By Jon Croxford
The taxation of ‘non-UK domiciled’ individuals has been a thorny political issue as successive governments have sought to crack down on those enjoying what some have seen as an excessively benign tax regime.
A UK resident but non-domiciled individual can, for example, choose to pay tax on his or her foreign source income and gains only when they are brought into or “remitted” to the UK. This is called ‘the remittance basis’ of taxation and can give a significant advantage as compared to the normal position where an individual’s worldwide income and gains are taxed as they arise.
Following the most recent tightening of these rules, announced in 2015 and due to take effect from April 2017, such individuals will be taxed as though they were UK domiciled once they have been resident in the UK for 15 of the last 20 years.
The new 15 year rule will apply for income tax, capital gains tax and inheritance tax (‘IHT’) purposes, removing the ability to claim the remittance basis of taxation in respect of foreign source income and gains after 15 years of UK residence.
For IHT purposes, this will also replace the current rule where an individual is deemed to be domiciled in the UK after 17 years of residence.
However, up until the end of the 15 year period, it will be still possible for such individuals to claim the favourable remittance basis. This is subject to paying an annual flat-rate charge of £30,000 after seven years of residence and £60,000 after 12 years.
The 15 year rule will also mean that anyone who lives in the UK from birth will automatically be treated as UK domiciled before he or she becomes an adult. Up to now, it has been relatively common for second generation migrants to the UK to be able to claim non-UK domiciled status.
The government recently signalled its intention to allow offshore trusts established by non-domiciled individuals to retain their tax favoured status provided they are set up before the individual becomes UK domiciled under the 15 year rule. This will allow non-domiciled individuals to establish new trusts in that time frame.
New rules will determine the tax charge on benefits received from offshore trusts once the non-domiciled settlor has been UK resident for 15 years and a higher tax charge could result. It is unclear yet as to how the new and old offshore trust rules will interact.
This is a complex area, where the stakes are high - for those affected, specialist professional advice is essential.
* Jon Croxford is Partner at specialist private client and tax lawyers Meridian Private Client LLP