In Summer 2015, a major announcement by former Chancellor of the Exchequer, George Osborne, highlighted new reforms for Tax on non domiciled UK residents and non residents. The following August, the government released a consultation document for the proposed changes and specified that this would come into effect from 6th April 2017. Early this year, the government has finally published the draft legislation for public viewing before the April deadline. As prominent tax accountants in London and Birmingham, we’ve put together a quick top line summary of the legislation and who it will affect.
What does non-domiciled status mean?
A non-domiciled resident, or “non-dom”, is a UK resident who is exempt from UK tax on their foreign assets and gains, meaning they can enjoy their worldwide wealth without being taxed on all of it whilst residing in the UK.
Traditionally, a domicile is the country where his/her father would’ve considered their permanent home when born. Controversially to some, a non-dom can be born in the UK, be educated in the UK and even have employment in the UK, but retain their non-dom status via their parents.
The criteria for being a non-domiciled resident is particularly important for calculating UK tax. Nom-doms are still required to pay UK tax on any income they earn within the UK. However, non-doms currently do not need to pay UK tax on foreign income unless they then decide to bring this income back into the UK.
In summary, having non-domiciled status can be a valuable protection for wealthy individuals looking to reside in the UK without wanting to be taxed on all their income.
The debate regarding non-domiciled status is an old one. Non-domiciled residency has been around for nearly 200 years and currently has around 116,000 people claiming non-dom status in the UK.
The topic is a particularly contentious one as more and more wealthy UK non-dom residents have become more prominent in recent years. This has often caused the mainstream media to question why such wealthy individuals are allowed to enjoy the benefits of the UK but not “put in their fair share”.
The April tax reforms will likely affect and influence many of the UK’s richest individuals that could have a negative effect on the UK economy according to the City.
Who are some non-domiciled UK residents?
Whilst the non-dom status is shared by ordinary individuals with ordinary wealth, critics say that the reforms are targeted to hurt the super wealthy who currently avoid tax on their own foreign wealth. Examples of individuals with non-domiciled residency include;
- Roman Abramovich – Russian billionaire and owner of Chelsea Football Club
- Lord Ashcroft – former chairman of the Conservative Party & 74th richest person in the UK
- James Caan – former investor on the BBC’s Dragons’ Den with an estimated network of £95 million
- Lewis Hamilton – Stevenage born triple F1 World Champion worth an estimated £88m
- Mark Carney – Canadian economist who is the current Governor of the Bank of England
- Antonio Horta Osorio – Portuguese banker and CEO of Lloyds Banking Group who enjoys an annual salary of £10.8m
How will the reforms change the status of non-domiciled residents?
The focus of the reform is largely on non-doms currently living the UK though some expatriates may also be affected. The draft legislation states that any UK tax residents who have been living in the UK for at least 15 of the past 20 years will now be identified as domiciled – automatically. As such, they will no long be able to avoid UK tax on their worldwide income.
In addition to this change, any individuals that are born into the UK but claim a new domicile by choice later in the life, will automatically lose their non-dom status should they return to the UK.
What are the key changes from the reforms?
- Non-domiciled individuals will be subject to tax on their worldwide income and gains if they have lived in the UK for 15 tax years, whereas previously it was just UK income and gains that was taxed.
- The government has stated that in the situation of a split tax year, that split financial year will count, which could see some non-doms targeted after just 13 calendars years as supposed to 15.
- Up until April, UK residential properties that are held via offshore companies or trusts have been able to escape inheritance tax. From 6th April, this protection will be removed and all properties will be subject to UK inheritance tax.
- The new legislation states that non-UK resident trusts that are created by non-doms will now face further tax rules once the individual is deemed domiciled. This is likely to cause further confusion and complexity, as well as additional costs.
- The reforms allow for non-doms to manage their offshore funds with a grace period of up to two years from April 2017. The reforms recognise that these changes could financially cripple several individuals with mixed fund accounts, so this grace period will allow for funds to be rearranged, assets sold and funds to be separated into foreign income, foreign gains and clean capital.
- However, in regards to property trusts, an excluded property trust will continue to be protected by the reforms. An excluded property trust that is created by a non-UK domiciled individual before they become domiciled (and contains non-UK assets only) will still be able to escape UK inheritance tax.
What are the issues if non-domiciled status is removed?
Though the government has set out consultations and even a grace period for some tax issues, the non-dom reforms could have a significant impact on the country and economy.
- The BBC reported that non-doms paid an estimated £6.2bn in UK tax in 2012-13 (the most recent figures available). If they choose to leave the UK altogether to protect their financial interests, how will the country cope without this income?
- However, if these non-doms stay in the country, there is an argument that the income generated from their new domiciled status could be even greater and should provide a fair contribution to the UK economy
- Should notable non-doms decide to flee, what impact might this have on the economy in terms of jobs and new businesses? With several notable entrepreneurs and business leaders claiming non-dom status, does the UK weaken or strengthen its position without them?
What should you do if you currently have non-domiciled status?
First and foremost, get in touch with a tax accountant like ourselves. Talk through your current situation, assets and tax planning with us and we can start to formulate a plan to ensure that your interests are protected but don’t fall foul of the new reforms by April 2017. With over 22 years of experience in tax planning across London and Birmingham, we can help you plan out solutions such as:
- Analysing and explaining if you are to be hit by the April 2017 reforms
- Setting out a robust and clear tax plan for the future if you’re currently holding non-domiciled UK residency currently
- Managing and organising any records for mixed fund accounts
- Creation of excluded property trusts if you’re currently not domiciled in the UK in order to be protected from inheritance tax
- Advising the acceleration for offshore distribution from trusts to UK beneficiaries who can claim remittance before April 2017
Whether you just want to check your own situation or are looking for an experience tax accountancy firm to help get their affair in order, please feel free to contact us online or drop us an email on email@example.com.