Reforms due this April will fundamentally alter how the government taxes those who are resident in the UK but not UK-domiciled.
It has been two years coming, but in April George Osborne’s new tax rules for non-domiciled UK residents will finally come into force – and some individuals could be hit hard by the new parameters.
Foreign expats who live and work in the UK, but are not UK-domiciled, currently benefit from significant tax advantages. The new rules, however, mean that is about to change. Since it is a complicated area, and given the imminence of the reforms, if you could be affected, now might be a good moment to review your situation and prepare your finances accordingly.
Most significantly, the rules that determine when a foreign expat becomes deemed UK- domiciled for tax purposes will tighten. Currently, the deemed domicile rule only applies for the purposes of Inheritance Tax (IHT) if an individual is UK resident for 17 of the last 20 tax years. However, from April the timescale will reduce to 15 out of the last 20 tax years, when individuals will be treated as UK-domiciled for Income Tax and Capital Gains Tax purposes, as well as for IHT.
Anyone approaching the 15-year trigger will need to consider the impact on their estate as, once they become deemed domiciled, they will become liable for UK IHT on their worldwide assets. But the change to the treatment of income and capital gains could also have a big impact.
Foreign expats living in the UK can choose to pay tax on a remittance basis, which avoids a UK tax charge on overseas income and gains – as long as they pay a charge each year to HMRC and do not bring the assets into the UK. After April, they can continue on this basis until they become deemed domiciled under the 15-year rule; but at that point they will be taxed on overseas income and capital gains irrespective of whether the assets are brought into the UK.
Window of opportunity
Individuals due to become deemed domiciled from April have been offered two tax concessions to sweeten the pill. The first is called ‘rebasing’, which will make it possible for assets to be given a new Capital Gains Tax (CGT) base value equal to their value at 6 April 2017 (although the offer is subject to several rules). While it will not always be beneficial to elect for CGT revaluation, this will generally reduce the capital gains charge on future disposal.
The government is also offering a two-year window from 6 April in which people can reorganise their overseas-based funds (whether foreign income, foreign capital gains or ‘clean capital’). The ‘clean capital’ (i.e. income or gains realised before an individual becomes UK tax resident) can then be brought back to the UK without a tax charge. In order to avoid later tax charges, individuals may need to consider investing the clean capital in tax-efficient, non-income-producing investments such as offshore bonds.
The new rules not only affect people who have been tax resident in the UK for 15 of the past 20 years. They also apply to those who had a UK domicile of origin, and who acquired a non-UK domicile of choice, and are now UK tax resident, or may become UK tax resident in the future. Indeed, it is this group that is expected to be most affected by the new rules since, as of 6 April 2017, they will be deemed UK-domiciled for tax purposes for any year in which they are resident in the UK.
The change in status will have several implications: all income and capital gains will henceforth be taxed on an arising basis; all worldwide assets will be subject to IHT; and if you are the potential beneficiary of any excluded property trusts, those trusts will lose their IHT efficiency. However, the new rule applies only if the individual is tax resident in the UK for at least one of their first two tax years after returning to the UK.
The tax changes undoubtedly make tax-efficiency more difficult for non-doms to achieve. But as well as some of the fundamental restructuring that may be necessary, such individuals shouldn’t overlook the tax year-end planning opportunities that apply to them.
Foreign expats living and working in the UK are able to invest in ISAs and pensions, and benefit from the same tax advantages as those born in the UK. Similarly, they are entitled to an annual CGT allowance of £11,100 (unless they are remittance-basis users) that can be offset against gains on UK and worldwide assets. Finally, the annual gift allowance of £3,000 is one way of passing on wealth to future generations while avoiding storing up future IHT problems.
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The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.