The main package of changes to the taxation of non-domiciliaries which was first announced in July 2015 became effective from April 2017 and some further changes will take effect from 6 April 2018. Despite the changes, the UK’s tax regime for foreigners who come to live in the UK is still very generous.
What are the tax benefits that still make the UK very attractive for foreigners?
There is no tax on overseas assets / income for 15 years.
There is no charge for accessing these benefits for the first seven years.
Even after that, the charges are relatively low (£30,000 after seven years and £60,000 after 12 years).
Even after 15 years, overseas assets / income are outside the scope of UK tax if they are held in an overseas trust. Tax is only paid on benefits received from the trust.
The benefits are available whether or not the individual is working in the UK.
Earnings for work done outside the UK are not taxable for the first three years.
In order to make the most of these tax benefits and to avoid unnecessary tax charges, it is important for non-domiciliaries to take proper advice, ideally before taking up UK residence and before reaching the 15 year residence milestone for deemed domicile.
Summary of the 2017 changes:
An individual will be deemed to be domiciled in the UK tax year starting with the 2017/18 tax year if:
he is UK resident and was born in the UK with a UK domicile of origin; or
he has been UK resident for 15 out of the previous 20 years.
Capital gains tax rebasing
Individuals who became deemed domiciled on 6 April 2017 and who have previously paid the remittance basis charge will not be taxed on gains arising on personally held non-UK assets which relate to the period prior to 6 April 2017.
Separating mixed funds
All non-domiciliaries who have cash which consist of a mixture of income, capital and / or capital gains can separate out those funds into their constituent parts at any time before 6 April 2019.
Business investment relief
The rules which prevent there being a taxable remittance where money is brought to the UK to invest in certain UK businesses (including property investment businesses) have been expanded so that the relief is much more attractive and will apply in more situations.
Inheritance tax on UK residential property
Interests in non-UK companies which derive their value from UK residential property are brought within the scope of UK inheritance tax. This includes tax charges on death or on gifts and periodic / exit charges in relation to trusts.
Loans and collateral for loans used to purchase UK residential property are also brought within the scope of UK inheritance tax.
The changes apply to all non-domiciliaries, even those who are non-UK resident.
Trust protections for deemed domiciliaries
No income tax, capital gains tax or inheritance tax is payable on overseas income / assets held in a trust set up before becoming deemed domiciled.
Tax is only payable on benefits received from the trust.
The protections are lost if additions are made to the trust after becoming deemed domiciled.
New rules for valuing certain benefits from offshore trusts
These changes apply to all trusts/beneficiaries and not just to those involving non-domiciliaries.
Statutory rules are introduced to determine the value of benefits consisting of loans, the use of real estate and the enjoyment of chattels (such as works of art, aircraft, yachts, etc).
2018 changes – further anti-avoidance provisions relating to offshore trusts
These changes were originally intended to be part of the overall package of changes related to the taxation of non-domiciliaries. However, some of the measures have been deferred and will only take effect from 6 April 2018. Some of these provisions are aimed principally at non-domiciliaries / deemed domiciliaries whilst others apply to all offshore trusts.
Capital gains tax
Trustees of non-UK trusts are generally not subject to UK capital gains tax. Instead, gains realised by the trustees are attributed to beneficiaries who receive a benefit from the trust. Historically, gains have been allocated to beneficiaries whether or not the beneficiary is UK resident. This means that capital gains tax could in some cases be avoided by making distributions to non-resident beneficiaries to “wash out” the gains before making a distribution to a UK beneficiary in a subsequent year. From 6 April 2018, benefits conferred on non-UK residents will be ignored and so will not reduce the pool of trust gains which can be taxed when benefits are received by UK resident beneficiaries.
In some cases, distributions from trusts have been made to non-UK resident beneficiaries (who are not taxable) who have subsequently made onward gifts to UK resident individuals (who would have paid tax had they received a direct distribution from the trust). New rules are being introduced both for income tax and for capital gains tax purposes which have the effect of treating the UK resident in these circumstances as having received a direct distribution from the trust.
Close family member rule
The purpose of this provision is to tax a UK resident settlor on a benefit received by a close family member (spouse / civil partner (or unmarried equivalent) or minor child) who is either non-UK resident or is a non-domiciled remittance basis taxpayer and who therefore does not pay tax on the benefit. In these circumstances, the benefit is treated as if it had been received by the UK resident settlor who will potentially be subject to income or capital gains tax on the amount of the benefit.
Non-domiciliaries who will become deemed domiciled (as a result of having been in the UK for 15 years) in the foreseeable future need to review how their personal assets are structured.
Anybody thinking of becoming UK resident should plan carefully, if possible in the tax year before arrival, particularly as the changes restrict the availability of split year treatment in certain circumstances. With good advice, the UK remains an attractive destination for overseas individuals.