Non-doms: A major state of flux for clients and advisers

Domicile status plays an important role under UK law. Individuals only have one domicile at any one time – they are born with ?a ‘domicile of origin’ (mirroring their father’s or mother’s ?at birth, depending on ?the circumstances), which ?endures unless a ‘domicile ?of dependency’ or a ‘domicile ?of choice’ is established. 

The essential requirements ?for acquiring a domicile of ?choice are having one’s only ?or principal residence in a new country, and voluntarily forming an unequivocal intention to make one’s home there permanently or indefinitely (without forming such an intention elsewhere).

Where a domicile of choice ?is abandoned or lost, an individual’s status reverts ?to their domicile of origin, unless a new domicile of choice is acquired. In practice, each case turns on its specific facts.

Effect of domicile

Where a UK resident has connections to multiple countries, domicile can determine which country’s laws govern their assets on death. ?The applicable succession law ?is particularly pertinent to an individual where ‘forced heirship’ applies or in Shari’ah countries.

While historically land has passed under the laws of the country where it is sited and ‘moveable’ assets in accordance with the deceased’s domicile, since August 2015 this may ?have been changed by the ?EU Succession Regulation ?(see SJ 159/26). 

Assets treated as UK sited for inheritance tax (IHT) purposes are subject to IHT, even if owned directly by an individual with non-domiciled status (non-dom) or by a trust they have created. The IHT situs of different assets ?is generally determined by decisions of the UK courts, ?but advisers should watch for changes in HMRC practice (not often announced publicly, let alone consulted on). 

All of a UK resident’s assets (and trusts they have created), wherever these are sited, are subject to IHT. Where an individual creates a foreign ?trust while UK domiciled, trust gains will be taxable on them personally.

However, non-UK situs assets, whether owned by a non-dom or a trust they created, are known as ‘excluded property’ and will not be subject to IHT. Domicile can therefore be crucial. 

Subject to double tax ?treaties, HMRC currently treats an individual as UK domiciled for IHT purposes if they were either UK domiciled at any time in the three calendar years preceding the IHT event, or UK tax-resident for any part of 17 UK tax years out of the preceding 20.

Under the proposed new rules, from 6 April 2017, individuals who have been UK resident for ?15 out of 20 UK tax years will be deemed UK domiciled for all tax purposes. This means they will no longer be eligible for remittance basis taxation, under which certain foreign income/gains ?are only subject to UK tax if remitted to use in the UK. 

Individuals used to be able to lose their deemed domicile by becoming non-UK resident for four full tax years – it will now ?be necessary to do so for six.

Pitfalls to beware

The ‘deemed domicile’ rules ?can cause difficulties for foreign individuals settling in the UK ?for long-term employment but always intending to return to their home country. Where a non-dom personally holds excluded property, but later becomes deemed domiciled, that previously excluded property becomes taxable. Excluded property trusts (EPTs) can be invaluable planning tools in these situations, but the timing of their creation can be crucial for effectively sheltering foreign assets from IHT.

The new rules will have drastic tax implications for individuals with the inverse circumstances. Where a person with a UK domicile of origin emigrates ?and acquires a foreign domicile of choice, then later returns ?and becomes UK tax-resident (whether before or after 6 April 2017), they will automatically ?be UK domiciled for all tax purposes from the date of return. ?This can be particularly difficult for advisers to spot where their client was brought up abroad and there is no obvious prior ?UK connection. 

Furthermore, if the client created an EPT while non-dom, it is treated as having been created while they were UK domiciled, and will therefore be fully taxable in the UK. This could effectively leave many ex-pats feeling exiled, preventing them from returning to the UK even for a short period.

Where one spouse is UK domiciled and the other is not, the IHT exemption for spouses will be restricted. A non-dom ?can elect to be treated as UK domiciled (or their spouse can do so after their death) to avoid this mismatch; however, they must remember that this will render their worldwide estate subject ?to IHT. The election is irrevocable; the elector needs to become non-UK resident for three years for the election to lapse.

Following a consultation ?this autumn, these changes ?will be included in the Finance Bill 2016, so advisers should tread with care.

Ravi Francis is an associate at Thomas Eggar @ThomasEggarLLP www.thomaseggar.com