Non-doms targeted in Finance Bill tax shake up

05/10/2017 Dhana Sabanathan, partner, Winckworth Sherwood,

According to HMRC figures released in August, non-UK domiciled individuals (Non-Doms) pay a total of £9.3 billion in tax every year. In addition to this direct tax contribution, non-doms employ large numbers of people in the UK, and generate considerable VAT for the government through spending in the UK.  

Prior to 2008, the tax regime for non-doms was far more attractive. The tax changes to non-doms since then have been almost relentless, creating significantly more complexity and uncertainty. This means that for many non-doms, it has not been possible to predict their tax bill each year. The cost of compliance (not tax planning) has escalated, with the number of advisers who specialise in this field and are up to date with the changes decreasing. 

Many non-doms have themselves questioned the rationale behind the remittance basis of taxation; which encourages them to keep their offshore income and gains outside of the UK and appears counterintuitive to maximising investment in the UK. The introduction of business investment relief in 2012 was therefore a welcome change.

The HMRC figures revealed this enabled the investment of £1.6billion by non-doms into privately owned companies, including start-ups. The government has made some changes to business investment relief in the recent Finance Bill, but many feel these do not go far enough, and may be a wasted opportunity to attract even more UK investment during these uncertain times.

Whilst the remittance basis still makes the UK a beneficial jurisdiction for high net worth individuals, non-doms will no longer be able to claim the remittance basis after they have been resident for 15 out of the previous 20 years (the 15 year rule), at which time they will become “deemed domiciled” in the UK for all tax purposes. Only non-doms who are caught by the 15 year rule this year will benefit from a generous rebasing relief in respect of their offshore assets. 

All non-doms who have previously claimed the remittance basis have the opportunity to cleanse their mixed funds held in cash in bank accounts. They will need sufficient records as to the contents of those funds and to make the relevant transfers and nominations by 5 April 2019. Whilst this is a fantastic opportunity for non-doms to mitigate the consequences of losing the remittance basis, yet again the complexity of the rules require professional assistance and proper records to have been kept by financial institutions (which is often out of the control of the individual non-dom). 

The Finance Bill terminates non-dom status for those born in the UK with a UK domicile of origin, whilst they are resident in the UK. This was always an aggressive position to take, and so HMRC may be more interested in the affairs of such individuals, who will now be subject to different filing obligations. Individuals with a UK domicile of origin are also not able to benefit from the rebasing and cleansing mixed funds reliefs referred to above.

Furthermore, UK residential property owned by non-doms can no longer be sheltered from inheritance tax. This leaves many non-doms owning UK residential property through companies which provide no tax advantage, whilst still generating tax for the government through the Annual Tax on Enveloped Dwellings.  De-enveloping such property can trigger further tax liabilities, and requires specialist UK tax advice.

The tax treatment of offshore trusts has been significantly changed (with further changes to come from 6 April 2018), meaning all structures should be reviewed. After 15 years of residence in the UK, it will no longer be tax efficient to establish or add to an offshore trust. The changes to trusts do not just affect long term UK residents; any UK resident non-dom settlors will find that benefits received from their trusts by non-resident or non-dom close family members can become taxable on them.

Fortunately there is a lot more to the UK than an attractive tax regime, and international high net worth individuals are unlikely to stop coming to live, work and invest here. However, there is a genuine concern that such individuals will become fed up by the continual changes to the tax rules and the lack of certainty that brings. 

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