UK non-dom status update

Changes to the UK non-dom regime are scheduled to take effect from 6 April 2017, with a transitional window in place until April 2019. The changes include deeming non-domiciled individuals who have been resident in the UK for 15 out of the previous 20 years as domiciled for income tax and capital gains tax, and applying inheritance tax to UK residential property owned by offshore structures.

The changes were removed from the Finance Bill this year ahead of the General Election, but were reintroduced last month. The announcement was met by disapproval from many in the accounting industry. The new law would see all non-doms liable to inheritance tax (IHT) on their UK residential property.

When are non-doms exposed to IHT?

Generally speaking, non-doms are only exposed to IHT on their personally held UK situated assets. In addition, every non-dom benefits from the IHT nil rate band, meaning that currently no IHT is payable on the first £325,000 of UK situated assets on death, assuming no lifetime gifts of UK situs assets.

UK residential property is a UK situs asset, of course, but in the past, non-doms wishing to own UK residential property would simply purchase it through an offshore company.

By interposing the company between themselves and the UK property, their ownership was of the shares of the offshore company – a non-UK situs asset not liable to IHT – and so, on the non-dom’s death, the UK property passed free of IHT to the next generation.

What about long-term UK resident non-doms?

The position of long term UK resident non-doms is slightly different. Once they had been resident in the UK for 17 out of the past 20 UK tax years (the new rules propose a reduction to 15 out of the previous 20 UK tax years), they become deemed UK domiciled for IHT purposes, regardless of what their actual domicile is.

Ignoring old estate duty double tax conventions, which can save the day in a few limited circumstances, deemed UK doms are liable to IHT on their worldwide, personally held assets.

Non-UK situated assets held in offshore trusts where the trust was created, and the transfer occurred, prior to deemed UK dom status starting, continued to be sheltered from IHT.

Offshore companies

If the government’s changes come to pass, the use of offshore companies to own UK residential property will no longer provide an IHT shelter. This will be the case for all non-doms, regardless of whether they are UK resident or not, or are deemed UK domiciled or not.

An interest in 5 per cent or more of a closely held offshore company, or partnership, which in turn owns, directly or indirectly, an interest in UK residential property of any kind, would be liable to IHT in the hands of the owner.

Further, any loan to or collateral given to another to enable that other to acquire UK residential property will also be a chargeable asset for IHT purposes.

Whole new band of IHT payers. If the changes are made, it seems that a whole new band of IHT taxpayers will be created – residential property owning non-doms. Many will come from jurisdictions which do not impose an estate or inheritance tax on death and will have no idea of the complexities of the IHT legislation – the IHT implications of making gifts with reservation of benefit (GROBs), for example. Hence, if the changes are made, there will shortly be a real need for advice to reassure non-doms that they can invest into the UK without losing 40 per cent of their investment to IHT.

What sort of solutions might work? Many of the IHT planning solutions currently used by UK doms will be of equal importance to non-doms. If these IHT changes come into effect, individuals are likely to start purchasing new UK residential property in their own names, rather than through an offshore entity, or removing existing properties from offshore structures into personal ownership. Some may work on the basis of selling their UK real estate before death is likely but they may not be familiar with using term life cover written in trust to cover the IHT risk. Married couples, both of whom have a non-UK domicile, can also take advantage of the generous, 100 per cent IHT spouse exemption on death.

Writing a UK will, ensuring that UK residential property passes to the surviving spouse after the first death, either outright or in a will trust giving the surviving spouse a life interest, will defer the IHT until the second death. If the surviving spouse sells the UK property and moves the proceeds abroad before their death, IHT may be legitimately avoided altogether.

Non-doms need to be made aware that gifts of UK residential property in lifetime, perhaps to the next generation, could have IHT implications if the gift is not survived by seven years. Again, term life cover may have a role to play. However, the IHT legislation disapplies, the GROB rules in certain situations where gifts of shares of property are made. A time when both UK doms and non-doms need high quality IHT planning advice may soon be upon us.

The full draft legislation will now be included in a Finance Bill, which will be introduced following the return of Parliament on 5 September 2017.

Acknowledgents to Accountancy Age and to the FT

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