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Doomed doms? The impact of changes for non doms

We had expected some changes in this area but were surprised by what was announced.  There are some disappointing points which will come in from April 2017 but, although change is rarely welcome, there are pluses.  The main advantage will be one of simplicity!  We have plenty of time to understand the new rules and help our clients to do the same.

The measures in a nutshell:

  • People who have been resident for more than 15 out of the past 20 years will be deemed domicile for ALL tax purposes so no remittance basis will be available. Those who came to the UK in 2002 or earlier will be affected.  No grandfathering of the old rules is proposed.
  • The £90,000 remittance basis charge for those who have been resident for 17 out of 20 years will no longer apply as those individuals will be taxable on the arising basis.
  • Deemed domicile status can only be lost after an absence of at least five tax years (compared to the current four).
  • Individuals who return to the UK after living abroad, but were born with a UK domicile, will not be able to use the remittance basis even if they have acquired a domicile in another country.
  • Non doms who have set up Excluded Property Trusts (EPTs) prior to becoming deemed domiciled under the new 15 year rule will not pay tax on income and gains within the trust and will retain their beneficial Inheritance Tax (IHT) treatment except for UK residential property.
  • Inheritance tax will be due on UK residential property held in any offshore structure.

So what does this mean?

Perhaps the biggest conceptual change is for those who have a UK domicile of origin (ie born here of British parents).  The remittance basis (ability to only pay UK taxes when bringing overseas funds here rather than on a worldwide basis) will no longer be available for such people on their return to the UK.  The IHT advantages of non dom status will only be available in limited circumstances after at least 15 years of non residence and assuming that a legitimate domicile of choice is acquired in another country.

For those who have a domicile of origin outside the UK and are here only for a limited time, the remittance basis remains available and there are still considerable advantages to be had with careful planning.  Once a stay in the UK extends beyond 15 years it will be more important to take stock of their global financial affairs and consider how they can be arranged as at that point the remittance basis ceases to be available and worldwide income and gains will be taxable.

Individuals who have been resident for more than 15 years in the UK have some 18 months to consider the best way forward. For many people, the £90,000 charge was already a step too far; the remittance basis was not practical and its abolition may not be missed. The income tax and CGT points may therefore have a limited impact although double tax relief points should not be overlooked.

Of perhaps greater significance for this group are the IHT changes.  There are a small number of people who will have been here for 15 years at 5 April 2017 and so their deemed domicile status will be accelerated.  It appears that we will have the intervening period to ensure that any appropriate steps are taken.

Typically, approaching deemed domicile one considers using an EPT. EPT’s remain valuable for IHT protection on overseas assets but from now on if there are any withdrawals from the trust after the 15 year date, these will be taxed in full regardless of where in the world the distribution is made. For property staying in the trust, the IHT protection previously afforded by holding UK property through an offshore company is now removed. So from this point, every trust holding UK residential property even indirectly can face IHT costs in the same way as UK trusts. As the Annual Tax on Enveloped Dwellings (ATED) remains, there may be little purpose in using a company in an offshore family trust – at least as far as real property is concerned. There is to be a consultation on whether particular ‘de-enveloping’ reliefs will be needed to address this effectively forced move.

Away from trusts, a similar transparency will apply on the death of the owner or shareholder of a partnership or company holding UK residential property regardless of whether the property is let or self-occupied and regardless of its value.

The combination of these rules will mean that the focus of IHT planning will change.  Daniel Bisby considers the new ‘main residence’ IHT nil-rate band in a separate article.

Overall although there are undoubtedly some adverse changes the system will be streamlined and not all of the advantages will be removed.  Careful planning will be needed.  Please contact your usual Mercer & Hole adviser for further discussion.



Date: 8th July, 2015
Author: Lisa Spearman


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