Following the recent tax changes in the UK, there has been a wave of non-doms leaving the UK in search of more tax friendly jurisdictions. But for many their children have strong ties to the UK, in many cases having been born or raised and educated here and, in most cases, having British nationality. As a result, these 'non-dom kids' are more often than not less likely to leave the British shores they call home.
So, while the parents embark on their new adventure, they and their children may be asking how to plan for the future. Here we give you a taste of some of the solutions we have been discussing with, and arranging for, our clients which offer tax protections or deferrals from both an income and capital gains tax ('CGT') as well as inheritance tax ('IHT') perspective, enabling them to protect and grow their wealth whilst their children can remain in the UK.
Trusts
The recent tax changes have made trust planning less attractive for settlors who chose to stay in the UK longer term, particularly from an IHT perspective. However, for those who have left the UK and were not deemed domiciled under the old rules (or who leave the UK before becoming long-term resident under the new rules), they could consider settling a trust for the benefit of their UK resident children and grandchildren.
Such structures can offer a tax efficient means of protecting and preserving wealth for the next generation even whilst the children remain in the UK by sheltering assets from IHT, as well as deferring (in some cases indefinitely) income and CGT charges. Trusts also offer additional benefits such as flexibility over wealth transfer and privacy and asset protections, including in the context of divorce.
For those who were deemed domiciled under the old rules before they left the UK, or who are long-term resident under the new rules and looking to leave, they will have to sit tight for a few years until they are outside the scope of IHT before implementing any trust planning but can certainly start the planning process now.
Corporate structures/partnerships
Creating non-UK companies to hold UK assets can also act as an effective IHT blocker for non-doms who have left the UK. Where non-dom parents have UK assets (with the exception of UK residential property), they could consider transferring these into a non-UK holding company after they cease to be UK resident.
Once they cease to be long-term residents for IHT purposes, these will be outside the scope of IHT as they will hold shares in a non-UK company rather than an interest in UK assets. These shares could either be transferred into trust or gifted to the next generation without triggering IHT. Sophisticated planning techniques could be incorporated within the share classes to enable the parents to pass on value to their children but not necessarily control over the company (especially if the children are still young).
Family partnerships are an alternative tax planning structure which can have significant tax and succession benefits for families looking to plan ahead. Partnerships are effective blockers for IHT purposes but their tax transparency for income tax and CGT purposes mean they can provide interesting planning opportunities for internationally minded families. The terms of a family partnership can reflect a family's bespoke needs and can be drafted with an eye on privacy, controlled access to family wealth and asset protection.
Usufruct arrangements
For parents with European connections, usufruct arrangements can be a tax efficient means of owning and passing on interests in non-UK companies and non-UK real estate to their children, particularly from an IHT perspective. Usufruct arrangements can be highly complex, so appropriate advice should be sought in order to ensure the tax benefits are achieved without falling foul of common pitfalls which could inadvertently bring the arrangement within the UK tax net.
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.
