Domicile

UK: Changes to non-domiciled rules in Finance Bill (No 2) 2017

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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:

Deemed domicile

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.

Rebasing relief

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.

 

UK: deemed domicile for income tax and capital gains tax

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The UK is currently conducting a consultation on measures changing the rules for non-UK domiciled individuals. The changes are to be included in the Finance Bill 2016 and are to take effect from 6 April 2017. Draft legislation has been introduced to deem some non-domiciled individuals as UK domiciled for UK income tax and capital gains tax purposes.

Under the draft legislation non-domiciled individuals would be deemed to be UK domiciled for the purposes of UK income tax and capital gains tax when they have been resident in the UK for 15 of the past 20 years. The new rule is similar to a deemed domicile rule being introduced for UK inheritance tax purposes.

Non domiciled individuals who have been resident in the UK for less than 15 of the past 20 years will still be required to pay the remittance basis charge, which is currently GBP 30,000 for non-domiciled individuals resident in the UK for at least 7 of the past 9 years and GBP 60,000 for those resident in the UK for at least 12 of the past 14 years. There is also currently a remittance basis charge of GBP 90,000 for non domiciled individuals resident in the UK for at least 17 of the past 20 years but this would no longer apply once the draft legislation is passed and comes into force.

When the legislation was announced the government also intended to include some exceptions to the deemed domicile treatment. These would relate to income and gains retained in a long term trust settled by an individual before coming within the deemed domicile rules, so no tax liability would arise while the income and gains were retained in the trust. These planned exceptions to the deemed domicile status have not been included in the draft legislation, but the government intends to include them in the Finance Bill 2017.