UK government to proceed with changes to tax rules

On July 13, 2017 the UK government confirmed its intention to proceed with implementation of a number of significant tax changes that were originally included in Finance (No. 2) Bill 2017 but tabled when Prime Minister Theresa May called for a general election to be held on June 8, 2017. The changes were to be effective from April 6, 2017 (the beginning of the UK tax year) and now are set to be implemented when Parliament returns in September with the same, now back-dated commencement date.

The most important of these changes will cause individuals who have been resident in the UK for 15 of 20 tax years to be subject to UK income and capital gains tax on their worldwide income and gains. Until now, it was possible for individuals to live in the UK for an indefinite period of time while claiming "non-domicile" status for income tax purposes.  This meant that such individuals could claim the "remittance basis" of taxation which made them liable to UK income and capital gains tax on UK source income and gains, but not on foreign source income and gains, unless such items were actually brought ("remitted") to the UK.  A similar rule already exists in the UK for inheritance tax purposes—an individual resident in the UK for 17 of 20 tax years is subject UK inheritance tax on worldwide assets even if claiming non-domicile status for income tax purposes. Under Finance (No. 2) Bill 2017, this rule will change to 15 of 20 tax years so that this same test will apply for all UK tax purposes.

Also included in the Bill is a rule imposing inheritance tax on UK residential property owned through non-UK companies or similar structures by UK non-domiciliaries. Under current law, such property escapes the application of UK inheritance tax if held by UK non-domiciliaries since the shares in such a company are deemed to be non-UK situs assets.

Trusts established outside of the UK by UK residents claiming non-domicile status are also affected by Finance (No. 2) Bill 2017. Draft legislation includes complex rules around the taxation of income and gain to a UK resident beneficiary falling under the new deemed domicile rules at the time a distribution is made to such beneficiary.  For US trusts with UK beneficiaries, there could be risk of double taxation.

The sudden halt to the implementation of these tax changes in April of this year caused unwelcome uncertainty for a large community of individuals living in the UK claiming non-domicile status. These taxpayers should now seek advice regarding their UK tax status and opportunities for rebasing foreign assets for UK capital gains tax purposes, possibly removing their UK residential property from non-UK holding companies, and the future tax treatment of distributions from non-UK trusts to UK beneficiaries.