It was probably inevitable. When the UK introduced new rules for non-domiciled residents back in 2017, there were concerns that this move would, to one degree or another, deter wealthy people from living here. The figures from HM Revenue & Customs certainly make it look that way. Its statistics show that, in 2017-18, there were an estimated 78,300 people claiming non-domiciled taxpayer status in the UK, down from around 90,500 in the previous year.
That drop of 13% is rather significant given how small the community was to begin with. The tax take from non-doms fell even further, by 20%, from £9.5bn to £7.5bn.
But these numbers don’t tell the full story. Despite news reports suggesting wealthy non-doms will flee to other jurisdictions, taking as much as £6bn of tax revenue with them, so far the impact has been less severe. While on the face of it the data suggests people have rushed for the door in large numbers, HMRC estimates that around half of these people switched to domiciled status and the other half have left the UK.
Mass exodus?
The reason why some people decided to leave the country is quite simple. Following a change to legislation in late 2017, anyone who has lived in the UK for 15 out of 20 years will now be ‘deemed domicile’ for all UK taxes. Anyone caught in this situation is now taxed in the UK on their worldwide income and gains and will be subject to UK inheritance tax (IHT) on worldwide assets. On top of that, offshore assets need to be set up to be compliant with both the US and UK tax authorities.
So, for someone who is currently resident and non-domiciled in the UK: should you stay, or should you go? The answer to this question is a personal one. To a certain extent, it will depend on how much you want to remain in the UK or move to a more favourable jurisdiction.
Here is what you need to know when you get to the 15-year mark.
Non-dom rules and you
The new rules took effect from 6 April 2017 and anyone who has lived in the UK for 15 out of 20 years needs to be prepared.
Previously, resident non-doms could pay tax on a remittance basis in the UK. Tax was paid on UK income and gains during the tax year they arise, but foreign income and gains were taxed only when they were brought – or remitted – to the UK. After being in the UK for seven to nine tax years, individuals could maintain this status by paying an annual charge ranging between £50,000 and £90,000 to sit on the remittance basis.
Crucially, residents who are deemed domicile in the UK can no longer use the remittance basis for future offshore income and gains. Instead, they are taxed on an arising basis for worldwide income and gains.
This poses a financial planning challenge for anyone who considers themselves an internationally mobile person. All investments need to be compatible with tax authorities in more than one jurisdiction. In short, if you have offshore assets that contains mixed (untaxed) and clean (taxed) funds, they needed to be rearranged to separate them into their constituent clean and mixed parts.
Is it right for me?
As we said above, it really depends on how much you love the UK. Before anyone embarks on a potentially complex process, it is important to consider whether you plan to live in the UK for the short or long term. Cleansing assets is a complex operation that is only worth doing if there is a strong chance you will be deemed domicile in the future. If you aren’t going to stay for the long haul, it might not be worth the trouble.
Likewise, even if you do intend to live in the UK for the longer term, you should consider whether it makes financial sense to go through the process of restructuring overseas funds. Given the potential for a large tax liability, it may be more beneficial from a financial planning perspective to liquidate (i.e. clean) just some, or perhaps even none, of your portfolio, relying only on the dividend income that it generates. No matter your circumstances, it is important that these funds are structured properly so they align with your financial objectives, and this can only be achieved through specialist financial advice.
Whatever your particular circumstances and requirements, it is vital that your investments are structured at a global and strategic level taking into account the tax position of your different accounts. The amount of time you can remain a non-dom in the UK has been reduced, and this means the potential inclusion of all your assets in your UK tax return. Expats losing their non-dom status should seek expert wealth and investment advice to make sure their affairs are structured appropriately.
If you would like to discuss your financial planning, please get in touch using the contact form here.
