HMRC: non-dom changes going ahead; new proposals to end property 'enveloping'

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Contrary to recent speculation from some quarters, the UK has announced it is to go ahead with plans to change the way it taxes its so-called “non-doms”, and at the same time has unveiled a consultation that reveals how it is proposing to end a popular practice non-doms have long used to shelter their UK residential property from inheritance tax.

The consultation,  published by HM Revenue & Customs on Friday, is due to run till 21 October. It seeks stakeholders’ views on how the reforms to the existing non-dom legislation, announced in the 2015 Budget, should best be legislated for, beyond what was set out in a previous consultation last year.

Much press and industry reaction to Friday’s consultation has focused on its proposal to abolish “enveloping”, whereby non-dom individuals hold UK properties through an overseas company or similar vehicle, for tax reasons.

Meanwhile, Mark Davies, of Mark Davies & Associates, noted that while the consultation published on Friday would provide “guidance” to non-doms as to how they “may” be taxed post-April 2017, “we would caution that…the proposals remain as merely a consultation, and we are still without any draft legislation”.

IHT on UK residential properties

In a statement outlining its proposals, HMRC said the Government’s plans to bring IHT to bear on UK residential properties held (“enveloped”) in overseas structures would “apply both to individuals who are domiciled outside the UK and to trusts with settlors or beneficiaries who are non-domiciled”.

These changes would come into force from 6 April 2017, and  be legislated as part of the 2017 Finance Act, HMRC said.

For many non-doms, this will be a major change, and one that, some experts say, will involve considerable costs, whether they continue to keep their property in an offshore entity or take the trouble to restructure the way they hold it.

The new deemed domicile rule

As for the other key part of Friday’s consultation, having to do with the government’s plans to implement a “deemed domicile” rule for those non-doms who have been UK tax resident for at least 15 of the 20 previous tax years, this appeared to hold few surprises.

As reported,  the previously-announced plan was for those non-doms who fall into the 15-out-of-20-years category to be given the status of “deemed domiciled” in the UK, status, which means, effectively, that they’ll no longer be able to benefit from their non-dom classification.

In recent months some commentators had argued that, particularly after the EU referendum in June put the UK on track to leave the European Union, the plans for changing the way “non-dom” UK residents are treated by the UK government were unlikely to go ahead. HMRC’s statements on Friday, however, showed that the non-dom changes are still very much going ahead.

Lucy Johnson, special counsel at Withers, the London-based law firm which specialises in cross-border tax issues, was among those who saw HMRC’s update on Friday as indicating “that change is still on the government’s agenda, and that the timetable has not changed”.

“Nonetheless, further information has been long awaited, and there are some helpful proposals in the document,” Johnson added.

“The draft legislation will need to be looked at carefully, but the proposals allow non-doms a grace period from April 2017 to April 2018, to separate out mixed funds and thus allow them to bring clean capital into the UK untaxed.

“They also confirm that non-doms will be allowed to re-base their assets as at April 2017 for CGT [capital gains tax]. The proposals for the taxation of income and gains in trusts have been improved too.

“There are some more questionable suggestions, including what appears to be the singling out of non-doms who were born in the UK. This group seems to be separated from other kinds of non-doms, and given short shrift in terms of their treatment by HMRC.”

Johnson echoed other industry commentators in saying it was “regrettable” that the Government had decided against offering any forms of relief, in the form of some kind of concessions, to those non-doms who will now be forced to “de-envelope” their UK property, a costly process.

On a separate matter, Davies, of Mark Davies & Associates, noted that non-dom taxpayers will be relieved to see that the Government has apparently dropped a proposed “trust benefits charge”, which sought to apply a tax to trust distributions without reference to the source of those distributions.

“Instead, the government intend to modify the current rules on how trust income and gains are taxed, in order to bring them into line with the introduction of the extended deemed domicile principle,” he said.

“The good news for non-doms is that it should remain possible to structure offshore trusts to allow access to clean capital and capital gains at lower tax rates; however, it is likely that a consequence of this change in approach will be the introduction of even more complex anti-avoidance legislation.”

Meanwhile, Davies noted, proposals relating to “boomerang domiciles” will be going ahead, “but the government will allow a grace period of two tax years for returning domiciles”.

“That being said, the government do not intend to allow returning domiciles to utilise the remittance basis during that grace period, so in effect this grace period is likely to only impact the tax position of any offshore structures these individuals hold interests in.”