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Upcoming changes to non-dom and inheritance tax rules announced in the UK Budget may have a “huge” impact on the islands, according to tax experts.
Chancellor Jeremy Hunt yesterday announced what will be his last Budget before a general election, which included scrapping non-dom tax status.
"Non-dom" describes a UK resident whose permanent home - or domicile - for tax purposes is outside the UK.
Currently they only pay UK tax on the money they earn in the UK.
For wealthy individuals, this had offered the opportunity for significant savings, if they choose a lower-tax country as their domicile.
This regime will now be phased out in a move aimed at raising £2.7bn a year by 2028/29.
“The non-dom changes could potentially have a huge effect on the islands,” Grant Thornton Channel Islands said, predicting it will lead to an “immediate and significant” restructuring of Guernsey and Jersey trusts and companies.
It also presents an opportunity as well as a threat.
“The non-dom announcement could also offer opportunities for the islands in attracting new businesses and highly skilled labour. However, it could be a poisonous apple if the changes spread the current UK non-dom market far and wide.”
Transitional rules are being used to encourage the remittance of funds and assets to the UK of previously untaxed income and gains.
Under the new rules, income and gains arising in a trust, wherever the trust is resident, will apparently be taxed on UK resident settlors.
“There are some transitional provisions being introduced, and it will be interesting to see the detail of how these address existing trust arrangements,” said Mark Savage, Tax Director at BDO in Guernsey.
The Chancellor announced a consultation on moving the basis of UK Inheritance Tax away from domicile and towards residence.
“The implication is that UK residents will, in future, be subject to inheritance tax on their worldwide assets (possibly including those settled into trust) regardless of their background and long-term intentions,” said Mr Savage.
“Conversely, it will presumably become easier for long-term non-UK residents to demonstrate that they should only be subject to UK inheritance tax on any UK assets that they hold.
“It will be interesting to see the effect of all these potential changes on the attractiveness of the Guernsey Open Market for high net worth and geographically mobile individuals.”
Other potential Budget impacts on Guernsey residents with UK interests include changes to property tax rules.
“The favourable treatment offered on the taxation of UK property that is rented as short-term holiday lets is being withdrawn, and this will now be subject to income (or corporation) tax in the same way as other UK property income,” said Mr Savage.
“On the other hand, a potentially significant tax cut sees the highest rate of UK capital gains tax on residential property fall by 4% to 24%. This will benefit any individuals looking to dispose of UK residential property.”
There is another potential benefit on the edge of the property side, according to Grant Thornton CI.
“The full expensing for leased assets should allow non-resident companies owning UK property to potentially get more capital allowances on moveable plant and machinery contained within leased premises as part of UK property business,” it said.
Ahead of the Budget announcement, Jersey’s External Relations Minister Ian Gorst suggested that any changes to the non-dom rules would make the islands more attractive to a larger pool of potentially wealthy residents.
Pictured top: Jeremy Hunt (Shutterstock).
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