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Non-doms and non-UK residents - UK tax rules

Non-doms and non-UK residents - UK tax rules

Wide scope of UK tax rules for non-UK domiciled and non-UK resident individuals

Wide scope of UK tax rules for non-UK domiciled and non-UK resident individuals

Changes affecting all UK resident non-UK domiciled individuals, inheritance tax applying to all UK residential property and for non-UK residents, UK capital gains tax on all UK land and property.

 

Background

From April 2017 UK tax rules were introduced that affect all UK resident non-UK domiciled individuals (non-doms) and extend the scope of UK inheritance tax (IHT) to all UK residential properties.

Some of the key features of these rules are highlighted below. This summary is based on Finance (No.2) Act 2017 which was enacted on 16 November 2017 and takes effect from 6 April 2017 and on Finance Act 2018 which was enacted on 15 March 2018 and takes effect from 6 April 2018.

 

Releasing ‘clean’ capital currently trapped within mixed funds

Non-doms have often found their offshore ‘clean’ capital trapped outside the UK in mixed funds by the application of the remittance basis rules. The Finance (No.2) Act 2017 clauses include a window up until 5 April 2019 to enable division of the income, capital gains, and ‘clean’ capital elements of existing non-UK bank accounts into separate accounts.

If managed correctly, this would enable any non-dom who has previously been taxed on the remittance basis prior to 2017/18, to remit to the UK without a tax charge ‘clean’ capital from overseas which was previously trapped within a mixed fund. Being able to do so will allow non-doms to more accurately manage their tax exposure when bringing monies to the UK.

For further information on the Finance (No.2) Act 2017 clauses see Reliefs under new domicile tax rules.

 

Fundamental change in the compliance landscape for non-doms

For many years a non-UK domiciled individual who is UK resident and claiming the remittance basis has only needed to report to the UK tax authorities (HM Revenue and Customs) UK income, UK capital gains and overseas income and capital gains brought (i.e. remitted) to the UK. There has been no need to either account for or report details about unremitted overseas income or gains.

This has meant that, for tax compliance purposes, non-doms and their advisors have only needed to know details of UK source income, UK gains and amounts remitted to the UK.

Under the new rules from 6 April 2017, there is a fundamental change in the compliance landscape for long term UK resident non-doms meeting the conditions for deemed domicile (see below) – from this date worldwide income and capital gains will need to be reported to HM Revenue and Customs and UK tax paid thereon.

As a separate issue, with the continuing global trend towards greater transparency, in addition to the changes to the tax rules there are further new rules which require more information to be reported. These take the form of two new registers recording details of beneficial ownership. These include:

  • A new reporting requirement for trusts. The so called Trust Register will record various details including trustees, settlors and beneficiaries. It will apply to trusts with a UK tax consequence and will include non-UK trusts with a UK tax liability. This Trust Register is not currently open to the public.
  • A public UK register recording the ultimate individual owners of non-UK companies which own property in England and Wales.

Deemed domicile

From April 2017, any non-doms who have been resident in the UK for more than 15 out of the past 20 tax years, will be deemed domiciled for all UK tax purposes. As a result:

  • they will be subject to UK tax on worldwide income and gains as they arise and will no longer be able to claim the remittance basis. Although the remittance basis rules will continue to apply to non-UK income and non-UK gains arising before becoming deemed domiciled under the new rules. Therefore the identification and segregation of these different amounts will need to be carefully managed; and
  • both foreign and UK assets will be subject to IHT.

For further information on the Finance (No.2) Act 2017 clauses see I am a non-dom – could I be treated as deemed UK domiciled?

Rebasing

The Finance (No.2) Act 2017 clauses include provisions for individuals becoming deemed domiciled in April 2017 to be able to benefit from rebasing of certain foreign assets to their market value on 5 April 2017. This would mean that on a future sale of such assets, only gains accruing from the date of rebasing would be taxable (on the arising basis). Rebasing will apply to assets subject to capital gains tax on disposal and to interests in non-UK funds that give rise to offshore income gains.

