04 January 2017
There are some major tax changes which will come into force on 6 April 2017 which will impact on those who currently do not have a UK domicile for tax purposes.
Domicile is a complex concept but is generally considered to be the country that a person treats as their permanent home and has a substantial connection with. It is possible to live and be tax resident in the UK for many years without acquiring a domicile in the individual country where an individual lives (Scotland, England and Wales and Northern Ireland are all treated separately for actual domicile). This might be, for example, due to an individual always intending to return to the country of their domicile of origin on retirement – in such an instance, that individual will not acquire a domicile of choice.
Domicile is an important concept for tax purposes in the UK. For inheritance tax purposes, those who are not domiciled in one of the UK jurisdictions are only taxed on their UK assets and not their worldwide assets.
For income tax and capital gains tax purposes those with a domicile outside the UK can access the remittance basis. Claiming the remittance basis (which can carry a charge depending on the length of UK tax residency) means a person will only be taxed on non UK income and capital gains if they remit the proceeds to the UK.
Up until 6 April 2017 an individual has been able to claim the remittance basis indefinitely, although the charge for doing so can be up to £90,000 annually. However for inheritance tax purposes an individual is deemed to be domiciled in the UK for this tax only once they have been tax resident for 17 out of the previous 20 years.
However, from 6 April 2017 this will change. The concept of deemed domicile from this date will apply for income tax and capital gains tax in addition to inheritance tax and the number of years of tax residency required to acquire a deemed domicile will reduce to 15 out of the previous 20 years. The individual will be deemed domiciled in the UK for tax purposes from the start of their 16th tax year in the UK.
Those who have been claiming the remittance basis and who will be affected by the new deemed domicile rules should consider bringing forward any offshore sales that will realise gains to before 6 April. There will be some limited opportunity for CGT rebasing of offshore assets.
Those who are non domiciled in the UK may set up offshore trusts which are considered excluded property for Inheritance tax purposes. Anyone who will become deemed domiciled from 6 April 2017 who is not already deemed domiciled for inheritance tax purposes should consider setting up an offshore trust prior to this date, although this does not apply to anyone with a domicile of origin in one of the UK jurisdictions.
Another change from 6 April means that residential property in the UK, no matter how it is held, will be taxed for inheritance tax purposes. Currently residential property held through a trust and offshore company structure can escape this tax.
In summary, while these changes will only affect a small percentage of individuals, the potential impact on these individuals is extensive and advice should be sought in good time in order to minimise the tax implications as much as possible.
Ross Brown, Partner firstname.lastname@example.org T. 0141 221 8012