While there was no doubt that the Chancellor’s second Budget statement of the year, and first as part of a Conservative-led government, would include further changes to the taxation of non-domiciled individuals the true extent of the reforms is now clear.
Key Changes from April 2017
- Non-domicile status to come to an end for taxpayers resident in the UK for 15 of the last 20 tax years, including for inheritance tax purposes.
- It will no longer be possible for those who lose UK domicile of origin, and who subsequently return to the UK, to be treated as non-domiciled.
Predictions prior to the Summer Budget statement this Wednesday 8 July included increases to the remittance basis charge, the introduction of a statutory test for domicile and a requirement for non-doms opting into the remittance basis of taxation to do so for a minimum of three years. Although the Chancellor made no mention of these in his speech (though the minimum election period has been decisively rejected in the Budget documents), the changes announced today will have a substantial impact on existing planning, requiring many non-dom individuals and their advisers to rethink.
Legislation is now expected to be introduced via Finance Bill 2016 (applicable from 6 April 2017) such that any person resident in the UK for 15 of the last 20 tax years will become UK domiciled for income tax, capital gains tax and inheritance tax purposes. The remittance basis will therefore be unavailable and tax, including inheritance tax, will arise on a worldwide basis. While the remittance basis charge will remain for shorter term residents, the £90,000 charge will become redundant.
In a second measure, which is designed to target individuals born of UK parents, those who lose their UK domicile and subsequently return will be treated as UK domiciled on their return and any trusts established in the interim will not enjoy the beneficial tax treatment currently available including excluded property trust status. Also expected from 2017 are changes to ensure that non-doms are unable to avoid paying inheritance tax on UK residential property, even where held via an offshore company. The number of years during which inheritance tax will follow a departing UK domiciliary will naturally increase to 5.
For the UK domiciled, the main residence nil-rate band, which is set to be £100,000 in 2017/18 and rise to £175,000 by 2020/21, will be available where a main residence is transmitted to direct descendants. The allowance is added to the existing nil-rate band (of £325,000 until 2020/21) eventually providing a combined £1,000,000 threshold although relief will be withdrawn gradually for estates worth more than £2 million. Any unused allowance will be transferrable. In order to fund this additional nil-rate band, those with adjusted annual incomes of more than £150,000 will, as a general rule, have their annual pensions allowance reduced by £1 for every £2 of income.
There are still plans to introduce a legislative ‘tax lock’ preventing any increase in income tax, VAT or NIC above this tax year’s levels. However, as in the first Budget of the year, there is no commitment to keep capital gains tax or the remittance basis charge at current rates. Further revisions are therefore possible.
Income tax rates remain stable but the higher rate threshold will increase to £43,000 for tax year 2016/17. The personal allowance will rise to £11,000.
The dividend tax credit will be abolished and replaced with a dividend tax allowance of £5,000, which may prove disadvantageous for those planning via personal investment companies. The new dividend tax rates will be 7.5%, 32.5% and 38.1%.
All of the advantages of a UK compliant Lombard International Assurance life assurance policy remain. A policy can be an attractive alternative to the remittance basis given that income and gains within the policy arise to the insurer rather than to the UK taxpayer. Further information on the non-dom changes can be found here.
By Simon Gorbutt, Senior Wealth Planner – Regional Head, Wealth Structuring Solutions