Foreign domiciliaries, sometimes referred to as Non-UK domiciliaries or more colloquially “non-doms”, will be burdened with having to consider a number of statutory changes.
There have been a number of changes to the rules applying to non-doms in recent years. Although the detail falls outside the scope of this planner, it is important to seek advice and clarity even if the changes are unlikely to affect you or you have already acted in anticipation of the changes. Menzies have a team who specialise in providing bespoke tax advice to foreign domiciliaries and answering offshore queries.
Click below to access each part of our non-uk domiciliaries planning guide:
UK deemed domicile for all tax purposes
Foreign domiciliaries will be deemed UK domiciled for Income Tax, CGT and IHT purposes once they have been a UK tax resident for at least 15 out of the past 20 tax years.
Since 6 April 2017, such individuals have been taxed on their worldwide income and capital gains on an arising basis. Unless suitable planning is undertaken, they will also be subject to UK IHT (currently set at 40%) on their worldwide assets. IHT protection will be available for trusts created by an individual before they become deemed UK domiciled.
Those who became deemed UK domiciled on or after 6 April 2017 should speak with their Menzies contact to ensure that the necessary planning is put in place. This ranges from simple bank arrangements to complex offshore structures.
The Returning Foreign Domiciliary (RFD)
Any individual who has a UK domicile of origin and was born in the UK and subsequently acquired a foreign domicile of choice, will immediately be treated as being UK domiciled for tax purposes if they return to be a tax resident in the UK at any point.
Foreign residents who originally had ties with the UK who wish to relocate to the UK, should carefully consider how these new rules will affect them as with arrangements that were established whilst they were not a UK tax resident. The risk is that one might accidentally become a UK tax resident and immediately fall within the scope of UK income tax, CGT and IHT.
Rebasing of capital assets
Capital gains realised after 6 April 2017 will enjoy freedom from CGT to the extent that the gain accrued before that date. This is achieved by the application of a rebasing election which will apply on an asset by asset basis.
The relief will only be available to individuals personally owned assets which were held outside of the UK as at 16 March 2016 by those individuals who became deemed UK domiciled on 6 April 2017. The individual concerned will need to have been UK resident for the 2017/18 tax year and had in the past paid the remittance basis charge.
UK residential property
Legislative changes now provide that UK IHT will apply in relation to UK residential property in cases where it would previously have been protected. Examples include cases where the property is held through a non-UK corporate structure directly or as part of a structure headed by a trust. If you own UK residential property through a structure or not, you should seek advice in connection with the exposure to UK IHT options which could be available to reduce the burden. This also applies to the finance costs attributable to purchasing UK property.
Your BrighterThinking Next Steps
“If you consider yourself a non-dom, ensure you have discussed your position fully with your tax advisor. It is crucial that you have as much ammunition as possible, to defend your non-dom status in the event of a query from HMRC. Non-doms remain under the spotlight at HMRC, and specialist tax advice is essential.”Craig Hughes – Private Client Partner
Business Investment Relief (BIR)
BIR allows UK tax resident foreign domiciliaries to invest untaxed foreign income and gains in qualifying UK businesses without triggering a UK tax charge. Investment can be made by subscribing for shares in, or lending money to a UK company.
Your BrighterThinking Next Steps
“The BIR remains a little known, but extremely tax efficient investment, for non-doms who want to remit untaxed funds to the UK without suffering an immediate tax charge. Specialist advice is essential as the timeline for investment is key”.Helen Cuthbert – Private Client Director
The changes to the legislation impacting non-UK domiciliaries also impacted offshore trusts.
The capping of the period for which an individual can claim the remittance basis could have led the income of settlor interested trusts to be taxable on the settlor as they will no longer have the ability to protect it by claiming the remittance basis. New legislation brought in with the above changes has meant that such trusts can have a “protected trust” status as long as certain conditions are met.
Where the conditions are met, income that would otherwise be taxable on the settlor is treated as “protected foreign source income” and remains outside of the scope of UK tax.
In particular, it is important to avoid “tainting” such trusts which could cause them to lose the protected status. This can occur when any value is added to the trust and the ways that this can occur is very broadly defined within the legislation.
Non-resident CGT, discussed above, also applies to trustees, both in respect of direct holdings in UK property, and in respect of disposals of “property rich companies”. The tight reporting requirements remain the same as for individuals and we would therefore encourage engaging with your advisor before any disposal is made.
Since 5 April 2019, where the disposals are made by an offshore company, whether or not the property is held by a trust, these gains are now subject to corporation tax rather than capital gains tax and, in the typical situation where the company is not otherwise subject to corporation tax, registration will be due within three months of the disposal with tax payable within three months and 14 days
Your BrighterThinking Next Steps
“If you have an interest in a foreign trust, be it as a settlor, trustee or beneficiary, we would recommend you speak to your Menzies contact.”Gurpreet Khatker – Trust Senior Manager
The taxation of UK trusts has remained relatively stable for a few years now, although we know that the government has been considering changes as a result consultations that they have run in respect of the simplification of trust taxation, as well as recommendations made by cross party committees in respect of inheritance tax and capital gains tax. Trusts remain a valuable structuring tool and can be used for a number of purposes including succession planning, tax mitigation and asset protection. The income tax treatment of UK trusts varies depending on what type of trust you have.
Discretionary Trusts are taxed and the highest rates of tax available being 39.35% (38.1% from 6 April 2023) for dividends and 45% for other income, subject to an allowance of up to £1,000 which is subject to tax at the basic rate of 8.75% (7.5% from 6 April 2023) for dividends and 20% for other income.
Distributions of this income to the beneficiaries are treated as having a tax credit in respect of
this tax paid at a rate of 45% and this can be offset against their overall tax liability. The tax
credit will be at a rate of 45% irrespective of the rate of tax paid on the income, but the overall
credit cannot exceed the tax paid.
Life Interest/Interest in Possession Trusts
In these trusts the income is subject to tax at the basic rates of tax described above, regardless of how much income there is. When this income is paid out to the beneficiary/(ies) it retains its nature and is treated has having had the tax paid at the basic rate with the rate of tax matching with the income it was paid on.
Capital Gains Tax
Both types of trust are subject to capital gains tax at the higher rate of 20% with the higher rate of 28% payable in respect of residential property. They also benefit from an annual exempt amount which is at a maximum of 50% of an individual’s allowance at £6,150.
Although smaller than the benefit to individuals, it is still a good idea to try to make use of this each year. From 6 April 2023 this allowance will reduce to £3,000 and then further to £1,500 from 6 April 2024.
The inheritance tax position is complex and varies depending on the age of the trust as well as the type of trust that you have. If you have a trust and are unsure of the IHT position, you should speak to your adviser.
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Menzies Private Client Team
Personal tax planning can be complex. We would always recommend that you seek professional advice when undertaking a review to ensure all changes are processed and managed effectively. Please do speak with your Menzies contact who will be delighted to meet with you to discuss ideas, opportunities and the appropriate action.
To discuss your non-UK domiciliaries planning arrangements for the tax year ahead, contact Menzies Private Client Team below: