2017 will see non-UK domiciled individuals become liable for tax on their worldwide income. Our partners at BDO Northern Ireland outline the changes and explain how they will impact high net worth international clients.
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What does non-UK domiciled (non-dom) mean?
Your domicile is inherited from your father at birth and usually the country in which you are born. If you were born to non-UK parents, outside of the UK, it is likely you will be non-UK domiciled. Essentially, domicile is about ‘where you belong’ and is not something which changes frequently.
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How does this differ to a non-UK resident individual?
Residence is about ‘where you are’ and this can change from year to year.
Residency is a complex area of taxation; to determine an individual’s residency position, it is important to consider the Statutory Residence Test. This test looks at a number of factors such as: days spent in the UK; owning a home in the UK; having employment or family ties to the UK and makes a determination on your residency.
For mobile individuals, residency position can change each tax year and careful analysis will be required on an annual basis.
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What does ‘deemed domicile’ mean?
Based on the definition of domicile above, if you are non-UK domiciled, HMRC can treat you as ‘deemed UK domicile’ if you have been resident in the UK for 15 out of the past 20 tax years. From 6 April 2017, this is a concept which will affect your income tax, capital gains tax (CGT) and inheritance tax (IHT) position and mean you are taxable in the UK on your worldwide income and gains and on the value of your worldwide estate.
Note: Having a passport for a country has no bearing on an individual’s residence or domicile position. This factor on its own is not sufficient to determine an individual’s tax status.
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What is the effect of taxation on remittance and arising basis?
If you are non-UK domicile, but resident in the UK for less than 15 out of the previous 20 tax years, you can choose to either be taxed on the ‘Arising Basis’ or the ‘Remittance Basis’.
If you choose the remittance basis, you will only be liable to UK tax on your foreign income or gains when you remit them (i.e. bring them in) to the UK. If you choose to be taxed on the remittance basis, you will forfeit your Personal Allowance and Annual Exemption for income tax and capital gains tax respectively.
Additionally, if you have been resident in the UK for at least 7 of the previous 9 tax years, you will be subject to a long-term resident charge (i.e. a payment to access this taxation regime) beginning at £30,000 and increasing to £60,000 for residency of at least 12 out of the previous 14 tax years.
Regardless of claiming the remittance basis, you will always be taxable on any income and gains that have been derived from UK sourced income or UK situated assets.
If you choose to be taxed on the arising basis, you will be entitled to your Personal Allowance and Annual Exemption. You will not be required to pay a long-term resident charge, but you will pay UK on all your worldwide income and gains as they arise, regardless of where they are in the world.
Interestingly the remittance basis of taxation does not need to be claimed (and paid for) every tax year. It can be used only in years where it makes economic sense to do so.
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What are the key changes for non-doms from April 2017?
From 6 April 2017, any non-domiciled individual who has been resident in the UK for at least 15 out of the past 20 tax years will become ‘deemed’ domiciled for income tax, CGT and IHT purposes – i.e. long-term non-doms will be taxable on a worldwide basis.
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What is the effect on inheritance tax (IHT)?
Currently, non-UK domiciles who own UK property through an offshore structure – e.g. a trust, will be outside of the scope of UK IHT.
However, from 6 April 2017, the Government has confirmed that it intends to extend the charge to UK IHT on all UK residential property held indirectly by non-doms through offshore entities. This means, at death, UK IHT will be payable at 40% on the net value of the asset regardless of how it is held. Indeed some loans to finance UK residential property are also caught by these new rules.
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What do non-doms need to do in advance of April 2017?
All non-doms, whether they will become deemed domiciled on 6 April 2017 or later, should review their worldwide assets and their ongoing financial needs both in the UK and offshore. We recommend that expert advice is sought to ensure the long term protection, flexibility and efficiency of any action taken. BDO have a specialist team who can help with this if required.
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What is the anticipated impact for UK-based high net worth (HNW) clients?
The Government’s announcements intend to make a tax system that “balances fairness and international competitiveness”, however, the changes initially may deter investment from foreign nationals who prefer a more stable and favorable tax environment. For those families remaining in the UK, consideration must be given to the holding structure of non-UK assets.
Nevertheless, the changes to taxation do not need to be prohibitive, and working alongside your circumstances and objectives, BDO can provide bespoke advice to ensure you achieve your planning aims.
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How does ATED apply to onshore and offshore companies?
ATED is an annual tax payable by companies and corporate entities that own UK residential property valued at more than £500,000. Irrespective of where the company is registered or resident for tax purposes, if the company owns UK residential property which is not let to a third party, it will be subject to the ATED regime.
It is important to note however that there are reliefs which can apply in respect of ATED, meaning the liability is reduced to zero. A common relief applicable to ATED is when the property is let-out to an unconnected third party with a market rent paid or is being used as part of a property development business.
BDO can review your structure and associated UK residential property assets to determine your ATED liability and ensure this is appropriately reported to HMRC.
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What is the non-resident landlord scheme?
If you live abroad for 6 months or more per year, and receive rental income from a UK property, you’re classed as a ‘non-resident landlord’ by HMRC – even if you’re a UK resident for tax purposes.
This means you can either have 20% of your gross rental income deducted at source by your letting agent or tenant.
Alternatively, you can register as a non-resident Landlord and receive your rental income gross (without any tax being deducted), declaring rental profits as income on your UK self-assessment tax return.
The non-resident landlord scheme can have many benefits including improving cash-flow or ensuring tax is not overpaid. You must apply to HMRC to become a member of the non-resident landlord scheme and BDO can help you with this application to HMRC if required.
