Consultation outcome

Reforms to the taxation of non-domiciles

Updated 19 August 2016

0.1 Foreword

At the Summer Budget 2015 the government announced a series of reforms to the tax rules for people who are not domiciled in the UK, or ‘non-doms’ as they are often referred to.

The government wants to attract talented individuals to live in the UK who will help to contribute to the success of this country by investing here and creating jobs. The long-standing tax rules for individuals who are not domiciled in the UK are an important feature of our internationally competitive tax system, and the government remains committed to that aim. However, 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, and those who are born in the UK with a UK domicile of origin cannot move abroad and return as a ‘non-dom’.

The majority of non-domiciled individuals who come to the UK leave again within a few years from the date they first arrive and so will not be affected by these reforms. These announcements have been carefully targeted to address some unfairness in the current rules in a way that will not deter those individuals who might be considering a move to the UK. The reforms will return the system to its intention of supporting those from overseas who come to the UK but who don’t intend to stay here permanently.

This consultation document sets out the government’s proposals for legislating these announcements and invites views from interested parties to help inform the legislation and ensure that it meets the government’s objectives.

I very much value the input that respondents can provide in helping the government to introduce these reforms.

David Gauke, Financial Secretary to the Treasury

September 2015

1. Introduction

This consultation document sets out the detail of the proposals which restrict certain individuals from claiming non-dom status for tax purposes. A ‘deemed domicile rule’ will be introduced so that long term residents of the UK can no longer claim to be not domiciled for tax purposes. This abolishes the permanency of non-dom status. The new rules will also ensure that individuals who are born in the UK and who are UK domiciled at birth will not be able to claim that they are not domiciled for tax purposes while they are living in the UK.

This consultation seeks views on how legislation should best be introduced in Finance Bill 2016 to achieve these aims. It seeks views on how the government can introduce these reforms in the most effective way without any unfair or unintended outcomes. Responses are invited from any interested parties, including individuals, advisers and representative and professional bodies.

The government has also announced that it will legislate so that inheritance tax is charged on all UK residential property, including property held indirectly by non-doms through a structure such as an offshore company or a trust. This change is intended for the 2017 Finance Bill and a separate consultation will be published to seek views on the detail of this proposal.

1.1 Policy aim

The government intends that those individuals who live in the UK for a long time will pay UK tax on their personal foreign income and gains, as would an individual who is domiciled in the UK. The government also intends that any individual who is born in the UK and has a UK domicile of origin should not be able to claim non-dom status while they are living in the UK, even if they have left the UK and acquired a domicile of choice in another country.

The government intends to differentiate between the status of the two groups affected by these reforms. The government recognises that there will in some circumstances be different outcomes for taxpayers depending whether they are affected by the ‘born in the UK’ deeming provision only, they fall within the scope of the ‘long-term resident’ deeming provision only, or they are UK domiciled under general law.

1.2 Structure of the document

The remainder of the document is set out as follows:

• chapter 2 explains the current taxation of non-UK domiciled individuals
• chapter 3 sets out the policy deeming long-term residents to be UK-domiciled
• chapter 4 covers the policy restricting non-dom status for those individuals who are born in the UK and have a UK domicile of origin
• chapter 5 provides a summary of consultation questions
• chapter 6 sets out an example of the draft legislation for these reforms
• chapter 7 covers the consultation process

1.3 Stage of consultation

To help interested parties understand the government’s intentions for the reforms which were announced at the Budget, HM Revenue and Customs published 2 technical notes on Budget day which provided an overview of the effect that the announcements were intended to have. Since then, government officials have met with a number of representatives to take their views on the impact of these reforms. These meetings have been used to inform this consultation document. The government intends to hold more meetings with representatives in the coming weeks to continue to take views on how best to legislate for these announcements.

The proposals in this document are at stage 2 (determining the best option and developing a framework for implementation including detailed policy design) of the government’s tax consultation framework.

However, given the relatively short timeframe between publication of this consultation and the anticipated date for publication of the draft Finance Bill 2016, the government has decided to hold a shorter consultation than the usual 12 week period. This consultation also includes detail about the legislation that will eventually form part of the Finance Bill 2016, in order to allow stakeholders the opportunity to review and comment at an early stage.

1.4 Planned timeframe

This consultation will run from 30 September 2015 to 11 November 2015.

1.5 How to respond

Please send comments by 11 November 2015 to:

Reform of the rules for non-doms
Personal tax team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

Email: NondomReform@hmtreasury.gsi.gov.uk

2. Current rules for taxing non-domiciles

The government understands that the UK operates in a globalised economy, where businesses, capital and labour are all extremely mobile. The tax rules in many countries distinguish between what are in effect permanent residents and those from abroad. The UK has done this for over a century now using the concept of domicile and related rules.

Under these domicile rules, individuals who are resident but not domiciled in the UK:

• are able to claim tax relief on overseas workdays during the first three years they are in the UK
• are liable to UK tax on all income and capital gains which arise in the UK; but,
• can choose to pay UK tax on their foreign income and capital gains only if/when they are remitted to the UK

The remittance basis rules are a long-standing feature of the tax system that are set out in Chapter A1 of Part 14 of the Income Tax Act 2007. Since 2008, choosing to be taxed under this unique regime has meant forfeiting both the personal allowance for income tax and the annual exempt amount for capital gains tax.

Furthermore, since 2008 those resident in the UK for a longer time have had to pay a charge if they wish to use the remittance basis of tax. Those resident for at least 7 of the previous 9 years have had to pay an annual charge of £30,000 if they choose to be taxed under the remittance basis regime. 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 increased again by the coalition government in April 2015, when the charge for those resident in the UK for at least 12 of the past 14 years was increased 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.

Individuals under the age of 18 are exempt from the remittance basis charges. Additionally, those who are non-UK domiciled and have less than £2,000 of unremitted foreign income and gains in a tax year do not need to claim to pay tax on the remittance basis and there is no charge to them for using the remittance basis.

Any individual who would prefer not to use the remittance basis can still simply pay tax on their worldwide income and gains, in the same way as any other UK domiciled resident.

3. Deemed UK domicile for long-term residents

At Summer Budget 2015, the 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 domiciled. Once deemed UK domiciled, an individual will no longer be able to use the remittance basis of tax, nor can they 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.

This brings to an end the permanency of non-dom status and will mean that those that have chosen to make the UK their long-term residence will pay tax on the same basis as UK domiciles. However, the rules do need to continue to reflect the fact that some non-doms are internationally mobile and the rules need to reflect that flexibility.

The proposed rules will mean that an individual who has lived in the UK for 15 consecutive tax years and then leaves the UK for 6 or more consecutive tax years could return here and could claim non-dom status again for another 15 years (assuming they still had a foreign domicile status under general law). The government believes that introducing the deeming rule in this way will allow those non-doms who are internationally mobile to continue to benefit from non-dom status in a way that is not appropriate for those who are firmly based in the UK.

This chapter covers:

• the proposed approach for legislating the deemed test, including interaction with the statutory residency test and existing de-minimis rule
• the proposed treatment of offshore trusts
• further consequential changes
• implications for inheritance tax (IHT)

3.1 Legislating the deemed test

The new rules will count any year of UK residence, including years spent while the individual is under the age of 18. This will mean that an individual who is born in the UK and who does not have a UK domicile of origin could become deemed-domiciled before they reach adulthood. However, that individual could still lose their deemed-UK domiciled status if they leave the UK and spend at least 6 years as a non-resident.

The deemed-domiciled status is not passed from a parent to their child.

The government intends to legislate for these reforms by, for example, restricting access to the remittance basis regime for those individuals who meet the deeming tests. Draft legislation attached to this consultation document in chapter 6 shows how this this aspect of reform would work in the context of the remittance basis. There will be other references to domicile in the tax legislation which will need to be considered and amended as well as a number of other consequential changes.

As set out above, these changes will come into effect from April 2017. These reforms will mean that the £90,000 remittance basis charge will no longer be applicable.

Question 1

Do stakeholders agree that this is the best way to introduce the test for deemed-domicile status?

Split years/statutory residence test

For the purpose of counting the 15 years of residence, the government intends to include any year in which the individual is resident even if they enter or leave the UK at some point during that year – ie tax years where split year treatment. The government believes this is the most straightforward way to deal with years of arrival and departure.

The new test will be introduced so that an individual becomes deemed-domiciled for the purposes of income tax, capital gains tax and inheritance tax at the same time. This will mean changing the way that the current deeming rules for inheritance tax work.

For tax years before the statutory residence test was introduced, individuals will have to assess their residence status based on the rules that were in place at the time, as they would do under the current rules for determining liability to the remittance basis charge and deemed-domicile status for IHT.

The government understands that stakeholders would like the deeming provision to align with the statutory residence test. That is, once an individual has spent sufficient time as a non-resident to qualify as such under the temporary non-residence rules of the statutory residence test, the deemed-domiciled status also falls away. However, aligning the two rules when the temporary non-residence rules look at periods of non-residence and the deemed-domicile status looks at tax years of residence is not straightforward. Furthermore, while the temporary non-residence rules look at individual periods of absence, the deemed-domicile status is a rolling test looking at years of presence over an extended period.

For example, there will be cases where an individual has had intermittent periods of non-residence during the past 20 years that the deemed-UK domicile test considers. This could mean that the deemed-UK domicile status would fall away before they spend a single period of more than 6 years as a non-resident. There may also be cases where an individual has been treaty resident in another jurisdiction which will affect the temporary non-residence period but not the deemed-domicile test.

Given the complexities involved in trying to align these rules exactly, the government believes that a straightforward deeming test based on years of residence would be the most appropriate solution. The effect of the draft legislation attached to this consultation document is that an individual’s deemed-UK domicile status would fall away once they have been non-resident for six consecutive years.

Question 2

Are there any difficult circumstances that might arise as a result of this approach that could be avoided with a different test?

Effect of the reforms

The intention of these reforms is that once a non-dom becomes deemed-UK domiciled they will be treated in the same way as a UK-domiciled individual, with the exception of certain protections that will be introduced for offshore trusts and arrangements caught by the Transfer of Assets legislation, provided they were set up before the individual became deemed-UK domiciled.

One of the main effects of these reforms is that once an individual becomes deemed-UK domiciled they will no longer be able to use the remittance basis of taxation for their foreign income and gains. There will be a number of other effects that these reforms will have which are set out in this consultation document. Throughout the reforms, the government’s starting point in looking at the effect of these changes will be that the individual who becomes deemed-domiciled will be treated in the same way as if they had acquired a UK domicile under the current rules. Part of the consultation process will be to take views from stakeholders as to whether this approach creates any situations that are unacceptable to the individual concerned or to the government.

£2,000 de-minimis rule

The current rules exempt from UK tax any individual who is not-domiciled in the UK and who has foreign income and gains of less than £2,000 annually on those amounts. This currently applies regardless of how long the individual has been resident in the UK. These rules need reconsidering in the light of the Budget announcements, given the intention to treat all long-term UK residents in the same way as those people who are domiciled in the UK.

There is a case for preserving this treatment for individuals who become deemed-domiciled in the UK so as to avoid imposing a significant administrative burden on individuals and on HMRC for those with relatively low levels of foreign income.

The argument against preserving this treatment is twofold. Firstly, any individual who lives in the UK for at least 15 years should be expected to familiarise themselves with the legislation of that country. Secondly, the recent changes to the treatment of interest and dividend income mean that from April 2016, all taxpayers will be able to receive up to £28,000 of income/gains without paying any UK tax when the allowances for interest and dividend income are combined with the capital gains tax annual exemption and the personal allowance.

However, this would mean that those resident non-doms in receipt of less than £2,000 of net foreign rental income or earnings who have not remitted their foreign income would have to pay tax in the UK for the first time. This is not an unreasonable outcome, bearing in mind that they will have been resident in the UK for more than 15 tax years. Equally, the government is mindful of the need to ensure that any new regime is proportionate in terms of the burdens it puts on individuals, particularly those on lower incomes.

Question 3

The government is interested in views from stakeholders about the need for preserving the £2,000 de-minimis threshold for those non-domiciled individuals who become deemed UK domiciled.

3.2 Treatment of offshore trusts

The government said at the outset of these reforms that it intended there to be some protection for those individuals who had set up offshore trusts before they became deemed-domiciled. Wealthy families who have set up a trust of some sort, possibly many years ago and while they were not living in or considering a move to the UK, will find it very punitive and administratively burdensome to have to recreate sufficient history of the transactions that may have taken place in the trust that would be necessary if the settlor were to be taxed on income and gains in the same way as an individual who is UK domiciled.

