UK: UK Budget July 2015 – Non-Doms In The Spotlight

Last Updated: 13 July 2015
Article by Justine Markovitz, David McLellan, Lindsay Brown and Ian Perrett

Introduction

The July Budget 2015 was one of the most eagerly anticipated UK Budgets in recent years. It was the first Budget to be delivered by a Conservative government since 1996 and there was much speculation in the media concerning the steps the Chancellor would introduce now that he is no longer subject to the constraints of coalition government.

Following an increase in political and media attention concerning the taxation of non-UK domiciliaries in the run up to the General Election in 2015, it was expected that the Chancellor would introduce reforms to the tax regime applicable to non-UK domiciliaries ('non-doms'), which he has done. It is likely that the changes announced will be welcomed by the public at large. However, they will also mean that long-term residents of the UK who currently elect to be taxed on the remittance basis will be forced to give serious consideration to their tax position and a number may choose to leave the UK altogether.

However, the reforms are not limited to the non-dom tax regime and the Chancellor outlined significant changes to other areas of UK tax law. Below we have summarised the changes that we think will be of particular interest to clients of our Swiss offices and their advisers.

Changes to the rules concerning non-UK domiciliaries

For many of our clients, the most significant changes announced in the July Budget 2015 concern the taxation of non-doms. Two potentially very significant changes have been announced to the rules currently in place, together with a more minor change concerning the election for the remittance basis to apply:

a) Extended deemed domicile rules and restriction of the remittance basis

From 6 April 2017, individuals will become 'deemed domiciled' in the UK for all tax purposes once they have been UK resident for more than 15 out of the past 20 tax years. This means that once an individual has been resident for this period he will be unable to claim the remittance basis and will be chargeable to UK income and capital gains tax on his worldwide income and capital gains.

In addition to affecting the income tax and capital gains tax position of individuals, the change will also mean that an individual who has been resident in the UK for 15 out of 20 years will be within the UK inheritance tax net and subject to UK inheritance tax at 40% on his worldwide assets up to two years earlier than was the case under the old rules (which stipulate that an individual becomes deemed domiciled for inheritance tax purposes when he has been UK resident in 17 out of the past 20 tax years). In addition, the new rules will mean that once a non-dom who has become deemed domiciled under the 15-year rule leaves the UK, he will not lose his UK deemed domicile until he has spent more than 5 complete tax years outside the UK. There will therefore be a longer 'inheritance tax tail' for those non-doms who leave the UK than is currently the case.

One piece of good news is that it will still be possible for non-doms to create 'excluded property trusts' for as long as they are not deemed domiciled in the UK (although subject to the restriction described in (b) below). This means that it will still be possible for non-doms to shelter their assets (with the exception of UK residential property – see point 3 below) from UK inheritance tax in the event that they subsequently become deemed domiciled. Furthermore, it appears that settlors of such trusts will not be taxable on income and gains that are retained in the trust, even after they become deemed domiciled. Offshore trusts will therefore still offer very attractive tax deferral possibilities for individuals with a non-UK domicile of origin.

b) Restrictions on individuals with a UK 'domicile of origin'

The government has also announced restrictions on tax planning that can be undertaken by individuals who were UK domiciled at birth. Under the current rules, it is technically possible for an individual with a UK domicile of origin to leave the UK and to acquire a domicile of choice in another jurisdiction. Such an individual could return to the UK at a later date and elect to be taxed on the remittance basis as long as he could demonstrate that he had not lost his domicile of choice outside the UK.

In addition, a trust set up by such an individual whilst that individual was non-UK domiciled (and not deemed domiciled in the UK for inheritance tax purposes) would be an excluded property trust for UK inheritance tax purposes and would therefore remain outside the scope of UK inheritance tax even if the individual subsequently lost his domicile of choice.

Under the new rules, such an individual will not be able to benefit from the excluded property status of any trust set up by him whilst non-UK resident and non-UK domiciled if he returns to the UK and becomes UK resident. In addition, he will not be able to claim the remittance basis in relation to the trust assets or other assets held outside the trust but kept offshore.

