When will the dust settle on the non dom changes?
The proposed changes to the legislation affecting those individuals who are resident in the UK but who retain a non-UK domicile (non doms) are having a long and somewhat chequered journey to the statute book.
Originally announced in outline by the then Chancellor, George Osborne, in July 2015, with a start date of 6 April 2017, the proposals have been delayed by political storms (the EU referendum and the May 2017 General Election) and by the sheer time needed to prepare the draft legislation. Such draft legislation as was included in the Finance (No 2) Bill 2017 was dropped in April 2017. Then on 13 July 2017 it was announced that the dropped proposals would be reintroduced in a Finance Bill in the autumn and the other planned changes would be introduced later in the year. In quick succession a new Finance Bill was published on 8 September 2017 and a policy paper and draft clauses were published on 13 September 2017.
There are three significant elements to the changes. The first element is that with effect from 6 April 2017 inheritance tax (IHT) applies to shares in offshore companies and partnerships holding UK residential property, and is chargeable on the shareholder or partner be it a trust or individual. The policy driver is to encourage the removal of UK property from corporate ownership by taking the IHT advantage away, and indeed the period leading up to 5 April 2017 saw the ‘de-enveloping’ of property on a much larger scale than hitherto. The proposals also apply IHT to loan creditors and those providing guarantees, collateral or security for loans in connection with such UK residential property interests.
The second element is to expand the deemed domicile test which has long existed for IHT into income tax and capital gains tax and to use one common period (broadly 15 years) for all three taxes, again with effect from 5 April 2017. At the same time, a subset of the non doms, formerly domiciled residents (FDRs), were singled out for particularly harsh treatment. The individual who was born in the UK with a UK domicile of origin and who becomes resident in the UK again will be treated as domiciled for all tax purposes straightaway except with regard to IHT where there is a two year deferral. Nor are FDRs eligible for any of the reliefs.
For the non doms who become deemed domiciled on 6 April 2017, there is a silver lining – the ability to rebase assets held at that date and thus
wipe out uncrystallised gains (but not any of the income or gains which funded the acquisition of a bought asset). And for all non doms who have been a remittance basis user in at least one year since 2008/9 there is a two year window to 5 April 2019 to cleanse mixed funds in bank accounts. Some valuable time has been lost on this through the legislative indecision.
The third element which is very much work in progress is the proposed changes to trusts, both the ones to give protections for trusts set up by non doms when they become deemed doms and the changes to counter the perceived abuses in offshore trusts.
It has been a challenging period for non doms, their trustees and their advisers, and it will continue to be so. How UK property is held is a difficult technical area, and the advice for non doms in terms of compliance, wealth planning and access to trusts will need careful consideration.