The government thinks it is fair to ask any individual who becomes deemed-domiciled in the UK to pay tax on benefits they receive from any offshore trust and any underlying entities.

However, the government does not intend that non-domicilliaries who become deemed-UK domiciled should have to pay UK tax on income and gains in offshore structures which were set up before they became deemed-domiciled simply because the individual was the settlor of the trust or was considered a transferor under the Transfer of Assets Abroad legislation. As a part of these reforms, the government will ensure that any individual who becomes deemed-UK domiciled will continue to be protected from UK tax on offshore trusts that they have settled while neither they nor their spouse or children receive any benefit from the trust.

The government intends to base the new rules on the taxable value of benefits received by the deemed domiciled individual without reference to the income and gains arising in the offshore structure. This will be a very significant change to the way that the income and gains arising in offshore trusts and their underlying entities are taxed and it means that there will be no need for trustees to have to recreate the history of the income and gains in the trust for tax purposes once an individual becomes deemed-UK domiciled.

Once a non-dom becomes deemed-UK domiciled, it will no longer be relevant whether a benefit is received in the UK or overseas; the value of that benefit will be treated as taxable regardless. However, UK source income will be taxable on the arising basis, as it would be under the existing rules if either the settlements legislation or the transfer of assets legislation applied.

The government is considering whether the new regime should apply to all non-domiciled individuals who are resident in the UK rather than being limited to those who become deemed-domiciled, though while an individual is not deemed-domiciled, benefits will be taxable only when remitted here. This would give greater consistency and would avoid the complexity of transitioning to new rules when an individual has been resident for 15 years.

The government continues to consider these issues and is not yet in a position to publish draft legislation on this aspect of the reforms.

3.3 Further consequences

There are further implications of being deemed UK domiciled that need to be considered in order to meet the policy objectives. In general terms, the government intends that an individual who becomes deemed-UK domiciled will pay tax in the same way as a UK domiciliary.

The government intends that earnings (including earnings and other income from employment-related securities) which relate to a period while an individual was not domiciled and not deemed-UK domiciled which are paid after the individual becomes deemed-UK domiciled will still be eligible to be taxed under the remittance basis where all of the applicable conditions are met.

The government also intends that those individuals who become deemed-UK domiciled will not be able to use the special rules for non-domiciles in sections 373 to 375 of ITEPA 2003. They will be able to claim tax relief for business travel in the same way as any UK domiciled employee.

Pensions arising outside the UK are currently taxable on an individual who is resident in the UK with a 10% deduction. The government does not intend to change this treatment as part of these reforms. However, an individual who is not domiciled in the UK and who is in receipt of a foreign pension can use the remittance basis of tax instead. The effect of becoming deemed-UK domiciled in the UK is that the individual will no longer be able to claim the remittance basis of taxation on a foreign pension.

Ensuring compliance for tax purposes on foreign income and gains

The government understands that a significant benefit of the remittance basis is the ability to avoid the compliance burden and complexities involved in reporting income and gains on a worldwide basis, particularly where funds have been held for a number of years and where there was never any intention to remit any money to the UK. The government will consider how best to legislate in a way that minimises the compliance burden, particularly with regards to reporting historic data.

Capital losses election

The current capital gains rules require individuals who are not UK domiciled to make an irrevocable election under s.16Za TCGA 1992 to claim foreign capital losses from the first year for which a claim to the remittance basis is made. Those who do not make this election are unable to claim foreign loss relief. However, the current legislation did not envisage the concept of deemed domicile and as such, the rules will need to be amended to accommodate these reforms.

As individuals who acquire a deemed-domicile in the UK will be subject to tax on the same basis as individuals domiciled in the UK under general law, the government believes that they should also have access to UK and foreign capital losses in the same way as a UK domiciliary. Legislation will be introduced in a way that allows individuals who become deemed-domiciled to claim foreign loss relief in addition to the UK capital losses they have always been entitled to claim.

3.4 Implications for inheritance tax

The Summer Budget also confirmed that the IHT deemed domicile provisions would also be changed, so as to bring into line with proposed changes to income tax and CGT.

As a result, the government will bring forward the point at which a resident non-dom becomes deemed-domiciled for IHT from when they have been resident in not less than 17 of the 20 years of assessment ending in the year of assessment in which a chargeable event (such as death) takes place. Under the new rules, the deemed-domicile status will apply when they have been resident in the UK for at least 15 of the past 20 tax years immediately preceding the chargeable event. The effect of these reforms is that an individual will become deemed-domiciled for IHT at the start of their 16th consecutive year of UK residence, rather than at the start of their 17th year of residence under the current rules.

Draft legislation to effect these reforms is attached in chapter 6 of this document.

The government does not intend to change the rules which will apply to excluded property trusts where a person has become deemed – UK domiciled under the new rule. Offshore trusts that are set up by an individual who is not domiciled in the UK will remain outside the scope of UK IHT, even after that individual becomes deemed-UK domiciled. However, on becoming deemed-UK domiciled, an individual’s worldwide estate becomes liable to UK IHT. There are a number of issues that will need to be considered to effect this reform.

One effect of the intended changes is that when an individual who has become deemed-UK domiciled ceases to be resident in the UK they will continue to be deemed-UK domiciled for up to 6 years following their departure. Once an individual is not resident in the UK, their deemed-UK domicile status will only be relevant for inheritance tax purposes. The deemed domicile status will not be relevant for income or capital gains tax purposes.

IHT for UK domiciles leaving the UK

The government is aware that these reforms would mean that an individual who is domiciled in the UK who leaves and acquires a domicile of choice in another country could potentially become not-domiciled for IHT more quickly than those individuals whose UK-domiciled status is only deemed. This is because under the current IHT rules an individual who ceases to be domiciled in the UK will only continue to be treated as domiciled in the UK if they have been domiciled in the 3 years immediately preceding the chargeable event and may not have been resident in the UK for long enough to satisfy the 15 year residence test. This would not be an outcome which is intuitively reasonable. It also means that there are several different rules for departing residents to consider. To address these concerns, the government is considering aligning the rules for UK domicilliaries.

The rules could be changed so that an individual is treated as domiciled until they have been non-resident for at least 6 years after they have acquired a domicile of choice elsewhere. However, this does mean that it would take significantly longer for an individual to lose their UK domicile status in some circumstances.

On balance, the government favours a rule which treats a UK domicile as non-domiciled on the later of the date that they acquire a domicile of choice in another country, or the point when they have not been resident in the UK for 6 years.

Question 4

Do stakeholders agree that changing the rules in this way is a straightforward and reasonable approach?

Potentially exempt transfers

The government intends that these reforms are introduced in such a way that if an individual who is not domiciled in the UK makes a potentially exempt transfer of an asset that is excluded property before they become deemed-domiciled, but within 7 years of their death, the transfer is not included in the death estate.

Spousal election

All individuals, irrespective of their domicile status, benefit from an IHT nil-rate band, currently £325,000. Transfers of assets between spouses and civil partners, whether gifts made during a person’s lifetime or transfers of assets occasioned by the death of one of the couple, are generally exempt from IHT. But where the spouse or civil partner to whom assets are transferred does not have a UK domicile there is a lifetime limit on the value of assets that can be transferred free of IHT. This limit is intended to address the risk that, following a transfer between spouses or civil partners that would otherwise be exempt, where the recipient is domiciled outside the UK, they could remove assets aboard, and escape any IHT on their subsequent disposal. The limit is currently £325,000 and is linked to any future changes to the IHT exemption limit.

If the individual who is not domiciled in the UK so wishes, they are able to elect to be treated as being UK domiciled for IHT purposes. Electing into UK-domicile treatment for IHT purposes will mean that:

• transfers from a UK-domiciled spouse or civil partner will be exempt from IHT, but
• the electing individual’s worldwide estate will henceforth be liable to UK IHT

Elections will be irrevocable while the electing individual continues to remain resident in the UK. This will prevent individuals from electing to be treated as UK-domiciled for IHT purposes to get an immediate benefit of an uncapped transfer from their spouse/civil partner while later reverting to non-UK domiciled status to regain beneficial IHT treatment to their overseas assets.

But an election will cease to have effect if the electing person is resident outside the UK for more than four full consecutive tax years. In such cases the election will cease to have effect from the end of the fourth full tax year of non-residence. Therefore, an electing individual will not remain indefinitely liable to IHT on their overseas assets after a 4 year period which will be treated as effectively breaking their connection with the UK.

This consultation needs to consider the effect of these reforms on the spousal election. The government’s current view is that there needs to be a slight increase to the four year period of non-residence before an electing spouse’s connection with the UK is broken. The 4 year period is based on full tax years and the 17 out of 20 rule. By moving to a 15 out of 20 deeming provision, it follows that the period of non-residence should be amended to 6 years. This is outlined in the draft legislation published alongside this consultation.

Question 5

Do stakeholders agree that the period an electing spouse needs to remain non-resident before the election ceases to have effect should be amended to 6 years?

4. Born in the UK with a UK domicile of origin

The second aspect of the reforms to restrict access to non-dom status are the proposals which will affect those individuals who were born in the UK with a UK domicile of origin but who have acquired a domicile of choice elsewhere. The government does not believe that those individuals who were born in the UK with a UK domicile of origin should be able to benefit from the non-dom regime while they are resident in the UK. Legislation will be introduced so that from April 2017, an individual in this position will be treated as having a UK domicile of origin for tax purposes while they are resident in the UK.

The intention is that if the individual returns to the UK, they will be taxed as a UK domicile while they are resident here for tax purposes. If under the statutory residence test the year is split into a UK part and an overseas part, foreign income and gains arising in the overseas part will not be taxable in the UK. The individual will continue to be treated as not domiciled in the UK while they are not UK resident.

This group of individuals will be treated as having a UK domicile for tax purposes. This means there will be no protection for offshore trusts, either in terms of the tax on income/gains in the trusts or for IHT purposes. The excluded property trust rules for IHT will be changed so that they do not apply in these circumstances. This will be the case even for trusts that are set up offshore while the individual was not domiciled or resident in the UK (and would therefore be excluded property for IHT purposes under the current rules). So if an individual caught by this test acquires an overseas domicile and then sets up an offshore trust while non-UK domiciled, once that individual becomes UK resident the assets in that trust will cease to qualify as excluded property and would be liable to inheritance tax charges.

The draft legislation attached to this consultation document in chapter 6 shows how this aspect would work in the context of the remittance basis.

Since the residence criteria will be based on the statutory residence test where individuals are either resident or non-resident for the whole year, it will create situations in which property will switch from being excluded property to being liable to IHT under the “relevant property” regime for periods of one or more tax years. If someone is frequently coming and going from the UK, the property in the trust will be excluded property one year and relevant property in the next year. The government accepts this position as it would allow individuals flexibility to move in and out of the UK as and when necessary. However, trustees will need to consider whether a ten year anniversary charge arises at any point during each period the settlor is UK resident.

4.1 Born in the UK

The government thinks that it is only reasonable to treat those individuals who were born in the UK and who had a domicile of origin as being domiciled in the UK for tax purposes when they are resident here.

In early discussions with stakeholders, representations have been made for a short period of UK residence (possibly a year or two) to be disregarded. This would target the reform on those individuals who return and live in the UK for a more substantial period of time.

On balance, the government believes that it is reasonable to expect a returning UK-domiciliary to pay UK income tax and CGT on an arising basis while they are UK resident. The tax regime for non-domiciled individuals is intended to attract individuals who are internationally mobile to live, invest and work in the UK; the government does not intend these generous tax rules to extend to those individuals who were born in the UK and whose domicile of origin was in the UK, even if they have subsequently moved abroad.

However, the government does have some sympathy towards the claim that in instances of short temporary residence, the effect of being deemed domiciled for IHT could arguably have a much more drastic effect than in the case of income tax.

Question 6

In what circumstances would having a short grace period for inheritance tax help to produce a fair outcome?

4.2 Impacts of the reforms

In initial discussions, stakeholders have suggested that it will be very difficult for returning UK domicilliaries to fully comply with the 10 year anniversary charge on relevant property trusts, since at least some of the trusts that will be treated as being relevant property will have been assumed to be excluded property trusts and therefore outside the scope of the UK’s IHT regime. The government believes that it will only be necessary to reconstruct the value and transactions in such a trust for a maximum of 10 years, which could be challenging for some but shouldn’t present an impossible challenge. The government is keen to hear views as to whether there is a better way to ensure that individuals affected by these reforms can be compliant with the new rules.

When the 10-year anniversary charge is payable on a relevant property trust, the charge will be apportioned if the settlor is not-domiciled but is treated as being UK domiciled by virtue of having been born in the UK with a UK domicile of origin and is resident in the UK. The apportionment will be based on the period of residence during the last 10 years. When the individual becomes non-resident again (and assuming they remain not domiciled in the UK), there is no exit charge.

Question 7

What difficulties do stakeholders envisage there could be for trustees tasked with calculating the 10 year charge in these circumstances?

The government is also aware that HMRC might need to publish updated guidance for banks on the withholding requirements for this group of individuals.

4.3 Leaving the UK

On departure from the UK, and assuming the individual retained their foreign domicile status under general law, the individual is treated as being not domiciled again once they become non-resident, unless they have been resident in the UK for 15 of the past 20 tax years (this assumes they have retained their foreign domicile status under general law). The individual who returns to the UK for a short period will be treated as UK-domiciled only for the period they are resident in the UK.

Question 8

Do stakeholders agree this is the most reasonable way to deliver these reforms? Are there any circumstances when applying these rules would produce unfair outcomes?

Question 9

Would the rules as described leave any significant uncertainty? If so, how?

5. Consultation questions

Questions on the proposal to legislate the deeming provision for those resident for 15 of the past 20 years:

Question 1

Do stakeholders agree that the approach outlined in this document is the best way to introduce the test for deemed-domicile status?

Question 2

Are there any difficult circumstances that might arise as a result of the intended approach that could be avoided with a different test?

Question 3

The government is interested in views from stakeholders about the need for preserving the £2,000 de-minimis threshold for those no-domiciled individuals who become deemed UK domiciled.

Question 4

Do stakeholders agree that the approach outlined in this document which will change the inheritance tax rules for those UK domicilliaries who are leaving the UK is straightforward and reasonable?

Question 5

Do stakeholders agree that the period a spouse needs to remain non-resident before the inheritance tax spouse election ceases to have effect should be amended to 6 years?

Questions on the proposal to treat those who are born in the UK with a UK domicile of origin as domiciled while they are living in the UK:

Question 6

In what circumstances would having a short grace period for inheritance tax help to produce a fair outcome?

Question 7

What difficulties do stakeholders envisage there could be for trustees tasked with calculating the 10 year change in these circumstances?

Question 8

Do stakeholders agree this is the most reasonable way to deliver these reforms? Are there any circumstances when applying these rules would produce unfair outcomes?

Question 9

Would the rules as described leave any significant uncertainty? If so, how?

6. Draft legislation

This chapter shows how draft legislation for deemed-UK domicile tests would operate in the context of the remittance basis and for inheritance tax. The legislation reflects the government’s latest policy position. Full draft legislation for these reforms will be published in due course.

Domicile: income tax and capital gains tax

(1) In Chapter A1 of Part 14 of ITA 2007 (income tax liability: remittance basis), after section 809E insert—

“809EA Domicile

(1) This section applies for the purposes of this Chapter.

(2) An individual not domiciled in the United Kingdom in a tax year is to be regarded as domiciled in the United Kingdom in that tax year if— (a) condition A is met, or (b) condition B is met.

(3) Condition A is that— (a) the individual was born in the United Kingdom, and (b) the individual’s domicile of origin at the time of his or her birth was in the United Kingdom.

(4) Condition B is that the individual has been UK resident for at least 15 of the 20 tax years immediately preceding the tax year referred to in subsection (2).”

(2) In Chapter 1A of ITA 2007 (exemption for persons not domiciled in UK), in section 828A—

(a) number the existing text as subsection (1), and (b) after that subsection insert— “(2) Section 809EA (domicile) applies for the purposes of this Chapter as it applies for the purposes of Chapter A1.”

(3) In Schedule 45 to FA 2013 (statutory residence test), in paragraph 154 (transitional and saving provision), after sub-paragraph (4) insert—

“(4A) A notice under sub-paragraph (4) does not have effect for the purposes of determining whether an individual was resident in the United Kingdom for a tax year for the purposes of section 809EA(4) of ITA 2007.”

(4) The amendments made by this section have effect for the tax year 2017-18 and subsequent tax years.

Domicile: inheritance tax

(1) In section 267 of IHTA 1984 (persons treated as domiciled in the United Kingdom), in subsection (1)— (a) in paragraph (a), omit the final “or”; (b) after that paragraph insert— “(aa) the following conditions are met— (i) he was born in the United Kingdom, (ii) his domicile of origin at the time of his birth was in the United Kingdom, (iii) he was resident in the United Kingdom for the tax year in which the relevant time falls, and (iv) he was resident in the United Kingdom for at least one of the two tax years immediately preceding the tax years in which the relevant time falls, or”; (c) in paragraph (b)— (i) for the words from “in not less than” to “the year of assessment” substitute “for at least than fifteen of the twenty tax years immediately preceding the tax year”;

(2) In that section, in subsection (4), for “in any year of assessment” substitute “for any tax year”.

(3) In section 267ZB of IHTA 1984 (section 267ZA: further provision about election), in subsection (10), for “four” substitute “six”.

(4) In Schedule 45 to FA 2013 (statutory residence test), in paragraph 154 (transitional and saving provision), after sub-paragraph (4A) insert—

“(4B) A notice under sub-paragraph (4) also does not have effect for the purposes of determining whether an individual was resident in the United Kingdom in a tax year for the purposes of section 267(1)(aa) and (b) of IHTA 1984.”

(5) The amendments made by this section have effect in relation to times after 5 April 2017.

7. The consultation process

This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:

• stage 1: setting out objectives and identifying options
• stage 2: determining the best option and developing a framework for implementation including detailed policy design
• stage 3: drafting legislation to effect the proposed change
• stage 4: implementing and monitoring change
• stage 5: reviewing and evaluating the change

This consultation is taking place during stage 2 of the process. The purpose of the consultation is to seek views on the announcements that were made at the Summer Budget 2015.

7.1 How to respond

The government welcomes comments and responses to this consultation. The key consultation questions are summarised in chapter 4. All e-mail correspondence should be sent to NondomReform@hmtreasury.gsi.gov.uk by close of business on 11 November 2015.

This consultation document is available on the Treasury website. Where possible, all correspondence should be sent electronically. Alternatively, mail correspondence can also be sent to the following address:

Reform of the rules for non-doms
Personal tax team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

7.2 Confidentiality disclosure

Information provided in response to this consultation document, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DTA) and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory code of practice with which public authorities must comply with and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential.

If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury or HM Revenue and Customs (HMRC). HM Treasury and HMRC will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.

7.3 The consultation code of practice

This consultation is being conducted in accordance with the ‘Code of practice on consultation’. A copy of the code of practice criteria and a contact for any comments on the consultation process can be found in Annex A.

8. Annex A: The code of practice on consultation

This consultation is being conducted in accordance with the ‘Code of practice on consultation’ that sets the following criteria:

• formal consultation should take place at a stage when there is scope to influence the policy outcome
• consultations should normally last for at least 12 weeks with consideration given to longer timescales where feasible and sensible
• consultation documents should be clear about the consultation process, what is being proposed, the scope to influence and the expected costs and benefits of the proposals
• consultation exercises should be designed to be accessible to, and clearly targeted at, those people the exercise is intended to reach
• keeping the burden of consultation to a minimum is essential if consultations are to be effective and if consultees’ buy-in to the process is to be obtained
• consultation responses should be analysed carefully and clear feedback should be provided to participants following the consultation
• officials running consultations should seek guidance in how to run an effective consultation exercise and share what they have learned from the experience

If you feel that this consultation does not satisfy these criteria, or if you have any complaints or comments about the process, please contact:

Olly Toop
Consultation Coordinator, Better Regulation and Policy Team
HM Revenue and Customs
Room 3E13
100 Parliament Street
London
SW1A 2BQ

020 7147 0062 or e-mail hmrc-consultation.co-ordinator@hmrc.gsi.gov.uk