Precisely how the UK taxes its so-called ‘resident non-doms’ has been an issue that has preoccupied such individuals – and their tax preparers, accountants and wealth advisers – for decades. Here, one of the country’s leading experts on the matter, Prudential technical manager Gerry Brown, considers where we are now, and what the changes due to come into force next year will mean.
Under the current rules, UK ‘resident non-doms’ – or RNDs, as they’re known to tax industry experts and enthusiasts – are required to pay tax on all their UK source income and gains. However, a RND’s foreign income and gains are not taxable in the UK, if that income and those gains remain outside the UK.
The income and gains become taxable if and when they are remitted to the UK – thus giving us what is known as the ‘remittance basis’ of taxation.
In order to obtain all these tax advantages, RNDs must pay an extra levy, the “remittance basis charge” (RBC). The RBC is £30,000, £60,000 or £90,000 annually, depending on how long they have been resident in the UK.
One significant difficulty is deciding where an individual is domiciled. This is not simply a tax issue, but one of much wider application; domicile is the usual tie-breaker where there is a conflict as to which country’s law applies in a particular situation.
There used to be similar conceptual difficulties with residence, until the Chancellor simplified matters by introducing a ‘statutory residence test’. This came into effect on 6 April 2013, and reduced the residence rules to a series of arithmetical operations.
Emboldened by this success, the Chancellor has now taken a tentative step towards dealing with the domicile conundrum – by substantially reducing the importance of domicile as a factor in determining liability to UK income tax and capital gains tax.
The chancellor’s domicile conundrum solution
A new regime will apply with effect from 6 April 2017. The key criteria are:
1. Any individual who has been UK resident for at least 15 out of the previous 20 tax years will be treated as UK domiciled (“deemed domiciled”)
2. Any individual born in the UK, with a UK domicile of origin therefore, who becomes domiciled elsewhere, will be treated as UK domiciled for any period in which he or she is UK resident
Any individual falling within either criteria will not be able to use the remittance basis for their tax affairs.
The Chancellor hasn’t forgotten inheritance tax (IHT) – the rules above will apply for IHT purposes (replacing the current 17 years out of 20 rule).
One refinement is that any individual born in the UK, with a UK domicile of origin, who has acquired a domicile of choice elsewhere, will become deemed domiciled for IHT purposes if at any time they are again resident in the UK, and have been resident in the UK in at least one out of the two previous tax years (this is called the ‘residence condition’).
When an individual who has become deemed domiciled leaves the UK, and becomes non-UK resident, he or she will continue to remain deemed domiciled for up to six years following departure.
What it all means
The proposed changes – and there is little doubt that the proposals will be implemented in their current form, or very close to it – will simplify the taxation of RNDs and arguably widen the IHT ‘net’.
Change also provides a planning opportunity – advisers have a year to re-arrange RND clients’ affairs to best advantage. The tax deferral feature of life assurance and capital redemption contracts – which don’t generate income – may prove attractive.
Simple IHT planning strategies – particularly the use of excluded property trusts (which the government has stated will be unaffected by the changes) – will need to be investigated.
The Chancellor has initiated several tax reforms in the last six years. When these changes have ‘bedded in’, we may well have a tax code for RNDs (or perhaps more accurately RDDs – ‘resident deemed domiciles’), which will be seen as fair and which will be ‘workable’.
Gerry Brown (FCA, TEP) is a member of Prudential’s technical team, based in Craigforth, Stirling. He started his professional career as an Inspector of Taxes, and later qualified as a chartered accountant. He is a member of the Society of Trust and Estate Practitioners. His role at Prudential involves providing technical assistance – internal and external – on the taxation of life assurance contracts (both”onshore” and “offshore”), OEICs and ISAs, and on their use in financial planning strategies.