Reforms to the taxation of non-domiciles
Susan Cattell outlines proposals on the reforms to the taxation of non-domiciles and the ICAS response to the initial consultation on the details.
At the Summer Budget 2015 the Chancellor announced a number of reforms to the tax rules for individuals who are not domiciled in the UK.
The changes to the rules will require complex legislation and there will be separate consultations on different aspects of the proposals.
The first consultation was published in September and closed last week.
This covered proposals to:
- Remove the permanency of non-domiciled status for individuals living in the UK for many years
- Ensure that individuals born in the UK with a UK domicile of origin should not be able to claim to be non-domiciled whilst they are living in the UK, even if they have moved away from the UK and acquired a domicile of choice somewhere else.
Long term residents
Under the proposals individuals who have been resident in the UK for at least 15 of the past 20 tax years will be treated as deemed UK domiciled for tax purposes with effect from April 2017. They will then be treated in the same way as a UK domiciled individual for most tax purposes; they will no longer be able to use the remittance basis and their foreign and UK assets will be within the scope of UK inheritance tax.
There will however be some protection for offshore trusts and arrangements caught by the Transfer of Assets legislation, provided they were set up whilst the individual was non-domiciled; this will be the subject of a separate consultation.
Once an individual has become deemed UK domiciled they will need to leave the UK for 6 or more consecutive tax years to lose their deemed domicile status.
Born in the UK with a UK domicile of origin
This part of the proposals affects individuals born in the UK with a UK domicile of origin but who have acquired a domicile of choice somewhere else. The government intends that from April 2017 they should not be able to claim to be non-domiciled whilst they are living in the UK.
If an individual returns to the UK they will be taxed as UK domiciled whilst they are resident here for tax purposes. When they are not resident in the UK they will continue to be treated as non-domiciled, provided they retain their foreign domicile status under general law and have not been resident in the UK for 15 out of the last 20 tax years.
In contrast to individuals who become deemed domiciled under the long term residents’ rules outlined above there will be no protection for offshore trusts even if these were established when the individual was non-domiciled. However there will be a short period of grace for inheritance tax, to allow a returning UK domiciliary to return for a short temporary period of residence without bringing their worldwide assets into the scope of UK inheritance tax.
ICAS consultation response
Representatives from ICAS attended a number of consultation meetings with HMRC. A written response to the consultation has been submitted.
Key points on long term residents’ proposals:
- The proposals state that time spent in the UK whilst under the age of 18 will count so that a child could become domiciled before they reach adulthood, even though they are likely to have little choice about where they live. We believe serious consideration should be given to excluding time spent in the UK under age 18. The government has stated it wants to attract people to the UK who can contribute to the economy. This measure will deter people coming to work here with their families. It will also deter people from sending their children to school and university here which will have a detrimental effect on the economy.
- HMRC has suggested that there may be transitional provisions for non-domiciled individuals who left the UK before the announcement of the changes and may not therefore be aware of the new requirement to be outside the UK for 6 years. This would be helpful but we believe consideration should also be given to individuals who may have returned before the announcement of the changes – basing that decision on the old rules which they thought applied.
Key points on individuals born in the UK with a UK domicile of origin:
- The proposed period of grace for inheritance tax is welcome but does not alter the essential unfairness of the proposals for someone who, although born in the UK, leaves in childhood and lives permanently elsewhere. If they return for a short period after many years absence, for example to look after a sick relative, they will be treated as domiciled with adverse consequences (particularly for IHT if they exceed the short grace period).
- Siblings could potentially be treated differently solely because one of them happened to be born in the UK, whereas the other was born elsewhere, even though their circumstances are otherwise identical; this is likely to cause confusion and uncertainty as well as being unfair.
- There will also be issues for employers. Employees who were born in the UK with a UK domicile of origin who have acquired a domicile of choice elsewhere and have no plans to move back to the UK permanently may be unwilling to accept an assignment to the UK because of the adverse consequences (particularly for IHT).
- We suggest a number of options could be considered to address these issues. Further conditions linked to an individual having a meaningful connection with the UK could be added to the rules. An individual who acquired a non-UK domicile of dependence, after leaving the UK in childhood, could be excluded from the provisions. The ‘period of grace’ for IHT could be extended to two or three years, either in all cases, or where the individual returns to the UK for a temporary period for their employment.