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Business Tax  •  IHT  •  Personal tax  •  Probate and Inheritance Tax  •  Tax Planning  •  Taxation

New non-domicile rules create inheritance tax liabilities from 2017  

By RJP LLP on 30 October, 2016

Some rather complicated new tax rules have been introduced which affect individuals who are non-UK domiciled and which broaden the scope of those who are required to pay UK inheritance tax on their worldwide assets. These will have an impact on anyone who considers themselves to be non-UK domiciled and has either:

  • been a resident in the UK for a long time;
  • owns a home in the UK through a company registered overseas; or
  • was originally born in the UK and has a UK domicile of origin.

The changes will become effective from 6 April 2017, which leaves a small window available for taking mitigating action. Anyone who thinks they may be affected should understand the new rules and their potential implications, so they can take the necessary steps to reduce future tax liabilities where possible.

Who is affected by the new tax rules for non-UK domiciles?

  1. Impact for long term UK resident non-domiciles

Anyone who has been resident in the UK for 15 out of the past 20 years will not be eligible to be treated as non-domiciled for tax purposes. This means they will no longer be eligible to claim the remittance basis of taxation for income tax and capital gains tax purposes, and assets held overseas will come within the charge to inheritance tax in the UK.

In order to know whether you are caught by these rules where you are uncertain of your UK residence status, it is also necessary to understand and apply the statutory residence test which came into force from 6 April 2013.

Many people who are unaware of this residence test may not appreciate that they have become UK resident over a period of years, and have therefore potentially also become UK domiciled for tax purposes. This may affect individuals who have attended university or boarding school in the UK for certain time periods, and who may be deemed UK domiciled sooner than they expected.

To ascertain the correct position and mitigate the risk of incurring UK tax it may be necessary to:

  • Verify tax residence status over the past 20 years;
  • Consider the longer term implications of becoming UK domiciled and whether it would be advisable to break UK residence to remain non-UK domiciled;
  • Rebase foreign assets to reduce the amount of tax potentially payable in the future. This has strict qualification criteria and requires specialist advice.

There is also a time limited opportunity for non-UK domiciled individuals who have lived in the UK for a long time and who hold offshore funds that generate income or gains, to declare ‘trapped clean capital’. Provided appropriate evidence can be supplied and the application is made between April 2017 and April 2018, additional tax liabilities may not be incurred.

It may also be possible to settle an overseas trust before acquiring a deemed UK domicile and again, this requires specialist advice.

 

  1. Impact for non-domiciled UK home owners

Currently non-domiciled residents in the UK who own a UK property through an overseas company are excluded from inheritance tax (IHT) charges because shares held by an overseas company are exempt. This will change from 6 April 2017, after which the normal rate of inheritance tax (40%) will apply. If the property is held in trust, trustees could incur an IHT liability every ten years.

If you are non-UK domiciled and own a UK property within an overseas structure, it will be important to review your tax position and potentially restructure the property holding as soon as possible. After April 2017, the cost of restructuring will be higher. The government intends to implement a targeted anti avoidance rule against anyone who tries to mitigate the impact of these new rules and there will be no special tax relief period available.

In addition, special powers are being awarded to HMRC giving them the right to postpone a property sale until any IHT due is paid in full. Other restrictions being implemented include preventing loans between connected parties when determining the value of a property for IHT purposes, and removing the tax relief available on loans unless they are exclusively related to the property in question.

 

  1. Impact for those born in the UK with a UK domicile of origin

From 6 April 2017, anyone who was born in the UK and has a UK domicile of origin will be deemed to be UK domiciled for tax purposes when they are living in the UK. This means they can no longer claim the remittance basis of taxation and will also be liable for IHT in the UK at 40% on worldwide assets. This has implications for individuals and also trustees of trusts holding overseas assets on behalf of a settlor, who may or may not be UK domiciled. Given that it may be difficult to ascertain the exact domicile status of a settlor depending on their movements, the tax status of a trust may change from year to year. It may therefore be wise to review and potentially unwind trust structures before 6 April 2017 to mitigate this effect.

If you are non-UK domiciled and concerned you may be affected by any of the forthcoming changes, please contact Lesley Stalker by emailing las@rjp.co.uk.

 

 

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