Domicile is an important concept which plays a key role in UK taxation. It also dictates what happens after death, not just in terms of tax but also in terms of how the succession to an estate will be dealt with.
It's possible for an individual to live in the UK and be UK tax resident but to retain a non-UK domicile status for the purpose of succession, inheritance tax (IHT) and some other taxes. For many who have income and assets overseas, there are often clear tax advantages to maintaining a non-dom status. From 6 April, it will become more difficult for individuals to maintain a non-dom status on a long term basis. In addition, UK residential property which is owned by a non dom in an offshore structure is being brought into the UK IHT net.
Previously, for IHT, an individual who was non-UK domiciled was deemed UK domiciled after being resident in the UK for 17 out of the preceding 20 tax years. This was for the purposes of IHT only.
From 6 April 2017, individuals will be deemed domiciled in the UK not just for IHT but for all taxes once they have been UK resident for 15 out of the 20 previous tax years.
Income and Capital Gains Tax
Non-doms can elect to be taxed on their income and capital gains on the remittance basis in the UK. This means that only non-UK income and gains that are actually brought into the UK are taxed in the UK. After 7 years of residence in the UK, there is an annual charge if an individual wishes to be taxed in this way starting at £30,000.
The extension of the deemed domicile status to income and capital gains tax has significant consequences for many, particularly those who have previously opted to be taxed long term on the remittance basis. The changes mean that once an individual has been UK tax resident for 15 out of the past 20 years, they will be unable to claim the remittance basis and instead will be subject to UK income and capital gains tax on their worldwide income and capital gains.
Subject to certain criteria, there will be permitted rebasing of values to 6 April 2017 in relation to foreign assets for the purposes of capital gains tax. The Government has also announced that there will be a two year window from 6 April 2017 to allow for certain accounts to be 'cleansed' which contain a mixture of income, capital and gains by separating them into different accounts thereby essentially allowing for capital to be remitted to the UK without having been "tainted" by taxable income or gains.
Those who might be affected by these changes should therefore take advice now to consider any planning which may need to be carried out in the permitted timeframe.
Inheritance Tax (IHT)
Long term non doms will now automatically be deemed domiciled in the UK for IHT if they are resident for 15 out of the past 20 years. This is a reduction from the previous 17 out of 20 years. After this time, the worldwide estate is subject to UK IHT (at a potential charge of 40%) subject to any relief or exemptions which may be available. As with those who are UK domiciled, a nil rate band is available.
Domicile of Origin
For an individual who was born in the UK and has a UK domicile of origin, extra care and planning is needed. Previously, it was possible for an individual who was UK domiciled by origin to move abroad and acquire an overseas domicile of choice. If that individual returned to the UK, it was possible (with careful planning) to maintain a non-dom status and therefore opt to be taxed on the remittance basis, assuming they had maintained close connections to the other country so as not to have lost their new domicile of choice. This has changed so that someone who is born in the UK with a UK domicile of origin, will become deemed UK domiciled if, at any time, they are tax resident in the UK and have been resident in the UK in at least one of the two previous tax years. To subsequently lose an acquired deemed domicile status, non UK residence will be required for 3 full tax years.
For those potentially affected, regard will need to be had of any IHT planning undertaken whilst non domiciled as this may no longer be effective.
UK Residential Property
There is a distinction between how non doms and UK domiciled individuals are taxed for IHT. For someone who is domiciled in the UK at the time of their death, their worldwide assets are taken into account when calculating the IHT payable on their estate. This includes property situated abroad. Non doms, on the other hand, even if tax resident in the UK, are only liable to IHT on the UK situated assets. For non doms, foreign assets are excluded from the scope of UK IHT.
Prior to 6 April 2017, a UK residential property which was owned by an overseas structure such as a foreign company controlled by a non dom, was excluded from UK IHT as the asset which the underlying non dom owner held, was a foreign asset (shares in an overseas company). This has therefore been a common way for non doms including many overseas property investors resident outside the UK, to hold UK residential property. Previously, this ensured that UK property was kept outside the scope of UK IHT and could therefore be passed on to family members on death or sold without a hefty IHT bill being applied.
This has now changed. From 6 April 2017, UK residential property which is owned through an offshore structure such as a company, trust or partnership, will be subject to UK IHT on an event which triggers IHT. This will most commonly be on the death of the underlying owner (i.e. the shareholder in the case of a company).
IHT will apply to all residential property whether the property is used by the family or whether it is owned by an investor and let to a third party at arm's length. It's worth bearing in mind though that a non-dom will still have the benefit of the nil rate band for IHT (currently £325,000) and has the ability to transfer assets to a surviving spouse or civil partner on death free of IHT (although this is restricted in the case of a UK domiciled spouse transferring to a non UK domiciled spouse).
While there may still be good reason to consider "enveloping" a UK residential property, this now needs very careful consideration and advice should always be sought on the most appropriate structure at an early stage. The ATED charge (Annual Tax on Enveloped Dwellings) also needs to be considered.
For those non doms who now opt to buy property direct in their individual name(s), it's essential that succession planning is considered as the law of the country where that property is located will govern how that property should be dealt with on death. Any existing Wills should therefore be reviewed and advice taken as to whether a new Will is required.
For anyone affected (or who may become affected) by any of these changes, it's important that advice is sought at an early stage. There is still planning which can be done. We can help you by providing UK tax advice, advising on the best structure for owning residential property, assisting you with the process of buying a property in Scotland and by advising you on your Will and Power of Attorney.