If you have been following the debate about the taxation of non-UK domiciliaries you might be forgiven for thinking the UK government does not want such individuals to stay in the UK.
From 6th April next year any non-UK domiciliary who has been resident in the UK for at least 15 years out of the last 20 will be treated as domiciled in the UK for all tax purposes. It has been possible to become deemed domiciled in the past due to lengthy residence in the UK but only for inheritance tax purposes. However, all is not doom and gloom. There are two measures outlined in the government’s recent consultation document which may ameliorate the impact of the new rules in some cases.
The purpose of this note is not to give a detailed briefing on these potential changes (because the new rules have not yet been drafted in every case and may yet change between now and becoming law). The purpose is to make you aware of the potential opportunities that lie in the rule changes.
If you will become deemed domiciled under the 15 out of 20 year rule next year any overseas assets you hold on 6th April 2017 (and which were held on held 8th July 2015) can be rebased for capital gains tax purposes. This means that only gains arising after 6 April 2017 will be taxed.
In some cases this may allow significant gains to escape tax but please remember that if the original investment was made using overseas income and gains these may still be taxable when realised. In addition, this relief does not extend to offshore income gains – profits on offshore roll-up funds the profits on which are subject to income tax rather than capital gains tax. There will be no rebasing on such assets.
If you are not going to become deemed domiciled next year because you have not yet hit your 15 years then some thought ought to be given to realising gains on overseas assets before the rules change, providing the level of gains justifies paying any remittance basis charge.
If you have offshore accounts which contain funds from different sources, some taxable and some not, it can be very difficult to separate these so that you can remit only the tax free element. It is normally necessary to remit the taxable elements first.
There was a proposal to allow all non-UK domiciliaries – not just those who become deemed domiciled on 6th April next year – to separate the constituent parts of these accounts during 2017/18, but the government has now announced that this is to be extended to include 2018/19 as well. If you can identify the source of the funds in your account this may allow you to separate clean capital which can then be remitted tax free in the future.
This provision only applies to bank accounts. If you have stocks and shares or other assets which were bought using a mixture of capital and income these can not be separated directly with this provision. In these circumstances you could sell the investments then separate the proceeds when they have been banked. In some cases it may also be desirable to sell the investments before 6th April 2017, unless you can benefit from rebasing.
There may be nothing you can do to take advantage of these measures but if you would like to discuss them, or any of the other proposals in the consultation document, please contact us.