Finance Bill changes: Impact on Non-Doms

Following the announcement of a snap election on 8 May, the Government yesterday decided to drop much of the Finance Bill in order that it can be passed in the short time before Parliament is dissolved.

Among the provisions that have been removed from the Finance Bill are all of the changes to the taxation of non-domiciliaries and non-UK resident trusts, which were first announced two years ago and were intended to take effect from 6 April 2017. By way of reminder, under the intended changes:

  • Non-domiciliaries would become deemed-domiciled in the UK for all taxes once they have been resident here for 15 out of 20 tax years.
  • Trusts established before a person becomes deemed-domiciled would be “protected” for income tax and capital gains tax purposes unless the trust is tainted by adding funds after the settlor is deemed-domiciled.
  • However, non-domiciliaries who were born in the UK with a UK domicile of origin will be deemed-domiciled for all UK taxes, and any trusts established by them would be entirely within the scope of UK tax, as soon as they become UK resident.
  • Individuals becoming deemed-domiciled immediately and who have previously paid the remittance basis charge would benefit from a rebasing of their assets to 5 April 2017.
  • Non-domiciliaries would have the opportunity to cleanse mixed funds, creating “clean capital” which can be remitted to the UK without tax.
  • UK residential property held within non-UK companies would come within the scope of inheritance tax.

It seems likely (but not certain) that the new Government will incorporate these measures in a new Finance Bill later in the year. However, it remains to be seen whether there will be further amendments to the previously published draft legislation and whether provisions which were previously deferred until a later date will be reintroduced, such as the removal of the ability to wash out potentially taxable trust gains through distributions to non-UK resident beneficiaries.
It is also not clear whether the new rules will still take effect retroactively to 6 April 2017. This seems unlikely, but until there is some certainty on this, those affected will be in a position of limbo. People who thought that they could no longer claim the remittance basis of taxation may still be able to in this tax year. Trusts which would have been “protected” may not be, and therefore income may still be taxed on the UK resident settlor. People who were going to sell assets relying on a rebasing to April 2017 should now consider deferring a sale.

If the new rules now take effect from a later date, it may give those who did not take action to restructure their affairs tax-efficiently before 6 April 2017 another opportunity to do so. This may involve establishing new trusts, restructuring existing trusts, or de-enveloping properties from corporate structures.

We will send further updates as this develops. In the meantime, any individuals or trustees affected should take careful advice before taking any action.

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