Under the current rules, a UK resident but non-UK domiciled individual may be taxed on their non-UK income and gains on the arising basis or remittance basis. Under the arising basis, non-UK income and gains are taxed in the tax year they arise. The remittance basis allows non-UK domiciled individuals to have their non-UK income and gains taxed in the tax year they are remitted (i.e. transferred) to the UK. The remittance basis can be very beneficial for non-UK domiciled individuals with non-UK income and gains that will be kept outside the UK. However, individuals aged 18 and over that have been long term UK resident have to pay a charge if they claim the remittance basis and have at least £2,000 unremitted income and capital gains in the tax year. The charges that apply are as follows:
- Individual has been UK resident for at least 7 out of the 9 previous tax years – £30,000
- Individual has been UK resident for at least 12 out of the 14 previous tax years – £60,000
- Individual has been UK resident for at least 17 out of the 20 previous tax years – £90,000
With effect from 6 April 2017, all UK resident but non-UK domiciled individuals that have been UK resident for at least 15 out of the previous 20 tax years will be deemed to be domiciled in the UK for tax purposes. These individuals will no longer be able to claim the remittance basis from 6 April 2017, so they will be taxed on their worldwide income and capital gains. For those paying the fixed remittance basis charge each year, this could mean a significant increase in their UK tax on non-UK income and capital gains.
A non-UK domiciled individual is subject to inheritance tax on their UK assets only. This is more favourable than the treatment for UK domiciled individuals, who are subject to inheritance tax on their worldwide assets. Under the current legislation, a non-UK domiciled individual is deemed to be UK domiciled if they have been UK resident in at least 17 out of the 20 tax years ending with the tax year in question. As mentioned above, with effect from 6 April 2017 an individual will be deemed to be UK domiciled for tax purposes if they have been UK resident for at least 15 out of the previous 20 tax years. This could bring forward the point at which a non-UK domiciled may become UK domiciled for inheritance tax purposes.
A non-UK domiciled individual may be adversely impacted by the change may need to consider their options which may include:
- Bringing forward the point of taxation of non-UK income (e.g. distributions from offshore trusts) and capital gains
- Transferring non-UK assets out of their estate prior to 6 April 2017
- Becoming non-UK resident for a period at least six complete tax years, so that they are not UK resident for 15 out of the 20 previous tax years when they return to the UK
Non-UK domiciled individuals born in the UK
With effect from 6 April 2017, individuals born in the UK with a UK domicile that have subsequently acquired a domicile of choice outside the UK, will be treated as UK domiciled if they are UK resident or later become UK resident. This means that they will not have the ability to claim the remittance basis from 6 April 2017. These individuals will also need to consider their options prior to 6 April 2017. Even if such individuals do genuinely acquire a new domicile of choice, whilst they are abroad only their UK assets will be chargeable to inheritance tax, however, as soon as they return to the UK they will have reacquired their domicile of origin in the UK.
Cleaning up of mixed funds
Non-UK domiciled individuals with offshore bank accounts containing a mixture of clean capital, income and capital gains have what is known as a “mixed fund”. Remittances to the UK from mixed funds are generally taxed on the basis that the item that would attract the most UK tax is treated as remitted first. This makes it difficult to access clean capital in these circumstances The government announced that non-UK domiciled individuals with mixed funds would be given an opportunity to segregate their funds by 6 April 2019, so the clean capital, income and capital gains are in separate accounts. This will enable certainty over what is treated as remitted to the UK and the ability to access and remit to the UK funds that were previously trapped in a mixed fund.
The ability to segregate mixed funds will not apply to individuals born in the UK with a UK domicile of origin.
UK residential properties
If a UK residential property is owned by a non-UK resident company owned by a non-UK domiciled individual, the property is outside the estate of the individual for inheritance tax purposes. With effect from 6 April 2017, the shares in the non-UK resident company owning the UK residential property will fall within the estate of the non-UK domiciled individual for inheritance tax purposes to the extent that the company’s value derives from the UK residential properties it holds. Non-UK domiciled individuals in this position will need to consider their options and how to mitigate inheritance tax going forward.
Non-UK domiciled individuals may have used non-UK resident companies to acquire UK residential properties. These individuals will need to consider whether to remove the UK residential properties from their company as a result of the impending change in inheritance tax rules. The costs of maintaining a company registered outside the UK and the payment of any applicable Annual Tax on Enveloped Dwellings (“ATED”) may not be justified if inheritance tax can no longer be saved. The tax implications of transferring a property out of a company would need to be considered.
With effect from 6 April 2017, UK residential properties held by a non-UK resident trust will be treated as being in the estate of the settlor of the trust.
Where a UK residential property has been transferred to a non-UK resident trust prior to 6 April 2017, the UK residential property is in the estate of the settlor of trust.
Double tax agreements
The UK has double tax agreements that cover inheritance tax. The use of these double tax agreements may mitigate the impact of becoming deemed domiciled in the UK for inheritance tax purposes. However, double tax agreements with countries that do not charge inheritance tax would not be able to be used to mitigate UK inheritance tax.
Capital gains tax for non-UK assets
For some individuals becoming deemed domiciled in the UK on 6 April 2017 as a result of the changes to the rules that take effect on that date, they will have the opportunity to uplift the base cost of their personally held non-UK assets to the value on 6 April 2017 for capital gains tax purposes. In order to be able to revalue non-UK assets, the individual must have paid the remittance basis charge at least once in any tax year prior to 6 April 2017. However, there may be circumstances where revaluing assets increases the capital gain or reduces a capital loss. Therefore, the individual will have the opportunity to disapply the revaluation.
The ability to revalue assets to the 6 April 2017 could be a significant boost to those considering disposals of non-UK assets, as they could wipe out the capital gain realised on a disposal. For those eligible for the uplift in base cost, it would be beneficial to wait until after 6 April 2017 before making a disposal of non-UK assets.
There are a number of significant changes taking place on 6 April 2017 and immediate action should be taken where necessary, so the impact of the new rules introduced is mitigated. If you believe action is required or you would like to discuss your position, you should get in contact with either: