The times they are a-changin' (for non-doms) | KPMG | UK

The times they are a-changin' (for non-doms)

The times they are a-changin' (for non-doms)

5 April 2017 will be ‘switchover day’ for many long-term resident non-doms. If you might be impacted - are you prepared?

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time changin

When the UK analogue TV signal was switched off on 1 September 2014, you needed a ‘digi-box’ or a new TV to watch digital TV. Preparation for the switchover was essential. But if you missed the switchover, you could at least buy new equipment later – though you may have missed a few things in the meantime. The non-dom is in a similar situation.

So what happens on ‘switchover day’ and what is the impact thereafter?

After 15 out of 20 years as a UK tax resident, non-doms will be deemed domiciled in the UK for all tax purposes (extending the ‘old’ 17 out of 20 year rule that applied solely for inheritance tax purposes). Thereafter they will be taxed on worldwide income and gains on an arising basis. The non-doms affected could see a significant increase in the amount of UK tax they need to pay, the volume of information reported in their annual compliance cycle and the work necessary to complete their tax return.  

Banking arrangements going forward

It would be good practice for the non-dom to review their banking arrangements before 5 April 2017. They may wish to segregate pre and post 5 April income and gains via new bank accounts, to distinguish between income and gains which arose when the remittance basis applied and those which will result when the arising basis applies. It will be essential to know the source of each pound being spent in the UK after 5 April to avoid the possibility of complex or even double taxation. If no preparation for the switchover is done before 5 April, remedial action should be considered as soon as possible thereafter.

The non-dom with existing mixed funds (e.g. of offshore income and capital gains and ‘clean’ capital) has a two year window from 5 April 2017 to split those funds into their constituent parts. Careful analysis of such funds will be needed after 5 April.

Rebasing

Offshore gains that a non-dom accrues to 5 April 2017 will be ‘rebased’ at that date if the non-dom is deemed domiciled at that date. But until that date, is there a possibility of the tax tail wagging the commercial dog? Avoiding an asset sale in order to benefit from rebasing might be counter-productive. Valuation issues should also be addressed. Where there is not a publicly listed price, help will be required with ‘harder to value’ assets such as private company shares and art. The valuation can be obtained later, e.g. when the asset is eventually sold. But we would recommend contemporaneous valuations when better information might be available.  

Investment portfolios previously focussed on non-UK assets to yield offshore income and gains, might be reconsidered after the switchover. UK investments will no longer face the ‘no entry’ sign at the entrance to the portfolio of a non-dom who is deemed, from 5 April, to be UK domiciled.

Offshore trusts

Finally a word on trusts. The proposals introduce tax 'protections' for offshore trusts set up by a non-dom before they become deemed domiciled (which for some will be on 6 April 2017). However, if new assets are added to the trust after they have become deemed domiciled, this 'protection' may be lost. The new rules are now focussed on taxing actual payments or other benefits from 'protected' trusts rather than some rather complex deeming provisions which were originally proposed. 

Conclusion

There is a famous motto ‘be prepared’ – meaning a state of readiness. We would encourage all non-doms to be prepared. 

For further information see kpmg.com/uk/nondoms.

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