Deemed domicile: the new rules and how they will affect individuals

From 6 April 2017 the new deemed domicile rules will take effect and will now apply to ALL personal taxes: income tax, capital gains tax and inheritance tax.

Not only has the scope of the application widened, the definition has been widened.

There will now be two categories of person classed as deemed domicile, replacing the old deemed domicile IHT rules. The ways that the deemed domicile status affect the individual depends on which category an individual falls into so we shall go through each of them. An important point to note is that parental domicile no longer has an impact on their  children.

Formerly Domiciled Residents (FDRs)

FDRs are born in the UK so have a UK domicile of origin, then acquired a domicile of choice elsewhere. They then return to the UK and become UK resident. At the point that they become UK resident they become an FDR and from April 2017, will be classed as deemed domicile in the UK.

Income Tax and Capital Gains Tax
FDRs will not be able to access the remittance basis for IT and CGT. It will still apply before 6 April 2017 though.

FDRs should therefore consider remitting foreign income and gains pre-6 April 2017 but obtaining tax advice on this first is vital.

Trusts
Income and gains are not attributable to non UK domiciled settlors of offshore trusts. But, if the settlor is a FDR, income and gains will be attributed to them on an arising basis as of 6 April 2017.

This will also increase the reporting requirements by trusts.

Inheritance Tax (IHT)
FDRs will be taxed on worldwide income and gains. This means that overseas assets are now caught.

The most important issue with this is that for an FDR, any Excluded Property Trust (EPT) that was set up by an FDR settlor will now fail for IHT purposes.

This also means that any Relevant Property Trusts (including failed EPTs) will now be subject to a ten year charge if the settlor is a FDR and deemed domicile at the date of the charge. The charge will crystallise for each complete quarter that they are deemed domicile for.

For IHT, there is a twelve month grace period for FDRs that have been resident in the UK and have been for one of the last two years. This means that trusts will fall into the scope of IHT in the second year of UK-residency.

Long-Term Residents (LTR)

LTRs have a foreign domicile but been resident in the UK for at least 15 out of the last 20 tax years. There are some transitional rules to take into account but these are the main provisions that apply to an individual who finds themselves becoming UK deemed domicile under these rules.

Inheritance Tax (IHT)
There is no difference here to previous rules.

Income Tax and Capital Gains Tax
LTRs will still have access to the remittance basis and the Remittance Basis Charge (RBC) will still apply when individuals are UK resident for 7 out of the last 9 tax years (£30,000) and 12 out of the last 14 tax years (£60,000). The £90,000 RBC will now become obsolete.

If an individual has unremitted foreign income or gains of less than £2,000, LTRs will still be able to claim the remittance basis without losing their personal allowances or paying the RBC.

The remittance basis will still be an irrevocable election.

Capital losses
Under the old rules, a UK resident non-dom using the remittance basis must choose to either forfeit the entitlement to relief for foreign capital losses or make an irrevocable capital loss election whereby relief can be claimed but in a prescribed order that is not favourable.

Under FA2017, LTRs will be able to offset all capital losses without distinguishing where they are from.

Rebasing option
As a transitional provision, rebasing relief is available for LTR individuals (not companies or trusts). If the LTR is resident in the UK on 6 April 2017 they can elect to rebase their foreign assets to the market value on that date, provided:

  • the taxpayer is not an FDR
  • the taxpayer was not domiciled in the UK under general law during the tax year the asset is disposed of
  • the taxpayer held the asset on 5 April 2017
  • the assets had foreign situs status from 16 March 2016 until 5 April 2017
  • the taxpayer was resident in the UK for 15 out of the last 20 tax years up to 2016/17
  • the taxpayer will remain UK resident in the 2017/18 tax year
  • the taxpayer paid the RBC at least once prior to the 2017/18 tax year.

 

Occasionally the FDR and LTR status’ will both apply. In this case the FDR rules will take priority, which are less favourable.

If you would like us to review your domicile status and advise on any planning that you can put in place before you become deemed domicile or due to your becoming deemed domicile, please contact Ben on bengander@gandertaxservices.co.uk or call 01730 231054.