The proposed new rules have been subject to consultation and are set to come into force from 6 April 2017.
At Autumn Statement, the UK Government confirmed that they will be going ahead with their latest proposals to change the taxation of long-term resident non-doms living in the UK and non-doms who were born in the UK with a domicile of origin in the UK ("returners"). The proposed new rules have been subject to consultation and are set to come into force from 6 April 2017 with the draft legislation being included in the draft Finance Bill 2017 published on 5 December, 2016. Whilst the changes are clearly aimed at individuals, it is important that employers are aware of the way in which their assignees and senior executives may be impacted.
All UK resident non-UK domiciled individuals can claim the remittance basis of taxation meaning they are subject to UK tax on:
Claiming to be taxed on the remittance basis does not require the payment of a charge for the first 7 tax years of tax residency but comes at a cost thereafter if the individual has at least £2,000 of unremitted foreign income or gains. A Remittance Basis Charge (RBC) is levied as follows:
For inheritance tax (IHT) purposes, in general non-UK domiciled individuals are presently only within the scope of UK IHT on their UK situated assets. However, such individuals become "deemed-domiciled" in the UK for IHT purposes when they have been UK tax resident for at least 17 out of the previous 20 tax years (the '17 out of 20' rule). From this point they are within the scope of UK IHT on their worldwide assets in the event of their death and this can continue to be the case for an additional 4 tax years after they have cease to be tax resident in the UK.
The new rules, which will apply from 6 April 2017, will be as follows:
The upcoming rule changes affecting non-UK domiciled individuals are not all bad news and in this respect there are some important points which should be borne in mind by those who are potentially impacted. Three of these are listed below and, for the first, action will be required well before the formal deadline of 6 April 2019.
The Government are proposing a two year window - from 6 April 2017 to 5 April 2019 - during which period all non-UK domiciled individuals who have been taxed on the remittance basis at some stage prior to 6 April 2017 (but not returners) will be able to reorganise their offshore "mixed" funds. In particular, this means they will have a limited opportunity to separate out these funds into their different underlying categories of income, capital gains and "clean capital" so that they can become accessible as such.
Over time, non-doms may have accumulated a variety of accounts with sources of UK income, foreign income, capital gains and capital where it can be very difficult to identify any tax cost of remitting funds to the UK. The accounts are called "mixed" funds and there are a strict set of rules designed to identify exactly what is being remitted. The mixed fund rules can mean that non-UK source income and gains in one tax year are deemed to be remitted before 'clean' capital, and before UK source income and gains for a previous tax year, which currently leads to the problem of "trapped funds". The ability to untrap these funds is therefore very welcome and it appears that Government is seeking to make this as straightforward and as flexible as possible. As noted, this exercise will need to be completed before the deadline of 5 April 2019. The special treatment will only apply to mixed funds which consist of amounts deposited in bank and similar accounts.
Individuals who become deemed domiciled in the UK under the 15 out of 20 year rule in April 2017 (again, with the exception of returners), will be provided with an opportunity to rebase their offshore assets to their market value on 5 April 2017. This will mean that only gains accruing from 6 April 2017 onwards will be within the scope of UK capital gains tax upon the eventual sale of these offshore assets. The rebasing will only apply to assets held on 5 April 2017 that have been non-UK situated at any time from 16 March 2016 to 5 April 2017.
However, a key point here is that this opportunity will only be available to individuals who will become 'deemed' domiciled in the UK on 6 April 2017 and who have previously paid the RBC in a tax year prior to 2017/18.
As a result of the consultation process, the Government have revisited their original proposals for the creation of a "protected" trust regime for non-UK trusts settled by individuals before they become deemed domiciled in the UK. The result is an alternative approach where liability to income tax or capital gains tax is dependent upon the extent to which benefits or capital payments are received from the non-UK trust. Accordingly, new provisions have been announced which, in certain circumstances, will treat the settlor as the recipient of any benefits and capital payments received from the trust by a "close family member". Protected status will be available for non-UK trusts settled by individuals before they become deemed domiciled in the UK, and will continue provided the settlor makes no direct or indirect additions to the trust after they have become deemed domiciled in the UK. The Government have confirmed that protected trust status will not apply to settlors who become deemed domiciled under the 'returners' rule.
The introduction of the new regime means that individuals who are currently non-UK domiciled may want to consider establishing a foreign trust before they become deemed UK-domiciled.
With these new rules coming into operation from 6 April 2017, employers will want to carefully consider the impact of the changes on their non-domiciled UK-based employee and assignee populations. We have outlined below a number of actions which an employer may wish to consider taking at this time.
1) Employers may wish to inform UK-based employees and assignees about the proposed changes, their timing and the potential need to take further advice. It may be that many impacted employees are fully aware of the changes, but it is almost certain that some will not be. In particular, it is important to note the following:
2) Employers may wish to review their assignee population to identify those non-UK domiciled individuals who will be impacted by the new rules and to consider the potential impact on their assignees under their global mobility policy. Adjustments may be required to policy to ensure that the original spirit of the policy is upheld in spite of the change in legislation.
Please do get in touch with your usual KPMG contact as soon as possible if you would like to discuss any of the above in detail. You can also email us at firstname.lastname@example.org.