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November 2, 2017updated 03 Nov 2017 11:30am

Navigating HMRC’s non-dom net

By Spear's

Although many non-doms are more likely to be worse off with the government’s tax reforms, there are practical measures to cushion the impact, writes Camilla Wallace

Non-domiciliaries (‘non-doms) have been in a state of limbo in terms of UK tax liabilities since the government announced in July 2015 that changes were afoot. Since then, we have had government consultations, drafts and re-drafts of legislation, but without non-doms being very much wiser. Then, once it looked like we had legislation ready to take effect from 6 April 2017, the government called the General Election and it was all postponed indefinitely. Non-doms could be excused for being extremely frustrated at the whole situation.

However, finally, on 8 September 2017, the government published the ‘Summer’ Finance Bill 2017-2019 and, on 13 September, the ‘Winter’ Finance Bill 2017-2018, which together reintroduce the proposed non-dom reforms. The majority of the provisions will have retrospective effect from 6 April 2017. The ‘Summer’ Finance Bill is expected to be enacted any day, and the ‘Winter’ Finance Bill on or before 6 April 2018.

Once enacted, with effect from 6 April 2017, a non-dom will be treated as deemed domiciled (deemed-dom) in the UK for most tax purposes if they have been resident here for fifteen out of the previous twenty tax years. Similarly, those born in the UK with a UK domicile will be deemed-dom during any period of UK residence.

The effect of deemed-dom status will be that an individual’s worldwide assets will be subject to UK inheritance tax (‘IHT’) and, for UK resident individuals, their worldwide income and gains subject to UK tax as they arise.

There will also be implications for deemed-doms with interests in offshore trusts: the gains and income arising to the trust will be taxed on them unless the trust qualifies for ‘trust protection’. Either way, a deemed-dom who receives a distribution from an offshore trust will face higher UK taxes than when they were non-dom. The ‘Winter’ Finance Bill also introduces a series of anti-avoidance rules for those who receive distributions; one to note being that distributions to ‘close family’ of a settlor will be taxed on that settlor in some circumstances.

Non-doms holding UK residential property through an offshore company or partnership (enveloped property) will also be affected. Such a structure previously offered an IHT shelter, but with effect from 6 April 2017, this will no longer be the case. The shares or partnership interest will be subject to IHT on the death of the non-dom, or if there is a trust within the structure, there could be a ten yearly IHT charge. Loans taken out to purchase the property could also be subject to IHT.

Non-doms should review their UK tax status and calculate their deemed-dom date. They will need six tax years out of the UK to ‘re-set the clock’, and they may want to factor such periods into their future plans. There is a two year window from 6 April 2017 to separate foreign bank accounts into pots of clean capital, income and gains, so that deemed-doms can bring capital into the UK without a tax charge, and this opportunity should be used.

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Those with affected UK residential property could consider de-enveloping it, subject to the UK tax implications; but otherwise they should ensure their Will is structured efficiently from an IHT perspective.

In terms of offshore trusts, a review will be essential and great care must be taken if the trust qualifies for ‘protected’ status to ensure this is not lost. There could also be advantages to making distributions before 6 April 2018 before the planned anti-avoidance measures.

The reforms represent a major taxation overhaul and there is no doubt that many non-doms could be worse off; but there are also concessions and opportunities that are there to be used, and with organisation and careful planning, non-doms should be able to structure their affairs to minimise the impact.

Camilla Wallace is partner and head of the Private Client Group, Wedlake Bell LLP

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