If you’re a resident foreigner (or non domiciliary) for tax purposes, you may be aware that some fundamental changes were brought in with effect from 6 April 2017. It’s a landscape that is continuing to change and, in this post, we summarise the three most important recent changes that may affect you.
Are you caught by the new “deemed domicile” rules?
The concept of deemed domicile in the UK for all tax purposes (i.e. income tax, capital gains tax and inheritance tax) applies to individuals who have been tax resident in the UK for at least 15 years out of the past 20 years.
These rules have now been extended to catch individuals born in the UK who have acquired a domicile of choice outside of the UK but who return to the UK. Even if they maintain their domicile of choice outside the UK, they will be treated as domiciled in the UK at the point they become UK tax resident.
Once deemed domiciled, an individual is taxed on worldwide income and capital gains on an arising basis and cannot access the remittance basis of taxation. There is some important but limited protection available for trusts set up before an individual becomes deemed domiciled.
Understanding the remittance basis
UK resident non-doms who are not deemed domiciled can choose, whether to be taxed on worldwide income and gains as they arise (the arising basis) or to claim the remittance basis.
The remittance basis allows you to only pay tax on your overseas income and overseas capital gains to the extent that the funds are brought to or used in the UK. However, it does also usually mean you lose your personal allowance and the CGT annual exemption.
Mixed Funds – Cleansing Opportunity
There is a window of opportunity for increasing the pot of funds that can be remitted to the UK without UK tax becoming payable by separating “mixed funds” (funds that contain a mix of one or more of capital, gains and income) into their constituent parts. However, it does not apply to an individual who was born in the UK with a UK domicile of origin, otherwise known as an FDR – a formerly domiciled resident.
Transfers from “mixed fund” accounts taking place on or before 5 April 2019 can be nominated so that the usual rules which deem a transfer to be of income or gains in a way that is less beneficial from a UK tax point of view are switched off. This enables capital to be transferred to a new account or left behind, so that it is ready for later tax-free remittance to the UK.
You need to be able to identify the make-up of the funds being transferred as if you nominate and transfer £100 of foreign income and you had only £90 of foreign income in the account before the transfer then the nomination would be invalid.
If you are non UK domiciled (and not a formerly domiciled resident) and have claimed the remittance basis in any year between 2008/09 and 2016/17, it is worth considering taking advantage of this opportunity.
UK property investment: non-residents
Non-residents – individuals, companies and trusts – who let out UK property are subject to UK income tax on any profits and have ongoing tax compliance obligations in the UK. For individuals and trustees, any profit is taxed at rates up to 45%. For companies, profits are taxed at 20%.
Disposals of commercial property and certain indirect interests in UK property by non residents became subject to CGT from 6 April 2019.
From April 2019, non-residents will need to make a return and a payment on account of any CGT owed to HMRC in respect of disposals of UK residential property within 30 days of completion. This will also apply to UK residents from April 2020.
Non-UK companies renting out UK property will move from the income tax regime to the corporation tax regime from 6 April 2020. Although this will mean a lower headline rate of tax – the corporation tax rate is set to fall to 17% in 2020 – companies will come within the corporate interest restriction, and this could result in an overall tax increase where properties are highly geared.
Do you need help with your non-dom tax status in the UK?
If you think you may be affected by any of these changes, we recommend you take professional advice. You can contact a member of our team today on 020 3195 1300.