One of the key announcements from George Osborne’s post-election Budget was of changes to domicile for tax purposes. Following a consultation last autumn, draft legislation in relation to Inheritance Tax (IHT) was published alongside other draft clauses for Finance Bill 2016 in December. HMRC have now also published the draft clauses relating to income tax and capital gains tax (CGT), along with a Tax Information and Impact Note (TIIN) entitled Domicile: Income Tax and Capital Gains Tax and an explanatory note.
In essence, the draft legislation is largely as expected, and introduces a new concept of ‘deemed domicile’ in the UK for income tax and CGT purposes with effect from 6 April 2017. As a reminder, the broad underlying policy intention is that long-term UK residents and ‘UK returners’ – see below - will be treated as deemed domiciled and taxed in the same way as those with UK domicile under law – that is, on their worldwide income and gains on an arising basis.
An individual not domiciled in the UK in a tax year will be deemed UK domiciled for tax purposes if either:
- they were born in the UK, have a UK domicile of origin and are UK tax resident in the relevant tax year (a ‘UK returner’); or
- they have been tax resident in the UK in at least 15 of the preceding 20 tax years.
For income tax and CGT, a ‘UK returner’ will be deemed to be domiciled at the point they become UK tax resident. This contrasts with the IHT position, which contains a grace period preventing IHT becoming potentially due on worldwide assets when an individual is only resident in the UK for a short, temporary period. Responses to last year’s consultation questioned whether a similar grace period should also be included for income tax and CGT, but it would seem from the draft legislation that the Government has decided against this.
The draft legislation also includes provisions which apply the new deemed domicile rule to various other areas of the UK tax legislation, including aspects of the remittance basis rules, some reliefs available to non-domiciled employees and aspects of the rules relating to trusts. It is these provisions which, in practice, ensure that an individual with deemed UK domicile is treated in the same way as one with UK domicile under law.
The Government has promised specific provisions to limit the effect of the new rules on offshore trusts set up by individuals before they become deemed domiciled in the UK. These clauses, however, do not form part of this draft, but will be included in Finance Bill 2017. For those considering how the rules will affect trusts, then, the draft Finance Bill 2016 clauses are missing a vital piece of the puzzle.
HMRC have requested comments on the draft legislation by 2 March
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