Updated following release of Finance Bill 2017 and announcements from HMRC on 21 March 2017)
We now know what will be legislated as part of the Finance Act 2017, subject to tweaks made as the Bill passes through Parliament. The following is a summary of the changes which are effective from 6 April 2017.
Deemed domicile – effective from 6 April 2017
1. All non-doms who have been UK resident for 15 out of the past 20 tax years will be regarded as deemed domiciled for income tax and capital gains tax (CGT) purposes from 6 April 2017.
2. Non-UK domiciled individuals will lose their deemed UK domiciled status for inheritance tax (IHT) purposes in the fourth year of non-residence – but if they resume UK residence before they have been non-resident for six full tax years their deemed dom status will be re-instated. Deemed dom status will continue for income tax and CGT purposes until they have been non-resident for more than five out of the previous 20 tax years (this essentially means that deemed dom status will fall away following the sixth year of non-residence if they lived in the UK for 20 years before their departure after 5 April 2017).
3. Non-doms leaving the UK before 6 April 2017 will not be subject to the new ‘15 out of 20’ test provided they do not return. However, if they return they will be deemed domiciled in the UK in the tax year they resume residence if they have not been non-UK resident for at least six full tax years out of the previous 20 tax years.
4. Formerly domiciled residents (also referred to as returning UK doms) who were born in the UK with a UK domicile of origin and have since taken a domicile of choice overseas will be regarded as deemed domiciled in the UK for income tax and CGT purposes if they are UK resident for a tax year from 2017/18 onwards. Deemed domicile status for IHT purposes will apply if the non-dom is a formerly domiciled resident and is resident in the UK for the relevant tax year and at least one of the two immediately preceding tax years.
5. Any trust, settled by formerly domiciled residents, and holding foreign assets will no longer be regarded as an excluded property trust (for IHT purposes) for a tax year in which the formerly domiciled resident is UK resident. Excluded property status will be reinstated for any year the settlor is no longer UK resident.
6. Non-doms who have previously applied the remittance basis (ss.809B, 809D or 809E ITA 2007) will be able to cleanse their offshore bank accounts during a two year period from 6 April 2017 to segregate income, capital gains and capital. This only applies to cash accounts but it will be possible for non-doms to sell foreign assets and then ‘un-mix’ the proceeds within the two year time scale. The facility to ‘clean’ offshore accounts is not available to formerly domiciled residents.
7. A foreign asset held directly by a non-dom who becomes deemed domiciled for CGT purposes on 6 April 2017 will be rebased to its value on 5 April 2017 if:
a) The asset was situated outside the UK between 16 March 2016 and 5 April 2017, and
b) The non dom paid the remittance basis charge in any year up to 5 April 2017, and
c) The individual is not a formerly domiciled resident, and
d) The non-dom does not elect for the rebasing to be disapplied. It should be noted that the rebasing is not applicable for non-doms who become deemed domiciled in a later tax year – as such it cannot apply to any non-dom who first became UK resident later than 5 April 2003. The rebasing will also apply to non-reporting funds that are subject to income tax.
8. Any capital loss election made by a non-dom will cease to apply in the tax year the non-dom becomes deemed domiciled in the UK. A further capital loss election can be made if the individual loses their deemed dom status in the future.
9. Temporary non-residents could be regarded as deemed dom by virtue of the ‘15 out of 20’ test in the tax year they return to the UK. Such individuals, who resume UK residence in 2017/18 or who became non-resident before 8 July 2015, will not be subject to CGT on the disposal of their foreign assets during their period of non-residence if a claim for the remittance basis is made under s.809B ITA 2007 for the tax year of their return. Where a claim is made, foreign gains realised in the intervening non-resident years will not be liable to UK CGT if the proceeds are not remitted. Furthermore, there is no remittance basis charge applicable and the individual’s personal allowance for the year of return will be preserved.
The remittance basis claim will only apply to the foreign gains made in the intervening non-resident years and will not apply to gains made in the tax year of return. All other non-doms who are regarded as deemed domiciled on returning to the UK will NOT be able to claim the remittance basis for foreign gains realised during a period of temporary residence as the basis of assessment will look to the domicile status for the year of return. Thus, any foreign gains realised in the period of temporary non-residence will be subject to UK CGT even if deemed domiciled status was not relevant at that time e.g. non doms who left the UK in 2015/16 (non-resident after 7 July 2015) or 2016/17 and return to the UK after 5 April 2018 as deemed doms due to the new ‘15 out of 20’ year rule.