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Non-UK domicile rules create IHT liabilities

29th March 2017

Non-UK domicile rules create IHT liabilities

From 6th April 2017, many individuals who have previously been protected from UK Inheritance tax by foreign domicile will have their worldwide assets brought within the scope of UK inheritance tax (IHT).

Who will be affected?

Non-UK domiciles resident in the UK:

Those who have been UK resident for 15 of the previous 20 tax years 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 of UK IHT.

We can help you work out your residence status if you are uncertain. To check whether you are affected you may wish to:

  • Make sure you know your tax residence status over the past 20 tax years;
  • Consider the long-term implications of becoming UK-domiciled - is breaking UK-residence to remain non-UK domiciled attractive?

What can I do if I am affected?

Non-UK domiciles who have lived in the UK for a period of time and hold offshore funds that generate income or gains may have the opportunity to declare ‘trapped clean capital’.  If you file an application with sufficient evidence between 6 April 2017 and 5 April 2018, then additional tax liabilities may not be incurred. It may be possible to settle an overseas trust before acquiring a deemed UK-domicile, this requires specialist advice.

It may be possible to “rebase” foreign assets to reduce the amount of Capital Gains tax potentially payable in the future. However, this has strict qualification criteria and requires specialist advice

Non-UK domiciles who own UK property:

UK property owned through an overseas company will also be caught by 40% Inheritance Tax from April 2017. If the company is owned by a trust, the trustees may incur an IHT liability every 10 years.

It is important to review your tax position and potentially restructure the property holding before the 6 April; after this date the cost of restructuring will be higher.

HMRC will have the right to postpone a property sale until any IHT due is paid in full. Other restrictions include; ignoring loans between connected parties when determining the value of a property for IHT purposes, and only loans exclusively related to the property in question will be deducted from the value of the property.

UK-born with a UK domicile of origin:

Individuals who have successfully abandoned their UK domicile in favour of an overseas domicile will be deemed to be UK-domiciled for tax purposes whilst they are living in the UK.  They cannot claim the remittance basis of taxation and will come within the charge of 40% UK IHT on worldwide assets.

This affects individuals and trusts where the settlor may or may not be UK-domiciled. The tax status of a trust may change from one year to the next, given the difficulty in determining the exact domicile status of a settlor because of their movements. It is therefore important to review and potentially unwind trust structures before 6 April 2017.

Please note that the proposed tax changes in this article may not now take effect from the date stipulated. The usual timetable to introduce the changes into legislation has been delayed due to the unexpected General Election. Please speak with your adviser in connection with any matters contained in this article.

CLIENTS WORDS

Very sincere thanks for all of the advice and support we have received from Sharmini and her team over the many years they have looked after our tax affairs, and the helpful way in which they have guided us through the intricacies of taxation.
Personal tax client

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