On departure from the UK, domicile status will be lost again in the tax year after departure, as long as the individual has not been in the UK for more than 15 years and has not acquired an actual UK domicile.

c) Claim period for the remittance basis to apply

In the March 2014 Budget it was announced that the government would consult on whether to change the rules regarding the ability to claim the remittance basis on an annual basis (it was suggested that an individual would have to elect to be taxed on the remittance basis for a period of 3 years). The government has now announced that it does not intend to implement these changes. Elections for the remittance basis to apply will therefore continue to be made on an annual basis.

Inheritance tax on UK properties

a) Current position

Under current rules, individuals who are not domiciled or 'deemed domiciled' in the UK (regardless of where they are resident) are only subject to inheritance tax ('IHT') on assets situated in the UK. Because IHT is only charged on directly held UK assets, it is relatively easy for a non-dom to avoid IHT by 'enveloping' such assets. i.e. owning them through a non-UK company or other non-transparent entity (either directly or via an 'excluded property trust').

In recent years the UK Government has made various attempts to discourage non-doms from enveloping UK residential real estate, including the introduction of the ATED (annual tax on enveloped dwellings) and the increased rates of SDLT (stamp duty land tax) for residential properties held through non-UK entities. However, some non-dom owners of high-value properties have taken the view that these disadvantages do not outweigh the benefit of protection from an IHT charge of 40% on their death.

b) Proposed new rules

With effect from 6 April 2017, the current IHT rules are to be amended so that individuals or trusts owning UK residential property through a non-UK 'envelope' will be subject to IHT on the value of the property, in the same way as UK domiciled individuals. The charge will be based on the existing ATED rules, but will be wider in scope as it will also apply in relation to properties which are rented out and the various ATED reliefs will not apply. Also, the IHT charge will apply regardless of the value of the property (assuming that it exceeds the normal IHT nil rate band).

IHT will be imposed on the value of UK residential property owned by the offshore holding company on the occasion of any chargeable event. This would include:

  1. the death of the individual (wherever resident) who owns the company shares,
  2. a gift of the company shares into trust,
  3. the ten-year anniversary of the creation of the trust,
  4. distribution of the company shares out of trust,
  5. the death of the donor within 7 years of having given the offshore company away to an individual, or
  6. the death of the donor/settlor where he benefits from the gifted UK property or shares within 7 years prior to his death (i.e. the IHT 'reservation of benefit' rules will be extended to apply to the shares of the offshore holding company in the same way as the rules currently apply to UK domiciliaries and directly held UK property of non-doms).

In some cases the position may be more complicated, e.g. because the offshore company has other assets as well as the UK residential property, the offshore company is held through a group or the non-dom/trust does not wholly own the company. The intention is that only the UK residential property will be caught by the new IHT charge and the government proposes to consult on the details of the proposals to ensure that this is achieved.

It is intended that the same IHT reliefs and charges will apply as if the UK property was held directly by the owner of the company. The spouse exemption will therefore be available on the non-dom's death in the normal way if he/she owned the company shares directly – but in most cases it will not apply if the property is held through a trust.

There will be targeted anti-avoidance legislation, and attempts to avoid the new charge may also be within the proposed extension of the DOTAS (disclosure of tax avoidance schemes) regulations in relation to IHT.

The UK government apparently does not intend to change the IHT treatment of other UK or non-UK assets held by non-doms or excluded property trusts.

c) Impact of new rules?

It is anticipated that the new IHT charge may prompt at least some non-doms and trusts to 'de-envelope' UK properties. The government is aware that in some cases (e.g. if the property is mortgaged or has increased in value since 2013) there may be significant costs associated in doing this and has announced that it will consult on this aspect, and any other concerns stakeholders may have, before the new rules are implemented. A consultation document is due to be published towards the end of this summer.

In the meantime, it remains to be seen what the overall impact of the changes will be in economic terms. Although they may well increase the IHT take, the yield from the ATED (which is more reliable given that an IHT charge will not always materialise, e.g. if the non-dom sells the UK property before his death) is likely to reduce, and the new charge may also affect the attractiveness of the UK property market for non-doms.

Taxation of UK dividends

The tax treatment of UK dividends is currently more complicated than it needs to be, mainly because of the dividend tax credit system (which reduces the amount of tax payable on dividends, but is disproportionately complex). The government is proposing to simplify the system from April 2016, by abolishing the dividend tax credit and replacing it by a new 'dividend tax allowance' of £5,000 and increased tax rates on dividend income. The new tax rates will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

According to the government, this change will result in a tax cut or no change for investors with modest income from shares, but taxpayers who receive significant dividend income (e.g. if they have very large shareholdings or receive significant dividends through a closed company) will pay more. The government also anticipates that the changes will reduce the incentive to incorporate and remunerate through dividends rather than through wages, and that this will reduce the cost to the Exchequer of future 'tax motivated incorporation'.

