On 8 July, chancellor George Osborne delivered the first Conservative Government Budget for 19 years. Many headlines had already been flagged up in advance, meaning there were no immediate surprises. There were a number of changes affecting UK non-domiciles but also other key areas of financial planning, such as pensions and inheritance tax (IHT).
Offshore tax and non-doms
Offshore tax evasion has been a hot topic in recent years. In the Budget, the chancellor again showed his intent to target those who evade paying tax and to ensure those who come to this country from overseas pay their way. Specific changes include:
Disclosure. HM Revenue & Customs will open a time-limited disclosure facility in early 2016 to allow non-compliant taxpayers to correct their tax affairs under certain terms, before it starts to receive data under the Common Reporting Standard. HMRC’s new facility will be on tougher terms than its previous offshore disclosure facilities.
If non-compliant taxpayers continue to conceal their tax affairs, HMRC will enforce tough penalties for offshore evasion through the existing offshore penalty regime, new civil penalties for tax evaders and the simple criminal offence of failing to declare taxable offshore income and gains.
The UK will begin to receive information on offshore accounts in 2017 and at the same time will begin to share information with other tax authorities on accounts held in the UK.
Marketed avoidance schemes. The Government will publish a consultation to crack down on serial tax avoiders who persistently enter into tax-avoidance schemes that are defeated. It will also publish a consultation on the General Anti-Abuse Rule (GAAR) penalty to consider introducing a GAAR penalty and new measures to strengthen the GAAR further.
GAAR will be consulted on this summer and the legislation will be issued in the Finance Bill 2016.
Deemed domicile. From 6 April 2017, anyone who has been resident in the UK for 15 of the past 20 tax years (the 15-year rule) will be treated as deemed UK-domiciled for all tax purposes. It is currently 17 out of 20. This means they will no longer be able to use the remittance basis of taxation after 15 years and will be deemed domicile for IHT purposes.
The Government will consult on whether split years of UK residence will count towards the 15-year rule.
Once a non-domicile has become deemed domicile under the 15-year rule and spends more than five years outside the UK, at that point they will lose their deemed domicile status (the five-year rule). This is likely only to be relevant for IHT purposes. However, there is an increase in the ‘inheritance tax tail’ from 6 April 2017, as currently this would only be relevant for four years.
Those who had a domicile in the UK at the date of their birth will revert to having a UK-domicile for tax purposes whenever they are resident in the UK, even if under general law they acquired a domicile in another country.
Domicile of choice changes. To align the treatment of UK domiciles and non-doms, UK domiciles who leave after 5 April 2017, having been in the UK for more than 15 years, will also be subject to the five-year rule even if they intend to emigrate permanently and settle in a particular place on the day of departure. The Government will consult on the interaction between the new five- and existing three- and four-year rules.
Excluded property trusts and non-doms. The Budget confirms that excluded property trusts can continue to be used by non-domiciles. Excluded property trusts enable a non-domicile to place property that meets the definition of ‘excluded property’ into a trust where it will be free from any future UK IHT charges once that individual becomes domiciled in the UK.
However, from 6 April 2017, once they become UK-domiciled, capital or income received from the trust will be subject to tax. It will no longer be possible to put UK residential property into the trust.
The Government recognises this is a significant change to the current rules and that changes to trust taxation are complex. It will therefore consult on the necessary details. We await the detail of these proposals.
We may see offshore bonds rise in popularity following these changes, as offshore bonds essentially defer any income tax and capital gains tax liability until the bond is encashed, so there is no tax to declare on an annual basis. An offshore bond meets the definition of ‘excluded property’.
Non-doms/UK domicile consultation. The Government intends to consult further on the interaction of the various deemed domicile rules for both UK domiciles and non-domiciles and also in relation to the tax treatment of trusts. No date has been indicated for when these consultations will be issued but it is proposed that the measures are to be introduced from 6 April 2017 and legislated in the Finance Bill 2016.
Non-domicile IHT residential property changes. From April 2017, non-UK-domiciled individuals will be liable to UK IHT on UK residential property that is held in an offshore company/partnership or offshore trust. This applies to all UK residential property, whether it is occupied or let, regardless of its value.
This change applies to UK residential property only. The change will not apply to any other UK assets, nor will it change the rules regarding non-UK assets.
