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Tax Update for Non-UK Residents & Non-UK Domiciles

21 July, 2015

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Tax Update for Non-UK Residents & Non-UK Domiciles

Summer Budget 2015 – Non UK Domiciles

At the time we were due to send out our summer update to our non-UK domiciles and non-UK residents, the Chancellor gave his summer budget speech.

This budget had some major announcements for non-UK domiciles, which we summarised briefly in our budget newsletter released shortly after the speech. The changes announced overtook some of the measures announced in the last coalition budget in March.

End of Permanent Non-UK Domicile Status

From April 2017, anyone who has been resident in the UK for 15 of the past 20 years will be deemed to be UK-domiciled for all UK tax purposes, including IHT, from the start of tax-year 16.

This will affect all non-doms resident in the UK on 6 April 2017 with no “grandfathering”. Those who have been resident in the UK continually since the 2002/03 tax year (or 15 of the tax years since 1997/98) will be in the regime straight away on 6 April 2017).

In addition from April 2017, individuals who were born in the UK to parents who were domiciled in the UK, and so at their date of birth had a domicile of origin in the UK, will no longer be able to claim non-UK domicile status for tax purposes when they are resident in the UK, even if under general law they have acquired a domicile in another country. (Highlighted to the Treasury, following the position of the HSBC Chief Executive, who was domiciled in Hong-Kong, but was born and resident in the UK, following the HSBC Swiss bank issues last year).

Individuals affected will be liable to tax on their worldwide income as it arises and to IHT on worldwide personal assets and they will no longer be able to use the remittance basis. These proposals will affect the taxation of foreign-domiciled individuals whether UK-resident or non-UK-resident and trustees and beneficiaries of excluded property trusts. It will not affect their domicile status under general law.

The reforms are being made because the government believes that long-term UK-resident non-domiciled individuals should pay tax on their worldwide income and gains, and that those who have a strong UK connection by way of a UK domicile of origin, and who leave and on their return become UK-resident, should not be able to access the remittance basis even if they lose their UK domicile as a matter of law.

UK Residential Property & Non UK Dom Tax Planning

Separately, UK residential property held via an offshore company and partnership structures will cease to be treated as an offshore asset (“excluded property”) from 6 April 2017. The shares in that company or partnership will be treated as UK assets to the extent to which the value of those shares derives from the UK residential property.

This will result in residential properties held through company structures to come back into the scope of UK inheritance tax. Trusts owning such companies may find themselves subject both to the periodic 6% IHT regime (“ten year charge”) and the settlor liable to 40% IHT on his or her death. The exclusions for ATED (such as let properties and properties below £500,000) will not apply.

Trusts set up by returning-doms will lose their excluded status on 6 April 2017 if the returning-dom is resident in the UK on that date, or subsequently if the returning-dom subsequently returns.

Non-UK domiciled individuals who have set up an offshore trust before they become deemed domiciled under the new 15-year rule will not be taxed on trust income and gains retained in the trust. Excluded property trusts will have the same IHT treatment as at present i.e. exempt from UK IHT tax, subject to changes to the tax treatment of UK residential property explained above. However, such long-term residents will from April 2017 be taxed on benefits, capital or income received from such trusts on a worldwide basis.

The changes look likely to override the special tax treaties with India, Pakistan, Italy and France, although this is subject to consultation and, presumably, may require re-negotiation of those treaties.

Individuals who had a UK domicile of origin and left the UK, obtained a non-UK domicile of choice under general law, and, having lost both their UK domicile of origin and deemed domicile for UK IHT purposes, set up excluded property trusts, and later return to the UK and become UK-resident but maintain their non-UK domicile of choice, will become deemed domiciled for UK tax purposes once they become UK tax-resident. At this point they will no longer benefit from favourable tax treatment in respect of trusts set up while not domiciled in the UK.

It’s not down and out for Non UK Domiciles!

The budget announcement does not abolish the remittance basis altogether (as the Labour party threaten do as part of their election campaign

Non-doms can continue to use the remittance basis for the first 15 tax years (and for the first 7 of those without paying any charge).
The deemed domicile test can be reset by 5 years of non-residence following the Statutory Residence Test.
The proposal that the remittance basis charge should be paid for 3 consecutive years has been dropped.
Although there will generally be no “grandfathering”, those who have left before 6 April 2017 will still be subject to the old rules.
While excluded property trusts will no longer work for UK residential property or for returning-doms, such trusts will continue to keep their excluded status for other UK assets (e.g. UK commercial property) and non-UK investment assets, even after the settlor has gone past the 15 year limit.

The government has undertaken to consult later in the year on the best way to deliver these reforms and, subsequently, on draft legislation for Finance Bill 2016.

