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In the 2015 Budget, George Osborne announced that, from 6 April 2017, certain new categories of non-UK-domiciled individuals will be deemed to be UK-domiciled for tax purposes. This will result in the loss of a significant tax planning opportunity for some couples who have non UK assets; are separating or contemplating divorce; and wish to make an offshore transfer between each other in a tax efficient fashion after the new rules take effect.
From 6 April 2017, assuming the draft legislation is enacted in its current form, individuals who have been resident in the UK for fifteen out of the last 20 years will be deemed UK domiciled for UK tax purposes. In addition, individuals who are born in the UK to parents who were UK domiciled, will also no longer be able to claim non-UK domicile status whilst they are resident in the UK.
Whilst it was undoubtedly not the government’s intention for these new rules to trigger divorce proceedings, we have observed some spouses commencing divorce discussions over disagreement on future residency or the location or ownership of assets held offshore as a result of one spouse (typically the husband) seeking to plan ahead for the new rules. Others, already in the throes of divorce, are proving eager to finalise their financial settlement and transfer any assets between them by 5 April 2017 to take advantage of the current tax benefits.
As part of divorce settlements, the court will often order an equalisation of the parties’ assets, or some other cash transfer from one spouse to the other. Currently, a UK resident non-UK-domiciled individual who is not deemed domiciled in the UK and claims the remittance basis of taxation, will be able, with proper planning, to transfer his or her assets outside the UK at or after separation, to his or her spouse, or ex-spouse, without paying any UK tax either upon transfer or even when the recipient brings the money to the UK. Careful planning will be required, and expert advice should be sought including upon the timing of the transfer between spouses (or ex-spouses) and the remittance of the payment back to the UK.
Regardless of their domicile status, newly separated divorcing couples have a window until 5 April each tax year when they can avoid immediate CGT on assets transferred between them during their year of separation, even if those assets are located in the UK. The timing of the transfer is often critical from a tax perspective. This advantage is sometimes used as a bargaining tool to achieve rapid settlement. Wealthy families typically consider their separation timetable strategically to take account of the tax year end and the tax implications.
However, this year, and until 5 April 2017, there is a unique extra one-off reason for some non-UK domiciled individuals, and their spouses, to consider the UK tax implications of divorce. My advice to such clients, if they are or may be seeking to separate during the course of 2016, is to consult with tax advisors about how to take final advantage of their, or their spouse’s, non-UK domiciled status whilst they still have the opportunity of doing so.
First published in Spear's in March 2016.
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