Uncertainty is the dominant state for professional advisers and their UK non-domiciled clients at the moment. The calling of the recent snap General Election and the failure of the Conservative Government to win a majority has raised questions over when, and perhaps even if, changes to the non-dom regime announced back in July 2015 will finally appear in legislation. Possibly the changes will be included in the Summer 2017 Finance Bill, announced in the recent Queen’s Speech. We will have to wait and see.
Regime change reminder
The regime changes were due to come into effect from April 6 this year. In essence, non-doms who have been resident in the UK for more than 15 out of 20 tax years would move onto a worldwide basis of taxation. On the plus side, their offshore assets would be rebased to their value at that date, representing a tax-free uplift. All non-doms who had claimed the remittance basis would have the chance to ‘clean up’ bank accounts that contained a mixture of income and capital gains. In addition, non-doms who were settlors of offshore trusts, providing they did not add to those trusts, would benefit by those trusts gaining protected status (so that trust income and gains would not be attributed to the settlor as under the previous legislation).
Another major change expected from 6 April 2017 was that UK residential property could no longer be shielded from inheritance tax (IHT) by being held in an offshore company. This triggered a large amount of restructuring.
Overall, many individuals received significant trust distributions. A lot of offshore structures holding UK residential property were wound up, sometimes creating tax charges that were seen as a short-term price to pay. Many assets came into the scope of UK IHT.
These changes were expected to be brought into UK law by the Finance Act 2017. However, after the General Election was called, huge chunks of the Finance Bill were cut – including the new non-dom rules. The previous Conservative Government indicated that, once re-elected, it would move quickly to pass the necessary legislation to create the new regime. Now that Theresa May’s Government has lost its majority, there is considerable uncertainty about what this means for the anticipated non-dom regime changes. On balance, we still expect them to be enacted through legislation: non-doms are unlikely to receive any particular favours from a minority government. This means that all the planning and restructuring undertaken in the run-up to April 6 2017 will not have been for nothing. That work should still have been worth doing.
The problem, however, is that the timing of the new legislation is uncertain – and the eventual effective date. Could this shift to April 6 2018? The Government has a lot on its plate, not least with Brexit negotiations under way. At the time of writing it isn’t even clear when the next Budget will take place but as mentioned above the legislation could be included in the Summer Finance Bill 2017. The UK is moving to an annual Autumn Budget and a Spring Statement, but a General Election is traditionally followed by a Budget to give the new government a chance to make its mark.
Non-dom limbo
As of late June 2017, non-doms are in limbo. Some made disposals between April 6 and the shrinking of the Finance Act, in the expectation that they would benefit from the rebasing. They may still, but we don’t yet know.
The best advice for UK non-doms is to do nothing until the tax situation becomes clearer. At the very least, no one should rely on any of the anticipated reliefs under the new regime, such as the asset value rebasing. If you have sold an offshore asset, do not rely on benefiting from a tax-free gain in the UK: keep it offshore for now.
Doing nothing is not always an option, of course. Some transactions may have to go ahead, regardless of the UK complications. Some life (and death) events cannot be avoided or delayed. For any non-doms in this position, sorting out the tax position could be complicated until we have more clarity on which rules to apply when.
As UK-based professional advisers, we find this situation frustrating. The UK’s non-doms have had a rough ride. The previous regime changes made in 2008 were rushed and problematic. Now we have another (expected) regime change and another botched implementation. We know that other jurisdictions, including Portugal and Spain, are relatively welcoming to foreign high net worth individuals and offer preferential tax regimes, at least for a period. We are also aware that some UK non-doms had already decided to leave the UK before this latest period of uncertainty began. Our July 2016 non-dom survey found that 37% of respondents were considering permanently leaving the UK, and 64% of these cited changing tax rules as the key factor influencing their decision.
Given that uncertainty over tax rules is as unpopular as change, if not more so, we can only expect an increase in UK departures. Non-doms contribute huge value to the UK – in the investments they make, the businesses they run, the employment they create and the taxes they pay – so this is a worrying situation.
Gill Smith and Mark McMullen are partners in the Moore Stephens Private Client Services team.
