By Clare Munro, Tax Partner
The government has started to provide more detail on the changes being made to the tax regime for non-UK domiciles ('non-doms') - essentially people with an overseas family background - who live in the UK. On 19 August a batch of new consultation documents was published; these start to fill in some of the information gaps and will help us to offer planning assistance for those affected by the changes.
Non-dom status carries benefits for income tax and capital gains tax, as well as for inheritance tax. At present, the income tax and capital gains tax advantages of non-dom status are, at least in principle, capable of lasting indefinitely, although non doms pay a price for taking advantage of their status with a flat rate annual 'remittance basis charge' which can be as much as £90,000 after 17 years' tax residence.
From April 2017, all non-doms who have been UK tax resident for 15 out of the last 20 years will be considered to be UK domiciled for all tax purposes, including inheritance tax, income tax and capital gains tax. In order to break that deemed domicile and re-start the 15 year clock, an individual would have to be non-UK resident for 6 full years. However, amongst the recent announcements were two reliefs which should ease the path to full tax residence.
Rebasing for Capital Gains Tax
The government proposes a 'rebasing' of non-UK assets for non-doms who become deemed UK domiciled on 6 April 2017 and have been paying the flat rate remittance basis tax charge. The result will be that the non-dom will be treated as acquiring their overseas assets at market value on 6 April 2017 and any UK capital gains tax on these assets will only be charged on subsequent increases in value. This will be useful for a limited range of non-doms who have already been tax resident for 15 years or who are approaching their 15-year anniversary in 2016/17. However, for the many non-doms who reach their 15-year anniversary after April 2017, it will not help and some further planning may be needed to rebase their overseas assets before the individual becomes deemed domiciled. It is also clear that the rebasing will only apply to directly held assets rather than those held via trusts, thereby excluding many from benefitting.
There may also be a further tax charge, however, on any remittance of the proceeds where the original acquisition was made from untaxed income or gains.
Cleansing of ‘Mixed Funds’
Additionally there is to be a window of opportunity of one year from 6 April 2017 for non-doms to sort out their bank accounts in a more advantageous way by splitting offshore mixed funds containing capital and income and/or gains into their separate components. This should enable a non-dom to extract clean capital from a mixed fund and then bring capital onshore tax free rather than remitting taxable income or gains. Inevitably there will be conditions, and the announcement indicates that this is likely to only be available where the funds are in bank accounts, but it appears that non-doms becoming domiciled later than 6 April 2017 will be able to take advantage of it. So, although it remains best practice to set up separate accounts before arrival, this should give an opportunity to repair mixed funds.
However, record keeping is likely to be crucial as the consultation document confirms that “Cleansing will not be available where an individual is unable to determine the component parts of their mixed fund”. Anyone looking to use this opportunity will need to collate the documentation and start to analyse the past movements in relevant accounts as soon as possible.
Although the recent announcements as a whole represent another erosion of the favourable status now enjoyed by non-UK doms, the ability of long term resident non-doms to rebase their assets before bringing them into the UK capital gains tax net and the relaxation of the rules on mixed funds are important opportunities for those already here. If you are affected by the changes, or need assistance in analysing your mixed fund accounts, please contact our tax partners, Phil Moss email@example.com or Clare Munro firstname.lastname@example.org.