With changes due to come into force in 2017, being non-UK domiciled for tax purposes is gradually being made less attractive. So what's changing and why, and who'll be affected?
Latest estimates suggest there could be 115,000 non-UK domiciled people (non-doms) resident in the UK. And, as with pretty much all tax matters these days, the non-dom issue can raise the temperature over who is (or isn't) paying their dues.
In a nutshell, a non-dom is a UK resident whose permanent home, or domicile, is outside of the UK. A domicile is usually the country that his or her father considered his permanent home when he or she was born, or it may be the place overseas where somebody has moved with no intention of returning.
Some may inherit their non-dom status from their parents. Some can also be born, educated and work in the UK but still hold non-dom status. Key to non-dom tax status is that a person must pay UK tax on UK earnings, but need not pay UK tax on foreign income or gains unless they bring that income back to the UK.
A number of revised non-dom tax rules were announced last summer and are due to take effect on 6 April 2017, with more to be released. Since the announcement, not much in the way of draft legislation has been forthcoming.
Indeed, Chancellor George Osborne confirmed in his 16 March budget this year that there will be no new draft legislation on reforms to non-domiciled tax status this year. So what we know already is all we'll learn until next year. The following three changes are what we do know:
• The long-term non-dom - A non-dom who's lived in the UK for 15 out of the past 20 years will be deemed to be domiciled and will therefore be liable to pay income tax, capital gains tax (CGT) and inheritance tax (IHT). This means a long-term non-dom will no longer be able to choose to pay tax on the income he or she receives only in the UK, that is on a so-called "remittance' basis. His or her worldwide income and capital gains will be taxed in the UK and their assets will be subject to IHT, regardless of where they're located.
• The returning non-dom - Non-doms of UK origin who've lived abroad and now wish to return to live in the UK will be treated as UK tax domiciled. Latest drafts of the impending legislation indicate a one-year "grace period' - individuals will be treated as UK domiciled if they were resident in either of the two preceding years.
• UK property look-through - UK residential property owned by offshore trusts or within offshore company structures - whether directly or indirectly - will become liable to UK IHT.
The principle behind the changes is that 'it is only right that those people who choose to live in the UK for a very long time pay a fair share of tax', according to HMRC.
Feeling the consequences
The first change signals an end to perpetual non-dom status and has several implications, says Phillip Dearden, a Director at Equiom Solutions, based in the Isle of Man.
"Of the three changes, the long-term non-dom one is the most controversial," he says. "Not least because George Osborne has said he wants to attract talented and wealthy individuals to the UK, and being able to gain non-dom tax status was part of the attraction. Now he's saying that while this may still be the case, if a person's been in the UK for 15 years they must now pay tax on their income and gains."
Mark Lee, Head of Trust and Private Client Services at EY, draws attention to the advantage non-doms have always had in being able to be taxed on income and gains on a remittance basis, regardless of how long they've been in the UK.
He says the non-dom would pay for this privilege at the rate of £30,000 per annum if they had been UK resident for seven of the last nine years, £60,000 per annum for 12 of the previous 14 years, and £90,000 for 17 out of the previous 20 years. Now, he says that after having been a non-dom UK resident for more than 15 of the last 20 years, "every type of income, on- or offshore, will be taxed as it arises. In other words, UK-resident non-doms will have a new basis of taxation forced upon them".
The returning non-dom change will affect many people resident in the Channel Islands and the Isle of Man who'd moved from the UK on a permanent basis and had achieved a domicile of choice in one of those jurisdictions but, due to changes in circumstances, are forced to return to the UK.
"This is perplexing for our clients but isn't receiving much media attention," says Dearden. "It's particularly worrying for those who've already returned to the UK and thought they would remain non-doms, probably until they died there."
There's a glimmer of hope, according to Arabella Murphy, Head of Private Wealth at private client specialist law firm Maurice Turnor Gardner.
"Clients need to think about what planning they need in order to make their affairs efficient if they plan to stay in the UK, and the Revenue has indicated they're looking very hard at how trusts will be taxed. But they're also saying that if you have assets in a trust before you become deemed domiciled, you won't be taxed as if those assets now belonged directly to you.
"Furthermore, assets that are yours when you become deemed domiciled on 6 April 2017 will be valued at that date for CGT purposes. That will be their valuation base. This is very helpful."
The property look-through measure will affect many around the world who have bought UK residential property and been able to use their non-dom status to escape inheritance tax. Murphy notes this is causing clients to re-examine their portfolios.
"On the property change, we're seeing a lot of work as clients take their UK residential properties out of companies to sell them, or take out life assurance, or put in place new structures, perhaps involving debt, to reduce the value of the property for IHT purposes," she says.
While Murphy doesn't think this will result in an avalanche of property sales, she says that those with properties in the UK may decide to sell, as the CGT change may be one more reason not to retain their property. "I've a client with significant property interests in the UK and they've calculated that maybe New York would be cheaper than retaining their property here," she says.
Next steps?
Given the inevitability of the changes and the lack of further guidance until next March, when there'll be little time left for non-doms to rejig their affairs, what should they do now?
Equiom's Dearden says that being a non-dom is still helpful to the very wealthy. The fees payable for a billionaire are "a drop in the ocean", he says. "I suspect that for less wealthy non-doms, it's probably not going to be worth maintaining the status. Billionaires will probably create trusts and continue to be as tax-free as ever."
Lee advises those potentially affected by the new measures to keep themselves abreast of changes as they emerge. "Surround yourself with lawyers, and tax and investment advisers," he says. "And be prepared to make decisions at short notice. With tax changes, there's usually a short decision window during which people can take action to rearrange their affairs."
Murphy adds a further point. "Is this another swipe at offshore financial centres?" she asks. "In part, there is a threat. But I think non-UK arrangements will be as useful as they've always been for people who are becoming deemed domiciled. But they have to do it before next April because they'll never be able to do it again."
Specialist trustees and advisers are likely to be very busy in 2016 and 2017 with non-dom clients, as they consider the implications of the new rules. Moreover, this comes at the very time when the introduction of the Common Reporting Standard legislation will enable tax authorities across different jurisdictions to exchange information more efficiently in order to close tax loopholes and gather unpaid taxes. But that's a whole other story…