By Phil Moss, Tax Partner
We were promised a consultation on the taxation of non-UK domiciles, or non-doms, in the summer and the government has now delivered on that promise. The proposals still lack detail so there will continue to be questions about precisely how the new rules will affect non-doms, but it's obvious that this is a fundamental shake up of non-dom taxation.
To start with, it is clear, as it was from the July Budget, that the concept of permanent non-dom status will go. Although the UK has for some time treated long term residents as deemed domiciled for inheritance tax purposes, the favourable non-dom income tax treatment was potentially available for life. This has meant that non-doms could keep offshore income outside the UK tax net, albeit at a price which after 17 years' residence was a hefty £90,000. This privilege will be removed from 2017 for those who are tax resident in 15 out of the previous 20 years.
What that means in practice is that, in order to regain one's non-dom status and restart the 15-year clock, a six-year period of non-residence is needed. This compares poorly with the three years currently required.
More promisingly it seems that offshore trusts, the IHT shelter of choice for non-doms, will remain effective to keep all assets, other than UK land, out of the IHT net. That sounds good, and our experience is that IHT is a major concern for our non-dom clients, but the downside is the prospect of a flat rate charge on benefits received by the non-dom. Again the mechanics of a new tax charge are unclear but it seems certain that it will affect the long-term, 15-year non-doms, and possibly the short-stay people too. If this charge is calculated without taking trust income or gains into account, the consequences could be harsh, effectively taxing non-doms on their own 'clean' capital for the first time.
The consultation on non-dom tax changes closed on 11 November, and once the results are collated, and hopefully considered, by HMRC, more detail on the changes will no doubt be published early in 2016. Meanwhile, a second consultation on proposed changes to charge IHT on the value of UK residential property held by offshore companies is still awaited. We'll be keeping our non-dom clients updated, but April 2017 is racing towards us.
In particular those non-doms who are approaching 15 years' UK residence should be considering whether to set up trusts, restructure their assets or extract income while they can still use the current remittance basis rules. Please do email me if you would like to discuss this issue in relation to your own circumstances.