The UK Statutory Residence Test clearly outlines the position for determining the UK tax residence status of an individual. The concept of domicile however is not defined in tax legislation. It is a concept of general law which is used in the rules of the UK tax system. Domicile relates to the country which you identify as your permanent home and where you have the strongest connections. Essentially it is where your “roots” and “heart” are.

Everyone is born with a domicile of origin. This is usually the same as the domicile of your father at that time so your domicile may not be the country where you were born. You can, though, acquire a domicile of choice (if you are aged over 16) by moving to another territory and evidencing that you have intentions to stay there permanently. Domicile is subjective, and there are many factors which can affect it. This is of particular importance where a person is trying to shed their domicile of origin in favour of a domicile of choice.

Why does it matter?

If you are UK resident, then whether or not you are also domiciled in the UK may affect what UK tax you pay on any foreign income and gains during a tax year. A UK resident non-UK domiciled individual (“non-dom”) will be subject to UK tax on UK source income and gains in the normal way under the arising basis, but if they have foreign income and gains they have the opportunity to determine how, when and whether these sources are taxed in the UK. Do note at this point that if you are non-UK resident then your domicile status will generally not affect your UK income and capital gains tax position.

The opportunity to determine how much of your foreign income and gains will be subject to UK tax is one which is valued greatly by many UK resident non-doms. The mechanics of the control here is via a remittance basis claim. By claiming the remittance basis an individual is only taxable on foreign income and gains to the extent that they are remitted to the UK. If the income and gains are kept offshore, they won’t be taxable in the UK.

The Remittance Basis Charge (RBC)

For long term UK resident non-doms, there are charges applied for the luxury of claiming this remittance basis. The remittance basis charge (RBC) varies according to how long an individual has been resident in the UK.

For those now preparing 2016/2017 UK tax returns, the RBC for individuals who were resident for at least seven out of the previous nine tax years is £30,000, for twelve out of the previous fourteen tax years it is £60,000 and for seventeen out of the previous twenty tax years it increases to £90,000. The £90,000 charge will no longer apply with effect from 6 April 2017, and this is detailed further in the next section.

For many non-doms it was beneficial to trigger the RBC as the overall UK tax payable including this could be less than the UK tax liability if all foreign income and gains were subject to UK tax.

The trade-off to the protection of foreign income and gains from UK taxation when retained offshore, is that there is no entitlement to the UK personal allowance or capital gains tax annual exemption if the remittance basis is claimed.

There is an exemption from the need to pay the RBC available to those with unremitted income and capital gains of less than £2,000 and certain other niche categories.

The journey to the non-dom rules overhaul

The old rules of the remittance basis were very attractive to wealthy non-UK domiciles who were resident in the UK, due to the potential to shelter significant foreign income and gains from UK taxation, whilst still living in the UK.

The second Finance Bill of 2017 seeks to remove a number of these advantages for long term UK resident non-doms. The Government’s aim is to overhaul the UK tax regime for non-doms so that it is more in line with the tax system for UK doms. It has been somewhat of a journey to get to where we are today.

George Osborne first announced significant non-dom reforms in the 2015 Summer Budget. The slow progress of these reforms created much uncertainty for non-doms and their tax advisers. However, with the assumption that the changes would come into force on 6 April 2017, many non-doms had taken advice and started to implement re-structuring.

On 25 April 2017 tax advisers and their non-dom clients were left in limbo when these significant non-dom provisions were cut from the first Finance Bill 2017 and did not form part of Finance Act 2017 as expected. It was said at the time that the new legislation didn’t make it into the Finance Bill because timescales were curtailed by the snap General Election. With an Election looming and much uncertainty around, tax advisers were not quite sure when the legislation would be enacted, whether it would be amended, and if it would be retrospectively applied from 6 April 2017, as was originally intended.

Finally, the second Finance Bill of 2017 was published on 8 September 2017. Finance Bill 2017–19 reinstates provisions left out of Finance Act 2017, and will legislate for many of the policies that were previously included and then withdrawn from the pre-election Finance Bill.