Enhanced compliance and increased criminal investigations

Also included in the Budget are measures designed to discourage tax evasion and tax avoidance and to increase compliance.

a) Tax evasion

The government has stated that it will increase funding to HM Revenue & Customs ('HMRC') by over £60m by 2020-21 to allow HMRC to step up criminal investigations into serious and complex tax crime carried out by wealthy individuals and corporations.

HMRC's powers to acquire data from online intermediaries and electronic payment providers will also be increased to catch those operating in the 'hidden economy'.

b) Tax avoidance

The government will introduce legislation to clamp down on serial tax avoiders who persistently enter into tax avoidance schemes which are defeated. The measures will include a special reporting requirement and a surcharge on those whose latest tax return is inaccurate as a result of a defeated avoidance scheme.

In addition, the government will seek to strengthen the 'General Anti-Abuse Rule', which seeks to prevent the creation of schemes which are artificial and designed solely in order to reduce tax. It will also consult on introducing a penalty for those who fall foul of the GAAR.

c) Compliance

The government will also invest additional funds to tackle non-compliance by small and mid-sized businesses, public bodies and affluent individuals.

Common Reporting Standard ('CRS')

Legislation will be introduced to require financial intermediaries (including tax advisers) to notify their customers about the CRS. The notification will also have to include information concerning the penalties for tax evasion and the opportunities available to individuals to regularise their tax affairs.

This is a welcome announcement since individuals may be unaware of the far-reaching implications of the CRS, which comes into force in some jurisdictions (including the UK) in 2016 and will result in the automatic exchange of information between jurisdictions where assets are located and where the beneficial owner of those assets is resident.

It is similarly important for advisers to make clients aware of the various disclosure facilities that are still available and which offer individuals favourable terms under which to regularise undeclared tax liabilities. These facilities, the most favourable of which is the Liechtenstein Disclosure Facility, will only remain open for new registrations until 31 December 2015. However, the government has also announced that it will introduce an additional time-limited disclosure facility in 2016 to allow non-compliant taxpayers to correct their tax affairs before HMRC start to receive data under the CRS in 2017. This facility will be on tougher terms than the facilities currently available and we recommend that taxpayers who are aware that they have outstanding tax liabilities take steps to regularise their affairs using one of the schemes currently available rather than waiting until 2016.

Other points to note

a) Capital gains tax and hedge funds

With effect from 8 July 2015, the rules on the taxation of 'carried interest' will be amended with a view to stopping investment fund managers from using tax loopholes to avoid paying the correct amount of capital gains tax on the carried interest. Individuals will normally be charged to CGT on the full amounts they receive in respect of the carried interest, regardless of the items notionally applied to satisfy the carried interest at the level of the partnership or other entity in the fund structure. Only limited deductions will be permitted, in particular for any actual consideration given by the individual for the carried interest. This measure will apply to all carried interest arising on or after 8 July 2015, regardless of when the arrangements were entered into.

The government has also issued a consultation on the circumstances in which investment managers' performance-related returns are to benefit from CGT treatment (rather than being treated as income).

b) Banking tax

From 1 January 2016, a new tax on banking sector profit set at a permanent rate of 8% will be introduced. There will also be a phased reduction of the bank levy rate from 0.21% to 0.10% by 1 January 2021. In addition, the scope of the bank levy will be changed so that from 1 January 2012 UK headquartered banks are charged on their UK balance sheet liabilities.

c) Pension tax

From April 2016 the government will reduce the amount of money individuals with an annual income of more than £150,000 (including their own and their employer's pension contributions) can pay into a pension scheme free of tax. The reduction will take the form of a taper to the annual allowance. For every £2 of income over £150,000, the limit on the amount of tax relieved pension saving will be reduced by £1 down to a minimum of £10,000 (the limit is currently £40,000).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Michael Kyprianou Advocates & Legal Consultants
 
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Michael Kyprianou Advocates & Legal Consultants
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions