Non-dom changes: Don't hold your breath waiting for the final detail
The draft Finance Bill 2017 released in December contained some (but not all) of the much-needed detail about the significant changes to the taxation of non-doms from April 2017. So what does it mean for your property and tax position?
UK Inheritance Tax on residential property
Historically, many non-doms held UK residential property via offshore trusts or companies, with the result that such assets would not be chargeable to UK Inheritance Tax (IHT) upon the death of the underlying beneficial owner.
From 6 April, any non-doms who have an interest in an offshore entity which contains UK residential property will find that this is no longer the case. Interests include loans made in order to acquire, maintain or invest in UK residential property and so this will be far-reaching.
Anyone with an interest in such an offshore structure should think carefully about whether it is worth keeping them. You should consider:
- Do you pay any other taxes, such as the Annual Tax on Enveloped Dwellings (ATED)? If so, dissolving the structure and transferring the property into personal ownership might be more tax efficient;
- What would the Capital Gains Tax (CGT) position be if you transferred or sold the property now? Remember that the current base value for CGT is the April 2013 value and with the recent slowdown in UK property prices, the gain between then and now may well be minimal;
- What are your long-term intentions, both for your personal circumstances and the property? Is it worth making a gift of the property now to someone who will use it?
There may be various ways to plan your circumstances around the new rules, such as gifting the property, taking out insurance to cover the liability or taking out loans for the initial purchase or later improvement. Although it is worth noting that the government will also be enacting strict anti-avoidance rules.
Deemed domicile rules
It was confirmed that long-term non-dom residents of the UK will now become deemed domiciled for all taxes. This is a change from only becoming deemed domiciled for UK Inheritance Tax. In addition, the deemed domicile rule will now kick in once an individual has been resident for 15 out of the previous 20 tax years (historically, it was 17). Non-doms who have been in the UK for a while – perhaps for work or whilst children are at school – should take this opportunity to look carefully at their residency status and check when the rules will apply to them.
If you are hit by becoming deemed domiciled, you will be able to break this by becoming non-resident for three full tax years.
UK domicile of origin – and domicile of choice elsewhere
The rules are stricter for those UK residents who have a UK domicile of origin but have acquired a domicile of choice elsewhere. Once that person becomes UK resident, they automatically become deemed domiciled for all taxes. Individuals who were born in the UK or whose parents may have been domiciled here should consider whether this will apply to them. This could significantly affect your worldwide tax profile, particularly if you have income or capital generated abroad, and you should take advice about how best to mitigate this.
What can I do now?
The Government is still working on finalising the detail of the reforms. However, the next few months will be crucial for people to 1) identify whether these rules may catch them and 2) think about their impact. Initial reviews should be undertaken now so non-doms have a clear idea about how the changes will affect them and what their options are going forward. If you require advice or an initial discussion, please contact Sophie Cisler, Mark Spash or another member of our Succession and tax team.