Non-Dom tax rule changes: Who will be affected and how?

Changes to the tax treatment of non-domiciled people in the UK were initially announced in July 2015 by the then Chancellor, George Osborne.

Following 18 months of consultation and debate, the two major proposed changes to the non-dom tax system are due to come into effect from 6 April 2017, but what are the changes and will they affect you?

This article looks at the key changes and who they affect, however, non-dom tax rules are complicated and this article is designed as a guide only therefore it must not be used to make any decisions. You should always seek professional advice regarding your tax affairs.

Who will the changes to the non-dom tax changes affect?

First, and foremost, it is important to understand who might be affected by the non-dom tax changes. While this is not a definitive list, in truth the changes are only going to affect a small proportion of people with a non-dom status living in the UK.

Those who will be affected include:

• Any non-dom who has been resident in the UK for at least 15 out of the last 20 tax years
• UK born non-doms: people who were born in the UK (i.e. were originally UK domicile), but have taken action to change their domicile to a different jurisdiction, but who become a “returning non-dom” (i.e. they return to the UK and become UK resident)
• Non-doms who own UK residential property through a third party (for example an offshore trust)

Deemed domicile in the UK

Any non-dom in the UK who has been resident for at least 15 out of the previous 20 tax years will be considered “deemed domicile” in the UK. For consideration, the 15 years do not have to be consecutive.

This means that anybody who is deemed domicile would be subject to UK tax on their worldwide assets and income, exposing them in the UK to capital gains tax, income tax and also inheritance tax.

Previously, deemed domiciled status only applied in respect of inheritance tax and for those non-doms who had been resident for at least 17 out of the previous 20 years.   

It was possible to shelter non-UK income and gains from UK tax through the remittance basis of assessment, however long you had been in the UK and where a charge was paid which ensured worldwide assets were only taxable in the UK if they were remitted into the UK.

Establishing residence status in any given year will be subject to the rules in place at the time. For example, in years following the introduction of the Statutory Residence Test (SRT) in 2013/14, the SRT will be used. However, in the previous years, the SRT will not be relevant and the tax rules in place in during that particular tax year would need to be used to establish tax residence status.

Once deemed domiciled under the 15 year rule it is necessary to become non-resident for six complete tax years to lose this status.

Deemed domicile exemptions

The new rules will not apply to any non-dom who leaves the UK before 6 April, 2017, providing they do not return to the UK.

Period of grace for non-doms

For non-doms who become deemed domicile any income or gains which occurred before the individual became deemed-domiciled would still be taxed on the remittance basis.

For offshore bank accounts containing a mixture of income, capital gains and other capital, the new tax rules will typically apply to income first. However, where there is a mixture of money from different sources (“mixed funds”), it could become difficult to ensure unnecessary tax charges are not imposed. 

To counter this, from 6 April 2017, there will be a period of grace of two years which will allow individuals who were on the remittance basis before 2017/18 and have mixed funds to move their finances around to segregate capital gains, income and any other capital into separate bank accounts which should help clarify future remittances of capital and therefore enable it to be taxed accordingly when required. 

This mixed fund exercise is very complex and requires specialist’s advice.

Individuals that were born in the UK or were originally domiciled in the UK will not qualify for the period of grace.

Impact on capital gains

In most cases, once an individual becomes deemed domicile in the UK, any gains realised from the disposal of UK or offshore assets will be subject to UK capital gains tax rules.

However, if the individual was not born in the UK or was not originally UK domiciled, capital gains may not apply to any gains made prior to 6 April 2017.

Assets owned by individuals who become deemed domicile on or after 6 April 2017 may be able to have their value rebased on 6 April 2017 and therefore wipe out any gains before that date. 

However this rebasing will only be available in cases where the individual has paid the remittance basis charge to shelter non-UK income and gains from tax.  So rebasing is likely to apply to a fairly limited number of individuals.

It is important to seek advice as soon as possible to establish which gains will be subject to UK capital gains tax.

Request a free consultation

The above article is to be used as a guide only and the full rules can be complicated.

If you think that that new non-dom rules will affect you, enter your details using the for and we will arrange for a free initial consultation with a qualified accountant who will be able to answer your questions – and help you structure your affairs in a tax efficient manner, if required.