Some actions which you can start taking now:

Review your domicile status, if you wish to continue to rely on it. Domicile will continue to be key and HMRC is increasingly investigating domicile claims. Make sure that you have the evidence in place to support your non-domicile. Those at risk of being treated as returning-doms, in particular, will need to be clear as to their domicile of origin.
Review your residency status – to establish if and when the deemed domiciled test commences for you. For years prior to 2013/14 (when the statutory residence test was introduced) this may require more work. Future residence also needs to be considered. As we always emphasis, maintain evidence to support your residency status, days in the UK etc.
Review your trusts to ensure that the trustees have the right powers; that valuations are in place should transfers/re-organisations have to take place; and that any CGT history (e.g. rebasing elections) are up to date.

Comment

The tax treatment of Non-Domiciled individuals is already extremely complex and the proposed changes outlined above add another layer of complexity. For the super-rich it seems as though they can still keep offshore assets and income out of the reach of the UK authorities by using offshore trusts and not remitting the income to the UK.

It will be interesting to see if the 15 year time limit is gradually reduced in subsequent Budgets so that eventually all UK resident individuals are taxed on their worldwide income and gains as they arise (subject to double tax relief in respect of foreign tax suffered).

Other Budget Changes That Could Impact Non-UK Residents

Landlords

Restricting Finance Costs Tax Relief – The UK Government will restrict the relief on finance costs that individual landlords of residential property can get to the basic rate of tax. The restriction will be phased in over 4 years from April 2017 as follows:
- 2017-2018 – the deduction will be restricted to 75% of the loan interest & cost, with the remaining 25% being at basic rate;
- 2018-2019 – 50% of finance costs given as a deduction and 50% given as a basic rate deduction;
- 2019-2020 – 25% finance costs deduction and 75% given as a basic rate tax reduction;
- 2020-2021 all financing costs incurred will be given as a basic rate tax reduction.
Reform of the Wear & Tear Allowance – The 10% wear & tear allowance will be replaced in April 2016 with a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets. (A technical consultation is to be released this summer on the subject).
Professionals Notifying Clients of HMRC’s Measures Re Offshore Accounts – Legislation will be introduced so that financial institutions, tax advisors and other professionals that have given advice to a client or may be aware of an offshore account to advise them that:-
- HMRC will receive in 2017 information on offshore accounts and share information with other countries;
- A time limited disclosure will be opened in 2016 to allow non-compliant taxpayers to correct their affairs, before the information is received;
- If non-compliant taxpayers continue to conceal their tax affairs, HMRC will enforce tough penalties, including a new simple criminal offence for failing to declare.

The Liechtenstein Disclosure Facility and the Crown Dependency Facilities will close at the end of 2015. A new Common Reporting Standard disclosure facility will be opened in 2016 and run through to mid-2017. This facility will give no immunity from criminal prosecution and a higher 30% penalty will apply. The Government is encouraging those with undeclared tax liabilities to disclose and bring their affairs up to date before HMRC begins to automatically receive information about UK residents’ overseas interests in 2017.

Capital Gains Tax on the Disposal of UK Residential Property by Non-UK Residents

In the 2013 Autumn Statement it was announced that consideration was being given to introduce Capital Gains Tax (“CGT”) for non-UK residents who dispose of UK residential property. This new charge taking effect for all residential property disposals from 6 April 2015.

Until the change, if you became non-UK resident and remained so for five complete tax years, a disposal of a UK sited property would have meant no UK tax charge, as non-UK residents are exempt CGT. 6 April 2015 this rule changed in respect of residential property and if the property is sold, you will be charged to UK tax. The gain is calculated by taking the sale proceeds less the value of the property as at 6 April 2015. (We have been advising our clients to obtain valuations for their properties, which can be used in the future for these calculations or as minimum recording conditions of the property, specific features etc, to assist with future April 2015 valuations).

The charge applies to non-UK resident individuals, partners, trustees, personal representatives and foundations. The charge will also apply to certain non-UK resident companies if they are ‘closely held’ (broadly, one which is under the control of five or fewer shareholders or participators).

Parties who fall outside the rules include pension funds, shareholders of property-owning companies and Real Estate Investment Trusts (REITs).

Further details regarding the tax charge can be found in our previous newsletters

Notifying HMRC and paying the tax

As a non-UK resident vendor you must submit a Non-Resident Capital Gains Tax (NRCGT) return to HMRC, within 30 days of the property transaction being completed.
You will usually have to report the gain AND pay the tax charge at the same time. Any amendments to the return are allowed within 12 months of the filing date.
All disposals must be reported to HMRC irrespective of whether there is a tax liability. Your return must include an ‘advance self-assessment’ of the amount liable for the tax year in question.
If you are a non-UK resident already within the self-assessment system, you will have to report the disposal both on the NRCGT return and again on the self-assessment tax return, but payment of the tax can be postponed until the normal self-assessment payment date.

We will post further updates regarding the above matters as announcements are made, in the meantime should you need to discuss any of the above, please do not hesitate to contact us.