UK: Update On The Inheritance Tax Position Of Non-Domiciled Individuals

Last Updated: 7 November 2016
Article by Freya Marks

Domicile is a common law concept which is distinct from an individual's residence or nationality. Generally speaking, it is the country where an individual intends to settle permanently. The concept is not defined in statute for tax purposes and depending on the circumstances, it can be a rather complex area which is open to dispute by HM Revenue & Customs ("HMRC").

Your domicile has tax implications but in the UK it also has an impact on the law which governs succession to moveable assets. In relation to inheritance tax (IHT), UK domiciled individuals are subject to IHT on their worldwide property. Those who are non-UK domiciled ("non-doms") are only liable to IHT on their assets located in the UK.

In the 2015 Summer Budget, the government announced that it would be introducing significant changes to the tax regime for non-doms. HMRC published the latest results of its consultation on the proposed changes on 19 August 2016. The government took this opportunity to confirm that post EU referendum it still believes it is appropriate to proceed with these reforms. Therefore, the whole package of reforms to the non-dom regime will be legislated in the Finance Bill 2017.

HMRC has just undertaken a further consultation which closed this month and the government responses to this are yet to be published. Therefore we do not have the final details of these changes. It is apparent that non-doms will likely only have a short window of opportunity to plan for these changes once the final provisions are published.

IHT on UK residential Property

It is intended that, with effect from 6 April 2017, residential properties in the UK held within an overseas structure, such as a company or trust, shall be subject to IHT where the beneficial owners of these structures are non-doms.

It has been common practice for non-doms to hold UK residential property indirectly through an overseas company or similar vehicle. This has historically offered IHT protection to non-doms as the asset in their estate would not consist of UK residential property but rather shares, in an offshore company, which did not constitute UK assets for the purposes of IHT.

UK residential properties owned indirectly through these offshore companies fall within the current definitions of "excluded property" for IHT. However the government proposes to remove such properties from these definitions in the 2017 Finance Act.

If you own UK residential property which is 'enveloped' in an offshore structure then you may wish to consider de-enveloping. However, the government has confirmed that it is not minded to introduce reliefs for de-enveloping as a result of these changes and so individuals should be prepared to pay some tax. Therefore, advice should be sought as soon as possible in order to plan the most tax efficient time and way in which to de-envelope UK residential property.

Deemed UK Domicile Status

From the tax year 2017/2018, the government intends to introduce new rules which will treat non-doms as deemed UK domiciled for tax purposes once they have been resident in the UK for 15 of the past 20 tax years. The effect of this is that once a non-dom becomes deemed domiciled in the UK the scope of IHT will extend to their worldwide property not just their UK assets. This reform brings forward the onset of deemed-domicile status by a year. The present rules provide that an individual acquires deemed domicile status at the start of their 17th tax year of residence in the UK but this will now be the start of the 16th tax year of residence within the 20 year period.

The provisions for departing non-doms are broadly maintained so that deemed-domicile status will fall away once an individual has been non-resident for more than four consecutive years.

If you are non-domiciled then it is important to take advice at least a year before the anticipated acquisition of a deemed domicile in the UK. For example, it might be appropriate to move assets into a trust and therefore it is important that you and your advisors have sufficient opportunity to review your tax position.

The reforms will also restrict the availability of non-dom status for UK-born individuals with a UK domicile of origin who subsequently acquire a different domicile of choice. From April 2017 such individuals shall be deemed UK domiciled for IHT purposes if they have been resident in the UK for at least one of the two tax years prior to the relevant tax year. This may have a significant IHT impact on any offshore trusts where such an individual is the settlor.

Taxation of non-doms is a highly complex area and therefore if you think you may be affected by the changes you should take advice as soon as possible regarding your overall tax position in order to ensure that you are able to carry out any appropriate tax planning once the final details of these reforms are published.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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