The UK Budget in July proposed significant changes to the rules affecting non-UK domiciled individuals.
It is proposed that from the 6th of April 2017, anyone who has been a resident of the UK for 15 of the last 20 years will no longer qualify for non-UK domiciled status, and will be deemed UK domiciled for income tax, capital gains tax and inheritance tax (IHT) purposes.
This is a particularly notable change regarding IHT, where liability to the tax is determined by an individual’s domicile status, rather than residency.
Individuals who are domiciled in the UK are subject to IHT on gifts made during their lifetime and upon death on their worldwide assets. If they emigrate and settle permanently in another country they may acquire a foreign domicile under general law, but remain deemed domiciled for inheritance tax purposes in the UK until 3 years after they have lost their UK domicile under general law, even if they have been non-UK resident for many years.
Non-UK domiciled individuals pay IHT only in respect of their UK situated assets. However, an individual who is not domiciled in the UK can become deemed-UK domiciled for IHT purposes in certain circumstances, for example if s/he has been resident in the UK for 17 out of the last 20 tax years. S/he then pays UK IHT on their worldwide assets.
Once deemed UK domiciled for IHT purposes, s/he can only lose that deemed domicile by being non-UK resident for 4 tax years.
In an income and capital gains tax sense individuals who are resident and domiciled in the UK are taxed on their worldwide income and gains.
Non-UK domiciled persons are able to claim the remittance basis of taxation, which does not tax foreign income and gains as long as they are not brought (“remitted”) to the UK. To access the remittance basis, longer term UK resident non-UK domiciled persons are required to pay an annual remittance basis charge.
The proposed changes also provide that an individual born in the UK with a UK domicile of origin and who has acquired a domicile of choice in another jurisdiction will be deemed to be domiciled in the UK if s/he subsequently becomes UK resident again.
In view of the deemed domicile status arising when resident for 15 out of the last 20 tax years a person’s deemed domicile status will continue for five tax years after ceasing to be a UK tax resident.
The UK Government will be consulting on the proposed changes over the coming year, and the Technical Briefing asociated with the above is available here.