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  • Non dom tax changes (2) – The income tax and CGT changes (including rebasing, mixed fund rules and Business Investment Relief)

    17 November 2016

    Andy Wood

    Non dom tax changes: the income tax and CGT changes (Including rebasing, mixed fund relief and Business Investment Relief)

    Update to reflect Finance Bill 2017 revisions


    This part considers the non dom tax changes impacting on the remittance basis of taxation for UK resident non-domiciled individuals (“non doms”). As per the previous part, the non dom tax changes announced do not change one’s domicile position at general law. It is merely the tax treatment of non-doms that is revised with effect from 6 April 2017.

    This part considers the non dom tax changes as they apply to income tax and capital gains tax (“CGT”). Broadly, the new rules apply a ‘long stop’ date after which one can no longer avail oneself of the remittance basis of tax.

    What is the remittance basis of taxation?

    The remittance basis is simply the ability for a non dom to leave his or her foreign income and gains (“FIG”) overseas without any tax being paid. If he or she leaves it overseas then no tax. However, if he or she brings, enjoys or uses the funds in the UK then they will suffer tax to the extent that they do so.

    If it is foreign income that is ‘remitted’ then it will suffer UK income tax. If it is a foreign gain that is remitted then it will suffer CGT. We will talk about what happens where the funds are in a mixed pot later in this article when we come to the rather generous (temporary) relief provided by the government for such mixed funds.

    Income tax – non dom tax changes


    Simply, before April there is no concept of deemed domicile for income tax purposes (or CGT for that matter). This is a new construct.

    Current rules

    In order to use the remittance basis at present, one must make an election and potentially pay a fee to be a member of the ‘remittance basis club’. The amount payable depends on how many years one has been resident in the UK:

    • If one has been resident in the UK for less than 7/9 tax years then the remittance basis can be tapped in to ‘free of charge’;
    • If one has been resident in the UK for between 7/9 tax years and 12/14 tax years then one pays £30k for the privilege;
    • If one has been resident in the UK for between 12/14 tax years and 17/20 tax years then one must pay 30k; and
    • If one has been resident in the UK in excess of this then the amount is £90k

    One does not have to pay the fee in every year. If one decides there is no benefit then one can decide not to elect for the remittance basis to apply. In such a scenario, one would be subject to tax on worldwide income and gains on an arising basis (ie like a UK resident and domiciled person).

    Remember – the remittance basis allows one to keep FIG offshore without the imposition of a tax charge. Bringing to, or otherwise enjoying these funds in, the UK will result in tax being payable.

    Non dom tax changes – New rules

    With effect from 6 April 2017, if one has been UK resident for 15/20 tax years then one is ‘deemed domiciled’ (“DD”) and cannot use the remittance basis at all.

    Until such time, one must pay the remittance basis charge as set out above. Clearly, the 90k category is now redundant.

    Then, the second newbie is the concept of a ‘Former or Returning UK domiciled resident (“FDR”). One will be in this class of person where you:

    • Were born in the UK,
    • Have a domicile of origin in the UK; and
    • become UK resident

    If you are an FDR, then one immediately becomes DD for IT and CGT purposes. We will discuss this special class of person in more detail later in the series of articles.

    Capital Gains Tax (“CGT”) – non dom tax changes


    As alluded to above, the changes that apply to income tax also apply to CGT.

    One notable difference is the Government’s rather wonderful gift of ‘rebasing’.


    The consultation paper states:

    ‘The Government agrees that it would be punitive to require long-term resident non-doms to pay CGT on gains that have accrued on foreign assets held while the individual was a non-dom.’

    It goes on to say that:

    To address these concerns… those who will become deemed domiciled in April 2017 because they have been resident [in the UK] for 15 out of the past 20 years will be able to rebase directly held foreign assets to their market value on 5 April 2017.

    This has now been confirmed in the Finance Bill for 2017 with some minor changes to those published in the ConDoc.

    The relief allows us to rebase an asset. Essentially, this means that on a future sale, rather than using the historic cost of the asset in the CGT computation, we can instead use the value of the asset in April 2017. Clearly, for assets which have been held for many years this is muchos beneficial.

    This attractive relief may apply where the following conditions are satisfied:

    • The taxpayer must be an individual;
    • He or she must become deemed dom on 6 April
    • The assets in question must be directly held foreign assets
    • Assets must have been held for the period from 16 March 2016 to 6 April 2017
    • The taxpayer must have elected for the remittance basis to apply in any year up to and including 2016/17.

