Taxation of “non-doms” – where are we now?
8 October 2018
For the first time ever, many non-domiciled individuals (“non-doms”) are now faced with the prospect of reporting worldwide income on their UK tax returns. This is a result of the 6 April 2017 withdrawal of the “remittance basis” for individuals who have been resident for more than 15 out of 20 years. The first tax return to which this applies is the 2017/18 return, which needs to be filed by 31 January 2019.
Individuals affected by this change should seek advice now, if they have not already done so, since their tax position may be significantly more complicated than under the previous regime. For example, they will be required to ascertain the treatment and correct reporting of assets and investments outside the UK. Where profits are already being taxed in another country, it is important to ensure (where possible) that foreign tax credits are claimed in order to prevent double taxation. This requires careful coordination between the tax returns filed in each country.
In addition to requiring long-term resident non-doms to pay tax on worldwide income, the government also introduced the following changes which took effect on 6 April 2017:-
- Structures which were designed to prevent UK inheritance tax (“IHT”) on UK dwellings are no longer effective from 6 April 2017 and can even result in double tax charges. Therefore all such structures must be carefully reviewed and may need to be unwound or modified.
- Trusts established and funded by individuals before they became deemed domiciled remain “protected” from many UK taxes provided (broadly) that no funds or value are added to the trust by the settlor or other trusts established by the same person.
- Non-doms with offshore bank accounts containing more than one type of fund, are able to separate out the different types of funds in the account (“cleansing”) before 6 April 2019 and subsequently remit funds to the UK in a tax efficient manner.
- Individuals who became deemed domiciled on 6 April 2017 benefit from the automatic rebasing of offshore assets to their 5 April 2017 more market value. They must have paid the remittance basis charge (“RBC”) at least once in order to benefit from the relief. If they have never paid the RBC then they should consider amending a prior year return in order to pay it so that they can benefit from rebasing.
- Individuals who become deemed domiciled under the new rules must retain their non-UK domicile under English law in order to benefit from the trust protections, rebasing and mixed fund cleansing.
- Individuals born in the UK with a UK domicile of origin but who subsequently acquired a domicile in another country, lose almost all the tax advantages of being a non-dom.
We have significant expertise helping individuals navigate the new rules and will be pleased to discuss with you how we can help.