Rebasing would apply to assets owned by individuals on 5 April 2017 that have not been UK sited at any time from 16 March 2016 or their date of acquisition if later. The rebasing does not include assets that are held indirectly.

For further information on the Finance (No.2) Act 2017 clauses see Reliefs under new domicile tax rules.

Offshore trusts

Under the new rules there will be a ‘protected’ trust regime for non-UK trusts settled by individuals before they become deemed domiciled in the UK.

These special rules will broadly allow for income and capital gains to roll up within such trusts without UK tax charges, provided the settlor makes no direct or indirect additions to the trust after they have become deemed domiciled in the UK.

Liability to income tax or capital gains tax will be based on the extent to which benefits or capital payments are received from the non-UK trust. Rules introduced from 6 April 2018 prevent the ‘washing out’ of trust income and gains to non-UK residents and other individuals where a UK tax liability would not otherwise arise.

For further information on the proposed new rules for trusts which are complex and included in both Finance (No2) Act 2017 and Finance Act 2018 see Taxation of non-UK trusts under the new deemed domicile regime.

Returners

The Finance (No.2) Act 2017 clauses provide that individuals who were born in the UK with a UK domicile of origin, but have left the UK and acquired a domicile of choice elsewhere as a matter of law, will be treated as having a UK domicile of origin for all tax purposes on their return to the UK. However, these individuals will not be able to benefit from the rebasing, mixed funds reorganisation and special tax rules for trusts.

For further information on the Finance (No.2) Act 2017 clauses see I am a non-dom – could I be treated as deemed UK domiciled?

 

UK residential property

Existing rules charging CGT for non-UK residents

In contrast with the tax systems of many other countries, historically non-UK residents have not generally been liable for capital gains tax (CGT) on sales of UK land or residential property under UK tax rules.

However, from 6 April 2013 rules have been gradually introduced which extend the scope of CGT to include non-UK resident taxpayers. Since 6 April 2015 all capital gains realised by non-UK residents, including individuals and trustees, disposing of direct or indirect interests in UK residential property, regardless of its value or usage, are within the charge to UK CGT. There is a requirement to make a return to HMRC within 30 days of conveyance of a property.

There is a further increase in the scope of the rules for non-UK residents from April 2019. Draft legislation sets out proposals to extend the scope of the UK tax charge for non-UK residents to include profits from all UK land and property, whereas currently non-UK residents are only taxed on gains arising from UK residential property. In addition, from April 2019, there is a requirement to make a return to HMRC and pay the tax due within 30 days of conveyance. These proposed new rules rewrite much of the existing legislation, include April 2019 rebasing provisions and a trading exemption.  

Changes to inheritance tax

In the past non-UK resident individuals and non-doms (and their trusts) have been able to shield the value of UK residential property from IHT by holding property through a non-UK company. This has been effective for IHT charges arising on death and during the lifetime of an individual as well as ‘ten year anniversary’ and ‘exit’ charges on the trust.

Finance (No.2) Act 2017 provisions extend the UK IHT net to all residential properties in the UK that are owned by non-doms, whether the non-doms and any companies that own the properties are resident in the UK or not. This also includes those who lend money or provide security to purchase UK residential property. Such loans will be subject to IHT in the estate of the lender, regardless of lender’s residence and domicile position. This will apply to all loans, with no distinction for loans between connected parties.

For further information on the Finance (No.2) Act 2017 clauses see Inheritance tax on UK residential property.

 

Given the changes - what actions should non-doms and non-UK residents be taking?

There are many issues for non-doms and non–UK residents to consider. If you are claiming the remittance basis or are a non-dom owning or seeking to acquire UK land or residential property, these changes could have an impact on you.

Now is the time to take stock of funds in offshore bank accounts and structures through which assets are held in order to have a clear understanding of the impact of the new rules. Specific advice should be taken before undertaking transactions that might be affected by these new rules.

Please call your usual KPMG Private Client contact to discuss how these changes might affect you.

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