A non-dom is an individual who is resident in the UK, but domiciled in another country under general law. Non-doms enjoy several tax advantages over UK domiciled individuals, including relief from inheritance tax for assets situated outside the UK, and access to the “remittance basis” meaning that UK income tax and Capital Gains Tax (CGT) is only due if wealth is brought into the country. In recent years the tax net has tightened on non-doms, generally by imposing a time limit on how long these advantages may be enjoyed, or paying an annual charge to continue to benefit from the remittance basis.
Abolition of the permanent non-dom
Measures are proposed to come in effect from 6 April 2017, which will mean that “permanent non-doms” will come to be treated on the same footing as a UK domiciled tax payer.
It is intended that an individual who has been resident in the UK for at least 15 of the last 20 years will be “deemed domiciled” for all taxes. This reduces the current inheritance tax rule by two years, and completely removes the opportunity for a long term UK resident to access the remittance basis indefinitely. In other words, after 15 years, a non-dom will be taxed the same as a UK domiciled individual. The last budget announced a £90,000 remittance basis charge for the long term resident non-dom, but this will become redundant.
The five year rule
Anti-avoidance measures will also be introduced to prevent individuals becoming temporarily non-resident, and then returning to the UK to either start the 15 year clock running again, or avoid UK tax soon after leaving. Broadly, an individual will remain deemed domiciled for the five years after leaving the UK, (“the five year rule”).
There is a deliberate side effect of this rule which brings others into charge, under the guise of “parity”. The five year rule affects long term UK doms as well, who emigrate permanently. Thus individuals who were born and lived their whole lives in the UK will be subject to UK inheritance tax for five years after permanently leaving the UK.
There are no grandfathering provisions, so the rules will affect everyone regardless of how long they have currently been in the UK.
Restrictions to the domicile of choice
Under general law, a child usually takes on the domicile of their father (domicile of origin) when they are born. On reaching majority, they may acquire a domicile of choice, being somewhere they are resident if different to their domicile of origin. It is currently possible for an individual to change their domicile of choice to somewhere other than the UK, but live in the UK and enjoy all the advantages of non-domicile status. Measures will be introduced to prevent individuals living in the UK being treated as non-dom, when they were originally domiciled in the UK.
Further attacks on UK residential property
It is currently possible to avoid UK inheritance tax with a little forward planning and the use of off shore trusts. A typical way to shelter a UK residential property would be for an offshore company to hold the property, and an excluded property trust to hold the shares in that company. Legislation will be introduced from 6 April 2017 to ensure that where there is a UK residential property connected to an offshore structure, and a chargeable event occurs for inheritance tax, (such as the death of the owner of the shares, or the ten year anniversary of the trust), it will be chargeable to UK inheritance tax as if it was held by a UK domiciled individual. The tax charge is not restricted to just offshore companies as partnerships and other “opaque” structures will be caught as well. Broadly, the rules will follow the Annual Tax on Enveloped Dwellings rules (ATED), but with no lower limit or exemptions. However the usual inheritance exemptions and reliefs will apply if applicable.