HMRC has now published a consultation document following the announcement in the Summer Budget that non-domiciled individuals would be deemed domiciled for all tax purposes once they have been resident for 15 out of the previous 20 years. The fundamental principle has not been changed; albeit, HMRC are seeking views.
The basis proposition is that 15 years is considered sufficient a length of time to enjoy any tax privilege attaching to the remittance basis charge.
The rules state that an individual is deemed domiciled in a tax year when they have been resident for 15 tax years out of the previous 20 years. It is important to appreciate the counting precision here. The test is applied to the previous tax year. In other words, on 6 April 2017, when the new rules are to apply, an individual will be deemed domiciled if they have been UK resident for 15 out of the previous 20 years counting to 5 April 2017. The 15th year is therefore “not” the year of assessment in which the “deemed domicile” will apply but rather the previous year.
The document has not made clear what the position will be for non-domiciliaries who have been resident for less than 15 years. It is therefore assumed that the current basis will apply; thus the £30,000 charge will apply where individuals have been resident 7 out of the previous 9 years and £60,000 for 12 out of the previous 14 years. Under current provisions the £90,000 charge for remittance-basis, users resident in the 17 out of the previous 20 years will only ever be relevant for 2015/16 and 2016/17 in these circumstances.
There are a number of supplementary points made in the consultation document:
- The starting year for the 15 year count is the actual year of arrival irrespective of the fact it may be for a very short period in any fiscal year.
- In order to “reset the clock”, an individual approaching the 15 year limit may leave the UK to return in due course. In all probability this will necessitate being non-resident for 6 years in order to ensure the formula applies because of this principle that “split years” count as one for the purpose of the test.
- Under existing rules, an individual becomes deemed domiciled for inheritance tax purposes once resident for 17 years. The impact of this new proposal is that for inheritance tax, as well as for all other taxes, an individual will become deemed domiciled from the start of their 16th consecutive year of residence rather than at the start of their 17th year. In the interest of simplicity, the document suggests that offshore Trusts will remain outside the scope of UK IHT, even after the non-domiciliary becomes deemed domiciled.
- If a UK domiciliary acquires a domicile of choice outside the UK, having ceased to be resident, and for some reason returns to the UK, they will automatically be treated as UK domiciled.
- One area that is somewhat lacking in the consultation is the lack of clarification of unremitted income and gains for non-domiciliaries who will become deemed domiciled from 6 April 2017. The document acknowledges that those individuals who have hitherto claimed the remittance basis have benefitted from avoiding the compliance burden or complexity of reporting income and gains on a worldwide basis, particularly where funds have been held for a number of years. It is likely that these details will become clearer over the next few months.
- There is likely to be some relieving provisions to deemed domiciled individuals in respect of capital losses that they have suffered in previous years so that, should they make gains after 6 April 2017, they will be in a position to claim them. Again, details will be forthcoming on this point.
As ever, consultation documents on a wide reform to tax are, by their nature, an evolutionary process and it is likely that significant amendments and changes will follow prior to the legislation being enacted. Hopefully, some of the practical issues can be properly addressed.
If you would like to discuss your position and options further, please do not hesitate to contact us.