HMRC confirms non-domicile changes are set to take effect in April 2017
Following the Brexit vote in June, there was speculation as to whether (and when) HMRC would follow through with publishing more detailed changes set to take effect in April 2017 for non-domiciled individuals who are long-term resident in the UK. However, on 19 August, HMRC published a second round consultation (open until 20 October) which provides a bit more insight into the details of the changes that are on the horizon.
Beginning in April 2017 all non-domiciled individuals resident in the UK for 15 out of the last 20 years will be treated as domiciled for income, capital gains and inheritance tax purposes. Partial tax years, years spent in the UK prior to age 18 and prior periods of residence all count towards meeting this test. Once an individual meets this test, the UK will generally apply its income and inheritance tax rules on an individual’s worldwide assets.
The consultation response addresses some transitional rules that will impact planning opportunities available for long-term non-domiciled individuals. Earlier this year it was announced that those individuals who will become deemed-domiciled due to the 15 out of 20 year rule on 6 April 2017 will have the opportunity to rebase their foreign assets based on the market value on 5 April 2017. This rebasing election can be made on an ‘asset by asset’ basis with the result being that any gain accrued before April 2017 will not be subject to capital gains tax in the UK. Gains accrued thereafter will be taxed in the normal way. Additionally, there will be no requirement that the sales proceeds relating to the part of the gain which arose before April 2017 remain outside of the UK. Where the asset was originally purchased with clean capital, the entire proceeds from the disposal can be brought to the UK without triggering a remittance. However, where it was purchased wholly or partly with foreign income and gains, an element of the disposal proceeds will still relate to those income and gains and so will be subject to the remittance basis in the normal way when the proceeds are brought to the UK. This election will be available for assets that were foreign situs when the original changes were announced during Summer Budget 2015. Crucially, rebasing will be limited to those who paid the remittance basis charge in any year before April 2017 and those who will become deemed domiciled later than April 2017 will not be able to take advantage of the rebasing opportunity.
The consultation response also addressed the concerns that many long-term UK residents hold mixed funds offshore where the non-domiciled individual did not properly segregate income and gains from ‘clean’ capital. The result would be that the ‘clean’ capital would not be accessible until income and gains were remitted onshore effectively limiting an individual’s use of that capital in the future. As such HMRC will offer a temporary window of one tax year (TY 2017/18) in which individuals will be able to clean up their mixed funds and separate those assets, sorting clean capital from foreign income and gains. This will effectively allow some individuals to press a ‘reset’ button with respect to their capital segregation and to remit funds to the UK from a newly segregated ‘clean’ account if they wish to do so. It is important to note that this process will not be available where an individual is unable to determine the component parts of their mixed fund. Mixed funds relief will be available to any non-domiciled individual – it will not be restricted only to individuals who have been resident for 15 of the past 20 years who will become deemed-domiciled under the new rules. An individual also does not need to be resident in the UK in April 2017 to be able to use this protection, but it will only be of any benefit to those individuals who have been UK resident at some point in time and who have used the remittance basis of taxation.
One of the concerns with moving to a 15 out of 20 year rule was the increased length of time one could continue to be considered UK deemed domicile and potentially exposed to Inheritance Tax after leaving the UK. The consultation initially indicated that six consecutive tax years of non-residence would be needed to break deemed domicile status for both income tax and inheritance tax purposes. However, HMRC agreed with concerns and noted that the extended inheritance tax exposure was an unintended outcome. As such, HMRC intends to maintain the existing treatment for departing non-domicile individuals for IHT purposes and the status will fall away once the individual has been UK non-resident for more than four consecutive tax years.
As the application and any benefit of these rules are very specific to an individual’s circumstances, it is important to take the time to sit down with your tax adviser over the coming months to determine what actions might be appropriate before the end of the current tax year or the start of the new tax year to take advantage of the opportunities available if appropriate. Given that this is draft legislation and HRMC has opened up a further consultation for a few weeks, it is possible that there will be added changes made in the final legislation.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The value of investments can fall as well as rise. You may not get back what you invest.
The above article reflects our understanding of the information published in August 2016. It does not take into account the specific goals or requirements of individual users and does not constitute advice. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.