    Rebasing may apply on an asset by asset basis.

    On sale, where rebasing has been applied, the funds do not have to remain outside the UK. However, care must be taken if the original asset was bought with non-clean capital as this may lead to a remittance when those funds are brought to the UK.

    Clearly this offers an attractive opportunity to ‘wash out’ historic capital gains where the conditions are satisfied.

    Clearly, one will wish to assess whether rebasing applies to particular assets. If it does then one may seek to take advantage of it. For some clients, it might be attractive to elect for the remittance basis to apply in 2016/17 (ie where they have not availed themselves of it in the past) in order to benefit from the relief.

    In other cases, where the relief is not available, one might look at crystallising a friendly sale. In other words, taking advantage of an informal version of rebasing.

    The key is understanding where one stands as soon as possible. This will allow one to act before the new rules come in to force if required.

    Mixed Funds

    This is the second silver lining provided by the Government in the non dom tax changes. However, that said, its practical usefulness is open to question.

    A well advised non-dom coming to the UK should have been advised to keep clean capital and FIG separate from one another in separate accounts. This is often referred to as segregating accounts.

    Why on earth would one want to do that? Essentially, this would leave said non dom with a degree of control over taxation by picking and choosing from which account any remittance might be made.

    Secondly, where funds are not segregated and all the cash is held in one big slush fund then a remittance from such an account is problematic. In such circumstances, the legislation will deem that the most harshly taxed funds come out first (eg income) and then capital gains, and lastly clean capital.

    Perhaps surprisingly, the proposals allow a non dom is this category to separate out the component parts of a mixed funds in to separate pots. This means that one is in a position to choose what to remit or not.

    The ConDoc stated that this relief would only be available where such separation takes place in 2017/18 tax year. However, it has been extend in Finance Bill 2017 to include a second tax year – 2018/19.

    Secondly, it only applies to cash. Therefore if one wishes to undertake the planning on an asset such as, say, a painting then one could sell it (perhaps after benefiting from rebasing relief) and then separate it out.

    Finally, this relief is not available to a FDR.

    It will not all be plain sailing however. One needs to be able to track the makeup of the funds. It is not a ‘free for all’. There are clearly going to be administrative problems in ‘following the money’. There will be particular practical issues prior to 2008 where many offshore providers kept much lighter records than they do now.

    In this area, the proof of the pudding will be in the eating. What do HMRC expect to see where a taxpayer is trying to avail themselves of this relief? What guidance will be issued?

    In terms of actions, we would recommend that non doms review their position regarding any such funds as soon as possible (though the addition of a second year make this slightly less pressing).

    Clearly, it will be a cost benefit analysis. What are the professional costs of drawing up any such accounts against any potential benefits.

    Business Investment Relief (“BIR”)

    Like the mixed fund rules, this was an earlier attempt by the Government to get its hand on FIG stashed overseas by non-doms.  Such individuals were incentivised to leave this cash overseas laying idle as an attempt to bring it to the UK would result in the imposition of a tax charge.

    BIR was supposed to solve this problem and unlock investment. Broadly, the relief was to allow FIG to be brought to the UK to invest in qualifying UK commercial activities. In such circumstances, no remittance tax charge would arise.

    Surprisingly, the definition of qualifying activities was (and remains) incredibly broad. It must be an investment in a UK company. However, that UK Company can be involved in a very broad range of activities – including property development and property investment. Furthermore, one can be connected with the Company!

    What’s this got to do with anything? Well BIR was also included as as part of the consideration. The problem is that BIR is rather unloved and nobody is seemingly using it.

    As part of the ConDoc, the Government wanted to know what it can do to broaden the relief. From the responses to that ConDoc (published alongside Finance Bill 2017) it is clear that the Government will extend the qualifying criteria for investee businesses.

    More detail on this relief can be found here.

    We trust that you have found our wander around the income tax and CGT non dom tax changes of interest. If you or any of your clients have any queries about the non dom tax changes then please get in touch


    Articles in this series:

    Part one: Setting the scene and what is domicile?

    Part two: The income tax and CGT changes (including rebasing, mixed fund rules and Business Investment Relief)

    Part three: The Inheritance Tax (“IHT”) changes (including revisions to excluded property)

    Part four: Returning non-doms – a tax pariah?

    Part five: The changes in relation to trusts

    Part six: A summary of actions and planning ideas