The main issue that the delay in enactment of the legislation has caused, is not only that we’ve been in limbo, but also that the windows of potential opportunity which were available with effect from 6 April 2017, are only now being confirmed. So essentially we have now lost a number of months of definitive action as a result of this uncertainty.

Non-dom changes: the headlines

Deemed domicile

From 6 April 2017, those who have been resident in the UK in at least 15 of the prior 20 tax years will become ‘deemed domiciled’ (“deemed-dom”) for income tax, capital gains tax and inheritance tax purposes, and thus taxable on their worldwide income and assets, whilst UK resident. The RBC of £90,000 for UK residence for 17 out of 20 years therefore ceases to exist, although the £30,000 and £60,000 charges are still relevant.

This means that resident non-doms becoming deemed-dom will be taxable on any arising worldwide income and gains in the same way as UK doms. Foreign income and gains relating to years where the remittance basis was previously claimed, prior to 6 April 2017, will be subject to UK tax only when they are remitted to the UK.

For inheritance tax, a deemed-dom individual’s worldwide assets and UK based assets will be subject to UK inheritance tax.

The ‘returning domicile’ rule also treats as domiciled in the UK those who were born in the UK with a UK domicile of origin, who subsequently acquired a domicile of choice outside the UK, and then return to the UK as UK resident and domicile for UK tax purposes.

Mixed funds – an opportunity

Non-doms who have availed of remittance basis claims have always had to monitor the remittances they make to the UK so that the source of funds remitted can be determined and therefore UK tax applied accordingly. Where an overseas account consists of a mixture of sources of capital, income and capital gains, it is referred to as a mixed fund. In order to determine the order of remittances from such an account, detailed analysis is often required and the rules regarding remittances matches them first to income which will attract the highest rate of tax. Getting to the “clean” tax free capital can therefore be a costly exercise.

The draft legislation offers a two year window for deemed-dom individuals to cleanse their mixed fund accounts to ensure that when they remit overseas funds to the UK, they remit monies which provide the lowest tax charge at remittance. This is a valuable opportunity to revisit offshore accounts and set them right for future remittances to the UK.

Note that mixed fund cleansing is not available to ‘returning doms’. It is however available to all other non-doms and not just those who fall into the new deemed-dom regime. Non-doms may wish to consider beginning the analysis of their mixed funds now, so that they are well prepared to cleanse the accounts once the legislation comes into force.

The two year window will be available to all non-doms who have been taxed on the remittance basis at some point prior to 6 April 2017. There is no need for an election, however a nomination is required for each relevant bank account. It is important to note that only a single ‘cleansing nomination’ can be made per account, although the transfers can be made to various bank accounts. It is therefore essential that the figures are correct, and the bank has very clear instructions in relation to the cleansing. A mistake could be costly.

Rebasing opportunity – for a select few

For capital gains tax (CGT) purposes, those becoming deemed-dom as of 6 April 2017 will be able to elevate the base cost of their personally held foreign assets to the market value of the asset at 6 April 2017. Effectively this means that only gains arising and accruing after April 2017 will be subject to CGT. This could be potentially beneficial for non-doms becoming deemed-dom who have offshore assets sitting with substantial gains. This rebasing opportunity is only available to those who become deemed-dom on 6 April 2017, but not for those who become deemed-dom in a later tax year.

The rebasing opportunity is also only available to those deemed-doms who have previously paid the RBC in any tax year. There is therefore a planning opportunity to look back to the 2015/16 and the 2016/17 tax returns to determine whether it would be beneficial to pay the RBC so that it will be possible for the individual to take advantage of the rebasing relief.

Rebasing is a generous relief for those who can avail of it. It is considered on an asset by asset basis. The relief is automatic but it can be disapplied if that is more advantageous, for example, where there are losses available.

