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New tax rules to tighten the grip on non-domiciled UK workers

A handshake with a bundle of Euros

Marion Hodgkiss, Head of Tax, and Michael Steed, ATT President and co-chairman of the ATT Technical Steering Group, explain and comment on new tax rules coming into force in April 2017 which will be legislated for in the Spring 2016 Budget .

The UK is to remove a loophole that allows visiting overseas workers to keep their overseas income out of the UK taxman’s grip. Chancellor George Osborne is reforming the “res non-dom” (RND) rules that currently give tax advantages to non-domiciled workers who are resident in the UK for tax purposes.

The current loophole means that any income and gains earned overseas by non-domiciled workers is not subject to UK tax, thanks to the so-called remittance basis of taxation. The remittance basis allows them to elect to be taxed on this overseas income and gains only if and when they remit them to the UK.

The Finance Bill 2016 (later to become the Finance Act 2016) is another step on the road to ensuring that overseas workers, termed by the Chancellor as “talented foreigners”, who come to the UK will be taxed like anyone else, if they stay more than 15 years.

The big picture is that from April 2017 the tax rules for Income Tax (IT), Capital Gains Tax (CGT) and Inheritance Tax (IHT) will be aligned so that long-term UK residents in the UK will be deemed “domicile” in the UK for all three taxes.

The changes essentially affect two groups of people:

  • Those who come into the UK from abroad and who have a domicile of origin outside of the UK – for example, a US banker coming to work in the UK)
  • Those who were born in the UK and who have a domicile of origin in the UK, but who acquire a domicile of choice outside of the UK, and then come back to the UK (“returning non-doms”) – for example, a UK worker moving to New York and becoming domiciled in the USA, before returning to the UK for a few years to work

The upshot of this is that the valuable remittance basis (which is only for IT and CGT) will no longer be available for anyone who is “deemed domicile” in the UK under the new rules.

The Policy objective

Marion Hodgkiss, Kaplan’s Head of Tax, said: “the UK government acknowledges that whilst the UK benefits economically and socially from this influx of overseas workers, it can give rise to unfair results as they can have a lower tax cost than someone who permanently lives in the UK with overseas income and gains.

“As a result, the government wants to reform the tax treatment of RNDs so that the UK can continue to benefit from the presence of “talented foreigners”, whilst also addressing the widely perceived unfair tax outcomes.

“This brings to an end the permanency of the RND status and will mean that those that have chosen to make the UK their long-term home will pay tax on the same basis as UK domiciles.”

Michael Steed points out that the remittance basis rules are a long-standing feature of the UK tax canon, but major changes were made in 2008.

He said: “since 2008, choosing to be taxed under the remittance basis has meant giving up both the personal allowance for income tax and the annual exempt amount for capital gains tax.

“In addition, those resident in the UK for a longer time have had to pay a charge if they wished to use the remittance basis of tax. Those resident for at least seven of the previous nine years have had to pay an annual charge of £30,000.

“Furthermore, the coalition government introduced a new charge in April 2012 of £50,000 for those individuals who had been resident in the UK for at least 12 of the past 14 years.

“The charges were again increased in April 2015 from £50,000 to £60,000, and a new charge of £90,000 was introduced for those resident for at least 17 of the past 20 years”.

However, at the Summer Budget 2015, the UK government announced that it will treat any individual who has been resident in the UK for at least 15 of the past 20 tax years as “deemed UK domiciled” for tax purposes.

From the 16th year, a foreign domiciliary will become deemed UK domicile. This will mean they will no longer be able to use the remittance basis of tax, nor will they be able to rely on any other rules for people who are not domiciled in the UK. Their foreign and UK assets will be subject to inheritance tax (IHT).

The government intends these new rules to take effect from April 2017.

Marion Hodgkiss, commenting on the outcome said: “It’s important to appreciate that these are just tax rules. For common law purposes, the domicile status of the individual is unaltered and the rules only impose a deemed domicile for tax purposes”.

“There will be more changes to the legislation in respect of trusts in 2017. When the reforms were announced at the summer 2015 Budget, the government made it clear that those long-term RNDs who have set up an offshore trust before they become deemed-domiciled (having been resident for 15 of the past 20 years) will not be taxed on trust income and gains that are retained in the trust. These protections will be legislated in Finance Bill 2017”.

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