From April 6 2017 foreign nationals who have lived in the UK for more than 15 of the past 20 years will be deemed domiciled in the UK for the purposes of income, capital gains and inheritance tax.
This is the culmination of a huge shift in tax policy which began in 2008. Prior to April 2008 non-domiciled UK residents could elect to pay tax on the remittance basis free of charge. This meant that they would not be charged tax on their worldwide earnings if their income and gains were not remitted to the UK. In 2008 an annual charge of £30,000 was introduced meaning that non-doms could either pay or else elect to be taxed in the same way as those domiciled in the UK.
In April 2012 the government introduced a new charge 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 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.
From April 2017 anyone resident in the UK for 15 out of the past 20 tax years will have deemed-domicile status, resulting in many being taxed in the UK on their worldwide income. This will also be the case for that those who were born in the UK to UK domiciled parents. They will no longer be able to keep their non-dom status when they return to the UK after living abroad, which has been the case until now.
The advantage of paying tax on the remittance basis was that non-doms did not pay capital gains tax when they disposed of overseas assets and, when they died their estate was only subject to UK inheritance tax if they became 'deemed domiciled' because they had been resident for 17 out of the past 20 years. If they were not deemed domiciled they could also make lifetime gifts of non-UK assets without the gift giving rise to inheritance tax.
These advantages meant that for who those held the majority of their wealth overseas London acted in effect as a tax haven and had the added advantage of being a dynamic and politically stable world city.
The favourable tax regime that non-doms enjoyed in relation to UK residential property is also being eroded. For many years UK assets held by a non-dom through a non-UK company have for many years been treated by HMRC as being effectively non-UK assets for inheritance tax purposes and therefore exempt from inheritance tax.
From April 2017 however non-dom investors who own a UK residential property through an offshore structure, such as a company or trust, will be liable to inheritance tax in the same way as UK domiciled individuals.
As a first step towards taxing such structures an annual charge on enveloped dwellings (ATED) was introduced in 2013. Now with the new rules coming in many of those holding property in such structures are 'de-enveloping' their assets as otherwise they could end up being liable not only for the annual ATED charge but also additional taxes. In the cases of trusts the trustees of any trust holding the company's shares are liable to the inheritance tax ten year anniversary and exit charges on the residential property value. The value of the property may also be included in the settlor's estate for IHT purposes on their death due to the gift with reservation of benefit provisions.
How the changes in the taxation will affect London's future as a financial hub have yet to be seen, what is clear however is that wealthy non-doms should take advice immediately to ensure that any changes they wish to make to their affairs are in place before the new tax year.