Inheritance Tax (IHT)

Once a non-dom individual becomes deemed-dom they will be subject to UK IHT on their worldwide assets, not just their UK assets. If the deemed-dom individual makes gifts and/or other transfers of value, they will be subject to IHT in the same way as a UK domiciled individual.

Previously non-doms could avoid UK IHT on property where it was enveloped in another entity, such as an offshore trust or company. However from 6 April 2017 UK residential property held by non-doms in offshore opaque entities will now be subject to UK IHT.

In the limbo period many individuals and trustees will already have taken action to ‘de-envelope’ UK residential properties from structures which may no longer be fit for purpose and thus have been incurring professional costs with no tax benefit anymore. Individuals and trustees yet to take any restructuring action may wish to begin considering their options in preparation for any actions they may choose to take.

Offshore trusts

The new deemed-dom rules affect the taxation of settlor-interested overseas trusts because the settlor becoming deemed-dom would potentially expose the settlor to UK tax on foreign income and gains within the structure.

There will be new rules for foreign income and gains arising in offshore trusts established by non-UK domiciled individuals (except those with a UK domicile of origin) prior to becoming deemed domiciled in the UK.

The settlor will not be subject to income tax on foreign income arising in an offshore trust, by virtue of anti-avoidance provisions, if the trust meets the conditions for a “protected settlement.” The income tax protections are designed to disapply the settlor interested trust and transfer of assets abroad anti avoidance provisions in relation to foreign-source income – they will not be turned off for UK source income.

Where a protected settlement exists, care will be required to maintain that protected status. A trust can be “tainted” for both income tax and capital gains tax if property or income is added to the settlement directly or indirectly, in a tax year on or after 6 April 2017 when the settlor is deemed-dom. If an offshore trust becomes “tainted”, the protection from the settlor’s exposure to the income tax charge on foreign source income is lost and a deemed-dom settlor is taxable on all income in the trust as it arises.

From a CGT perspective, unless the trust becomes tainted, the UK resident non-dom settlor of an offshore trust will be subject to UK tax as they’ve previously been under s87 TCGA 1992. Under this legislation the settlor is only subject to CGT in the trust to the extent that a benefit is received and matched to trust gains. Once the settlor is deemed-dom, the remittance basis will no longer be available in respect of capital payments from the trust. If the trust becomes tainted then s86 of that CGT legislation will apply and trust gains will be taxed on the settlor on an arising basis.

Therefore, to the extent that the trust remains as it did before, the settlor becomes deemed-dom and no further property is added to the trust either directly or indirectly (including loans in certain circumstances), then a CGT charge will not arise on the settlor unless a benefit is received from the trust.

What should we and our non-dom clients do?

As tax advisers we should be ensuring that all of our non-dom UK resident clients are aware of the proposed changes to the tax legislation. Many non-doms will need to review their residence and domicile status to understand whether they will become deemed-dom from 6 April 2017 or in the coming years.

If there is a risk that the non-dom will become deemed-dom in the near future then the tax implications of that should be considered in the context of the individual’s foreign source income and gains, and their worldwide estates.

On the island of Ireland alone there will be individuals who have lived in Northern Ireland for many years but who have an Irish domicile and these clients should seek tax advice. Questions will arise such as:

• What exposure to UK tax might there be on the arising basis compared with election of the RBC in 2015/16 and/or 2016/17 in order to avail of rebasing/cleansing?
• How much will it cost them in additional tax exposure going forward?
• Will their Irish based assets now be subject to UK IHT?
• Do they have Irish assets sitting with gains which could be rebased?
• Is it time to relocate to reset the clock on the deemed-dom rules?

There is a limited opportunity for non-doms who become deemed-dom on 6 April 2017 to protect their overseas income and gains to a certain extent. Each case is unique so it is strongly advised that individuals who may be affected by the new legislation seek professional advice.

Sherena Deveney is Head of Private Client Services for Northern Ireland with EY

Email: sdeveney@uk.ey.com