Changes to the UK non-domiciled rules that were excluded from the Finance Bill 2017 are to be included in the Finance Bill (No 2) 2017. The Bill is to be published and considered by parliament in September 2017 following the summer recess. Updated draft legislation and explanations on the changes to rules on deemed domicile were published in July 2017, and when passed they will take effect from 1 April 2017.
The provisions relating to non-domiciled individuals include the following measures:
New deemed domicile rules provide that a non-domiciled individual will be treated as domiciled in the UK for all tax purposes in a tax year if that individual has been resident in the UK for at least 15 of the last 20 years.
The new rules will also provide that a non-domiciled individual who was born in the UK with a UK domicile of origin is to be treated as domiciled in the UK for income and capital gains tax purposes in any tax year in which that individual is UK resident; and the individual will also be treated as domiciled in the UK for inheritance tax purposes after one year of UK residence.
Individuals who are deemed domiciled from 6 April 2017 because they have been resident in the UK for 15 of the last 20 years can rebase their foreign located capital assets to market value on 5 April 2017 for purposes of capital gains tax. Consequently on a future sale of a foreign asset only the gain from 6 April 2017 to the date of sale would be liable to capital gains tax. This will apply automatically unless the taxpayer elects for the provision not to apply.
Segregation of mixed funds
Any non-domiciled individual who has been taxed under the remittance basis prior to 2017/18 will be able to rearrange mixed funds held in non-UK bank accounts and segregate them into their constituent parts. This is a transitional arrangement for the 2017/18 and 2018.19 tax years and applies only to nominated transfers of money from a mixed account to another account.
This is a useful measure because income and capital gains taxable under the remittance basis are treated by the law as remitted before non-taxable income. So if there is income taxable under the remittance basis and also non-taxable capital in a bank account any remittance from that account will be treated as a remittance of taxable income or gains rather than of the non-taxable element. By separating out the non-taxable element into a separate account the taxpayer can arrange to remit that non-taxable capital without a tax charge.
Inheritance tax on residential property interests
From 6 April 2017 inheritance tax is to apply to UK residential property interests held indirectly by non-UK domiciled individuals, for example through a non-UK company, and any debt used to finance the property will be subject to inheritance tax in the hands of the lender.
This means for example that any shares in non-UK close companies or interests in overseas partnerships the value of which is derived from UK residential property will come within the scope of inheritance tax. This will apply whether the individual is UK resident or non-resident.
Any debt used to finance the purchase, maintenance or repair of UK residential property will be treated as an asset within the scope of inheritance tax in the hands of the lender. If the lender is a non-UK close company or a partnership then look-through provisions will apply. Any security or collateral for the debt will also be within the scope of inheritance tax as part of the estate of the person providing the security.