The taxation of non-domiciled individuals

Following consideration of the taxation of non-UK domiciled individuals, the Government has proposed various amendments to the current position.  The intention is to provide a balance between ensuring that the UK is an attractive jurisdiction for non-UK based individuals to invest into, whilst ensuring that all UK residents are taxed fairly.  There is currently consultation on the position; depending on the outcome of this consultation, the legislation will be amended accordingly.  It is intended that the amendments will be effective from 6 April 2017.  The proposals are as follows.

Domicile position for individuals

Firstly, where an individual is a long-term UK resident/non-UK domicile, they will be subject to tax on their worldwide income and gains, along with being subject to inheritance tax on their worldwide estate.  A long-term resident will be one who has been UK resident for fifteen out of the last twenty tax years.

Secondly, where an individual has a UK domicile of origin but later becomes non-UK domiciled, if that individual later becomes UK resident, they will be subjected to tax on income and gains on a worldwide basis.  To lose this deemed domicile status, it is necessary to be non-UK resident for at least five years.

Impact on trusts

Subject to the following paragraph, if a non-domiciled individual has settled a trust before becoming deemed domiciled, that trust will retain its offshore status for tax purposes: income and gains will not be taxable unless remitted; non-UK sited assets will not be within the IHT remit.  However, once the individual has become deemed domiciled, income and gains paid out of the trust will be taxed regardless of whether they are remitted to the UK.

If the non-domiciled individual had a UK domicile of origin, the trust will be taxed as if the settlor was UK domiciled at the time of its settlement.  Consequently, income and gains will be taxed in the trust as they arise and its worldwide assets will be subject to IHT.  Once the settlor loses the deemed domicile status, the trust will revert to its offshore status.

UK property held in trust

Where UK residential property is held indirectly by a non-domiciled individual or an excluded property trust, its value will be subject to UK IHT.

Proposed planning

For non-UK domiciliaries that did not have a UK domicile of origin, it is recommended that an excluded property trust is given serious consideration if they intend to remain in the UK for fifteen years or more.

For all non-UK domiciliaries, the taxation benefits of an offshore bond should also be considered.