For foreign nationals who have recently moved – or are in the process of moving or intending to move – to the UK, it is now a time of great uncertainty. The political and economic landscape of the UK, due in part to the fall-out from Brexit, the pandemic, the war in Ukraine and the resignation of two Prime Ministers, has been shifting rapidly and it is important for individuals to stay ahead of these changes.
As the next General Election draws closer, the issue of non-UK domiciled tax status has become an area of contention. During last year's controversy around the (then) non-dom status of Prime Minister Rishi Sunak's wife, it was not perhaps surprising that the opposition Labour Party announced that it would be scrapping the non-dom regime altogether.
The non-dom regime directly benefits many affluent foreign nationals who were born overseas but live in the UK. Currently, non-dom taxpayers who choose the remittance basis of taxation only pay UK tax on income and gains that have a UK source, or on any non-UK income and gains that they choose to remit to or use in the UK.
All non-UK source income and gains that are left outside UK, however, remain outside the scope of UK taxation for as long as the individual remains a remittance basis taxpayer – up to a maximum of 15 years of continued UK tax residence. The non-UK assets of non-doms are also sheltered from UK Inheritance Tax (IHT).
According to HM Revenue & Customs, there were 68,300 non-doms in the UK in the tax year ending in 2021 who contributed £7.9 billion in personal taxes. But a recent study by Warwick University and the London School of Economics, which analysed 21 years of non-dom tax returns up to 2018, estimated that an extra £3.6 billion of tax would be raised each year if the non-dom regime is scrapped. The Labour Party is using this study to support their stance on the abolition of the regime.
It might be worth noting other studies argue that the financial influx from non-doms might outweigh any perceived loss in revenue, indicating that abolishing the regime might not be in the UK's best economic interest, however this is a debate for another day. Whether the non-dom regime is left alone, scrapped or further amended, the current uncertainty surrounding its future highlights the essential benefit, for any current or prospective foreign nationals in the UK, of setting up an Excluded Property Trust (EPT) and to take the opportunity to do so while it is still there.
Among the benefits of an EPT is that it is a strategic mechanism
enabling non-UK domiciled individuals to protect their assets from
UK Inheritance Tax, even if they later become UK domiciled. Its
strength lies in its status as a distinct legal entity. Once an EPT
is formed, its excluded property status remains steadfast,
irrespective of the settlor's subsequent domicile changes or
regardless of any changes to the non-dom regime.
A critical factor to note is that the settlor must be non-UK domiciled during the initial transfer of assets into the trust. When the guidelines and terms of the EPT are adhered to, the settled property continues to retain its exclusive status and remains outside the scope of IHT, even if the settlor subsequently acquires a UK domicile.
Assets held in an EPT are not subject to UK income tax, so foreign income can be kept outside the UK, and assets held within an EPT are not subject to UK Capital Gains Tax which means that any increase in the value of the assets within the EPT will not be taxed in the UK, allowing for significant potential tax-free growth over time. EPTs are also highly versatile in terms of investments and can hold a diverse range of assets including cash, shares and real estate, offering non-doms a viable structure for financial diversification.
It is essential to maintain the excluded property status of any trust set up in this way. Generally, no further assets should be settled into the trust by the settlor once domicile has changed because this might 'taint' the trust such that it could lose its excluded property status. Any investments in overseas companies that themselves invest in UK residential property should also be avoided because these investments may remain within the scope of IHT, regardless of the domicile of the trust.
While we cannot predict what current or future UK governments may do, EPTs offer an invaluable buffer against such uncertainties because the assets within the trust would remain excluded property, secure from any alterations to the non-dom regime.
Sovereign has eight options available in terms of suitable jurisdictions in which to establish your EPT. Popular locations for EPTs include Guernsey, the Isle of Man, Mauritius, Singapore and Hong Kong. We will assist you to find the jurisdiction that is suited to your particular circumstances and needs, so please contact us to arrange a consultation without fee or commitment.
Originally published 23 August 2023
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.