Mark Davies, on surprising, ‘shambolic’ non-dom reg changes delay

Yesterday’s news that the UK government was to delay the introduction of a package of new regulations, including reforms to the rules governing the tax affairs of non-UK domiciles who have lived in the country for more than 15 of the past 20 years, came as a surprise to the industry and was a “shambolic” decision, according to one of the best-known experts on UK non-dom regulation and tax planning, Mark Davies. 

” Many non-doms would have taken advice and either left the UK, restructured, or accepted the additional tax” at this point, Davies, who is managing director of Mark Davies & Associates, notes.

“Now those most prepared [for the new legislation] may find that their planning is now defunct – for instance, some may have retained assets in their personal name, sold them post-6th April 2017, expecting to be able to claim the re-basing election.

“This [would have meant] that only the gains post 6th April 2017 would become taxable, and the proceeds would be a source of funding in the UK. But now, as a result of the postponement of the new rules, this does not work.”

As reported, the Government said yesterday that a large percentage of the legislation included in the Finance Bill has been put on hold until after the general election on 8 June, throwing the already complicated matter of tax planning for long-time non-domiciled UK residents into fresh confusion.

This came around a month after an earlier notification that certain other changes  also due to come into force on 6 April, and affecting overseas trusts, were to be pushed back to an unspecified future date. 

Davies says it is “likely” that the changes originally due to come into force on 6 April will return in a future Finance Bill, whichever government is in power  after the election in June, and take effect from 6 April 2018. But in the meantime, he recommends that those affected get advice. 

Below, he elaborates.

The reason the Government decided to remove 72 of the 135 clauses contained in the Finance Bill ahead of its being presented to Parliament yesterday is because they needed to get it enacted before the summer recess. And the decision to hold an early General Election, announced on 18 April, has meant that there is simply not enough time to put everything through before Parliament is dissolved on 5th May.

So this is a practical measure rather than a change of heart.

That said, there are going to be a lot of consequences for non-doms.

For a start, those non-doms who missed the earlier, 5 April 2017 deadline to restructure their affairs ahead of the new rules coming into force now have time to do so. In particular, they should seek advice on:

• Removing UK properties from corporate structures;

• Setting up qualifying trusts before they become deemed domiciled; and

• Other pre-deemed domicile planning.

Some long-term UK non-doms who would have been affected by the new rules, had they come into force as scheduled, however, have already left the UK, expecting that the law would have applied from the 6th of April.

Some of these people have even sold assets, expecting that the rebasing election would apply from that date. Now it doesn’t apply, which means that these gains have to be sheltered by claiming the remittance basis – which means that they can’t be used in the UK without additional tax.

Some will have set up trusts, expecting that trust protections would apply from 6th April 2017, and now they too will have to claim the remittance basis.

A bright spot: ‘some did nothing’

On the positive side, we found a lot of people who either did not do anything to prepare for the new regulations, or didn’t have time to do anything. So for them, there may still be an opportunity to implement planning for them.

To recap, the intended changes are as follows:

•  Individuals who have been UK tax resident for more than 15 out of the previous 20 years are to now be ‘deemed’ to be UK domiciled, so they no longer qualify for the  ‘remittance basis’ of taxation, and would become subject to income tax and capital gains tax on their personal worldwide income and gains.

In addition, inheritance tax could become due on their worldwide assets.

•  Offshore trusts set up by such individuals are to granted exclusion from income tax, capital gains tax and inheritance tax where they meet the qualifying conditions.

• Non-doms who had claimed the remittance basis and paid the remittance basis charge are, under the new rules, to be given an opportunity to ‘rebase’ the cost of their assets to what they were worth as of 5 April 2017.

• Non-doms are to be given the opportunity to ‘cleanse’ any mixed funds they may have, so that clean capital could be readily identified.

• Inheritance tax on UK properties held by non-doms and their trusts is to now be charged, where those properties are held by overseas companies.

The changes were set out in Finance Bill 2017, and were intended to take effect from 6 April.

As has been widely reported, the House of Commons has approved an early general election date of 8 June, and as a result, Parliament will formally be dissolved on 3 May.

This means that there will be a much shorter time than usual for the Finance Bill to go through the appropriate stages of review and receive Royal Assent.

In conclusion

The U-turn means that trusts set up by non-doms prior to 5th April 2017 will protect the settlor from capital gains tax and inheritance tax, but will not shelter the income in an offshore trust in which a settlor can still benefit.

In most circumstances, a UK resident non-dom settlor will still need to claim the remittance basis and pay the remittance basis charge until the changes are brought in.

Non-doms who intended to fund their lifestyle in the UK by taking advantage of the re-basing election or the cleansing provisions will now need to wait until next year.

This may mean that plans to sell re-based assets may now need to be deferred.

ABOUT THE AUTHOR
Helen Burggraf
Helen Burggraf is the editor of International Investment. A US-trained journalist, she has worked in Rome, New York City and London, covering everything from the fashion and retailing industries to the global drinking water and water-treatment sector, private equity, and most recently, the international cross-border financial services/advice industry.

Read more from Helen Burggraf

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