Restrictions to Tax Planning for Non-Doms – Fairer but there may still be opportunities for Non-Doms to save UK Tax

Wed 08 Jul 2015

The Chancellor claimed that the current rules for the taxation of non-domiciled individuals had ‘an important place’ and would not be dumped outright before announcing significant proposals to the current regime to make the UK tax system fairer.  It’s difficult to argue that the proposals will not make the system fairer but it seems doubtful that the playing field is truly level yet.

The proposed changes to the taxation of non-doms will be subject to a lengthy consultation process which will commence in the Autumn but the three main proposals are:

• Non-domiciled individuals who have been resident in the UK for more than 15 out of the last 20 tax years will be treated as deemed UK domiciled for all UK taxes.  This will mean that all worldwide income and gains will become taxable in the UK as it arises (removing the opportunity to choose whether to be subject to tax only if remittances to the UK are made).
• Charge all UK residential property owned by non-doms to UK IHT regardless of whether it is held though an indirect structure such as an offshore company.
• To treat all individuals who had a UK domicile of origin at birth as UK domiciled whenever they are UK resident regardless of whether they have spent time overseas and lost their UK domicile as a matter of law.

This means that it will no longer be possible for non-doms to essentially pick and choose when to pay tax in the UK on income and gains after being UK resident for more than 15 years.  Without any planning, non-doms will also be subject to UK IHT at this point too – although previously this deemed domicile rule was in place for IHT but after 17 out of 20 years of UK residency.

It would appear that there may still be opportunities to plan ahead and settle non-UK assets on an offshore trust which would still qualify for the existing IHT excluded property regime.  Income, gains and any benefits received from such trusts may still be subject to UK Income and Capital Gains Taxes but sheltering UK IHT may still be very attractive and advantageous to wealthily non-doms.  Of course, the detailed consultation documents to be published in due course may clarify to what extent non-doms can still capitalise from their now limited tax-advantaged status.

The restriction to turn UK residential property into a non-UK asset for IHT purposes is not surprising given that we have seen similar rules to bring enveloped properties into the UK SDLT and capital gains tax regimes over the past few years.  There will be no de minimis or exemptions from the IHT charge unlike the existing ‘Annual Tax on Enveloped Dwellings’ regime.

The third attack on the taxation of non-doms should also make the UK tax system fairer.  Whilst it is currently difficult for an individual with a UK domicile of origin at birth to obtain a domicile of choice elsewhere and later re-establish UK residency it is possible under law.  The proposed restrictions should result in such non-doms being liable to UK tax whenever they are also UK tax resident.  However, it would appear that there could still be scope to reorganise the ownership of non-UK assets in an IHT efficient way when such individuals become non-UK tax resident for more than 5 years.

As is so often the case, we need to see how these proposals develop in the coming months but with potential opportunities for many non-doms to structure the ownership of their wealth in a more tax efficient way it might be a little premature to say that the system is now ‘fair’ regardless of domicile.

For more information please contact Paul Barham at paul.barham@mazars.co.uk , Liz Ritchie liz.ritchie@mazars.co.uk or Tony Maleham at tony.maleham@mazars.co.uk