Dhana Sabanathan and Simon Gibb 6 Jul 2017 10:30am

How non doms will be affected by upcoming tax changes

Last month, the United Kingdom was awoken to further shock election results as the news that Theresa May’s call for a snap general election had resulted in a hung parliament

Caption: Now that May has secured a government with DUP support, major tax reforms are coming.

These results, which come less than a year after the Brexit referendum, left the UK in continued uncertainty.

A deal was finally struck with the Democratic Unionist Party (DUP) on Monday whereby Theresa May will be able to form a working government held up by Arlene Foster’s Northern Irish party in exchange for £1.5bn and a few concessions to the Tory manifesto.

Despite the controversy of the deal, some sighed in relief to finally get the Brexit negotiations underway and welcomed the potential for increased stability in the country. 

The agreement states that, “The DUP agrees to support the government on all motions of confidence; and on the Queen’s Speech; the Budget; finance bills; money bills, supply and appropriation legislation and estimates … the DUP also agrees to support the government on legislation pertaining to the UK’s exit from the EU and legislation pertaining to national security.”

What we can gather from this, despite the Tories having to drop the likes of the pensions triple lock and winter fuel payments to create a working majority, is that it will be “business as usual” going forward. The two parties’ manifestos, at least in the field of taxation, do appear to harbour some significant common ground.

The Conservative Party’s manifesto, though silent on major tax changes, did propose to increase the personal allowance to £12,500 and the higher tax rate to £50,000 by 2020; to reduce corporation tax to 17% by 2020; to introduce tougher regulation of tax advisory firms; and to have a more proactive approach to transparency and misuse of trusts.

We can also safely assume that the prime minister will not consider herself bound by any of the tax and National Insurance promises contained in the 2015 manifesto. The DUP’s manifesto promised to support any proposals to further increase the personal allowance; to reduce Northern Ireland’s corporate tax rate to at least 12.5%; and to ensure UK-wide tax policy improvements in order to encourage economic growth in Northern Ireland. It is therefore not surprising that the two parties are able to agree with each other on the headline tax proposals of the next finance bill and to see lower income and corporation taxes.

There have also been far-ranging changes to the taxation of non-domiciled individuals and non-UK trusts that have been in the pipeline since 2015. Significant changes were due to be implemented as part of the Finance Act 2017 but were delayed after the snap election was called, for fear of rushing the legislation through parliament and producing unworkable rules. Yet more of the proposed changes have been deferred altogether until the Finance Act 2018, creating huge uncertainty for taxpayers who took action to prepare for the anticipated changes and altered their position based on the proposals.

These changes were intended to reduce the benefits of non-domiciled status to an individual and restrict their ability to use the remittance basis of taxation – which allows income and capital gains to be kept outside the UK free of UK tax by non-domiciled people.

The planned changes included treating individuals who have been resident in the UK for 15 of the past 20 tax years to be “deemed domiciled” for all tax purposes; treating UK-domiciled individuals resident in the UK who were born here as always UK domiciled for all tax purposes; and to narrow the circumstances where offshore trusts would be advisable for a taxpayer. Finally, an inheritance tax charge has been proposed to be levied on the value of non-UK companies attributable to UK residential property and certain loans (and related security arrangements) used to acquire such property, ending a longstanding and advantageous tax planning practice.

Now that the deal has been struck to prop Theresa May up to lead the country, it is expected that these reforms will be implemented soon. The stated position of the government - before the election - was that they would proceed at the earliest opportunity to legislate for these changes, but now that Brexit negotiations are underway, enacting these reforms may not be the government’s top priority.

The Chartered Institute of Taxation wrote to the Treasury on 15 June 2017 recommending that the reforms are delayed in their entirety until 6 April 2018, but with the option for individuals to elect to be “deemed domiciled” under the new 15-year rule from 6 April 2017. We strongly agree with this proposal as it provides certainty and means that individuals who rearranged their affairs in light of this expected new rule are not unfairly prejudiced.

Dhana Sabanathan, partner and Simon Gibb, associate, private client, McDermott Will & Emery London