The Chancellor has predictably announced further restrictions on the non-dom rules in today’s 2015 Summer Budget. The key measures are:
- non-dom status will only be available for IHT and income tax and capital gains tax for the first 15 years of residence in the UK;
- some UK-born individuals who move abroad will be prevented from claiming non-dom status if they return to the UK; and
- UK residential property, held by non-doms through offshore companies or trusts, will become subject to IHT.
The non-dom regime received close scrutiny during the general election campaign and would probably not have survived but for the election of a Tory majority Government.
Abolishing permanent non-dom status
The non-dom tax rules currently benefit individuals who live in the UK but who intend to return to the country which they consider as their permanent home. An individual can reside in the UK for many years, even decades, and remain non-dom.
Currently, for inheritance tax purposes only, non-dom status is lost after residing in the UK for (broadly) 17 years.
From April 2017, non-dom status for both inheritance tax and also for income tax and capital gains tax will “expire” after broadly 15 years of residence in the UK.
Such long-term residents will become deemed UK domicile for UK tax purposes. However, their domicile status under general law will not be affected. Interestingly, they can continue to pass on their non-dom status to their children (i.e. born after their 15th year of UK residence) who can then claim the tax benefits of being non-dom.
It also seems that individuals who are UK domiciles under general law and who have been UK resident for 15 years and then move abroad will not become non-dom for IHT purposes until at least 5 years following their departure. The details of this are still to be worked out.
Some individuals who have lived in the UK for 7 or 12 years must pay charges of £30,000 and £60,000 in order to opt into the non-dom tax regime. These charges will remain unchanged. The £90,000 charge (which applies to those resident for 17 years) will fall away once the 15 year limit on non-dom status comes into force.
UK-born individuals who move abroad
Much was made during the election campaign of the fact that individuals born in the UK and who live most of their life in the UK can, in some circumstances, claim to be non-dom.
The Chancellor is not proposing to prevent anyone born in the UK from claiming non-dom tax status. While that might sound generous, the effect of the 15 year rule above means that such individuals lose the tax benefits of non-dom status before they leave secondary school.
The Chancellor is, however, focusing on those who are born in the UK to UK-domiciled parents and so start off with a UK domicile of origin, leave the UK and acquire a domicile of choice abroad, and who then return to the UK.
From April 2017, these returning individuals will be treated as UK dom as soon as they become resident in the UK, even if they remain domiciled abroad under general law.
Trusts which have been settled during the temporary period of non-residence abroad will not qualify as excluded property settlements for UK tax purposes.
UK homes held within offshore structures
The “annual tax on enveloped dwellings” and the related capital gain tax charge were intended to discourage UK residents (primarily non-doms) from holding their UK homes through offshore companies.
One potential benefit of these structures is that shares in a foreign company can be passed on by a non-dom without inheritance tax, even where the company’s main asset is a valuable UK property.
The reason for this is that while a UK dom pays IHT on their worldwide assets, a non-dom does not pay IHT on their foreign assets. Foreign assets settled by a non-dom into a foreign trust (an excluded property settlement) are also outside the scope of IHT.
It is proposed that, from April 2017, trusts and non-doms owning UK residential property through offshore, closely-held companies will be liable to IHT in the same way as UK-domiciled individuals. This charge will be triggered by specified events including the death of the individual shareholder. Properties will not be exempted on the basis that they fall below a certain value or where they are let out.
There is, however, a hint that the Government may consider providing relief for the tax costs which a non-dom would otherwise trigger when removing a UK property from an offshore corporate structure.