is not domiciled in the UK will be automatically become deemed domiciled when they have been UK Residents for 17 of the last 20 years but only for inheritance tax purposes.
Under the new rules, a non-domiciled individual who has been UK resident for 15 of the last 20 tax years will automatically be deemed domiciled for all tax purposes. This will not change their domicile status under the general law but only for tax purposes.
The main change for non-doms is that they will no longer be able to access the remittance basis once they have been UK resident for 15 of the previous 20 tax years. They will pay tax on their worldwide income and capital gains on an arising basis regardless of whether the income or gains are remitted to the UK. Non-doms will also then be subject to inheritance tax on their worldwide assets. They would generally need to leave the UK for six complete years before they lose their deemed domicile status. They could then return to the UK and remain non-domiciled for another 15 years, with access to the remittance basis by paying the appropriate remittance charge.
Trusts that were set up before a non-dom becomes deemed domiciled will still offer future protection. Although there has been no precise reporting, the government has indicated that any trust income and gains retained in the trust will not be taxed even if the person who created the trust, or the beneficiaries, are deemed domiciled under the new rules. Such trusts will generally also offer the same inheritance tax treatment as at present, namely that any non-UK assets in the trust will be permanently excluded from inheritance tax.
New Rules for UK Residential Property
Non-domiciled individuals who own UK residential property through an offshore company (whether the shares are owned personally or through a trust or foundation) will be subject to inheritance tax as if the offshore company is transparent or does not exist. Currently an offshore company offers non-doms a way of converting what would otherwise be a taxable UK property into non-taxable shares in the offshore company. This shelters the entire value of the underlying property from inheritance tax. That advantage will be removed from April 2017 and will apply to all offshore companies holding UK residential property.
If you have any questions about the new Non-Dom rules, or you would like us to analyse your particular circumstances and advise on possible tailored mitigation strategies through Cyprus as a Jurisdiction, then please contact Mr. Andreas Christoforou.