It is currently 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 law, 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.
At present, for IHT, an individual who is non-UK domiciled will be deemed UK domiciled after living in the UK for 17 out of the 20 tax years. This is for IHT only.
The Chancellor has announced that from 6 April 2017, individuals will become 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.
What does this mean?
Income and Capital Gains Tax
Currently non-doms are able to 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 presently opt to be taxed on the remittance basis. The changes mean that once an individual has been UK 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 worldwide income and capital gains.
Inheritance Tax (IHT)
An individual who has remained non UK domiciled will now (from April 2017) automatically be deemed domiciled in the UK for IHT if they are resident for 15 out of the past 20 years (a reduction from the 17 years at present). This means that after this time, the worldwide estate is subject to UK IHT (a potential charge of 40%) subject to any relief which may be available. As with UK domiciled individuals, a nil rate band is available.
Domicile of origin
For an individual who has a UK domicile of origin (which is acquired at birth) extra care and planning is needed. At present, it's possible for an individual who is UK domiciled by origin to move abroad and acquire an overseas domicile of choice. If the individual returns to the UK, it is possible to maintain a non-dom status and therefore opt to be taxed on the remittance basis, assuming they have maintained close connections to the other country so as not to have lost their new domicile of choice. This is changing so that they will not be able to claim non-dom status when they return to the UK to live. Care will be needed in relation to any IHT planning undertaken while abroad as it may not be effective on a return to the UK (for example if offshore trusts have been established while the individual was non UK domiciled).
UK residential property - IHT treatment
At present, non-doms (assuming they are not deemed domiciled) even if they are resident in the UK, are only subject to IHT on assets they own which are situated in the UK. Overseas assets are excluded from the UK IHT net for non-doms. Currently, it is common for non -doms owning residential property to hold the property in an offshore corporate structure. The non-dom owner then does not own the property directly but rather, holds shares in that offshore company - a non UK asset and those shares are outside the scope of UK IHT. For many, this has been an effective way of avoiding paying UK IHT on death in relation to UK property.
The common use of offshore companies for this purpose has caused the government in recent years to review how such structures are taxed and over the last few years we've seen the introduction of the Annual Tax on Enveloped Dwellings (ATED) and in those jurisdictions of the UK where SDLT (stamp duty) still applies, a higher rate for residential properties being purchased in the name of a company. The government believes however, that these changes have not gone far enough and are now set to remove the IHT benefit of holding a residential property in such a structure to bring non-doms owning residential property in the UK in line with UK domiciled individuals.
As of 6 April 2017, the government intends to amend the rules so that trusts or individuals owning UK residential property through an offshore company, partnership or other structure, will pay IHT on the value of the property, in the same way as UK domiciled individuals. Unlike ATED, IHT will apply to all UK residential property whether occupied or let and whatever the value. Remember though that a non-dom will still have the benefit of a nil rate band (£325,000) and has the ability to transfer assets to a surviving spouse free of IHT.
When does the IHT charge arise?
The value of the property will be assessed for IHT on the value of the UK residential property owned by the offshore company on the death of any individual who owns the company shares, wherever he or she may be resident. There are other events which could trigger the charge such as gifts of the shares into trust or where the individual who owns the shares gifts those shares and dies within 7 years.
The changes announced demonstrate that more care needs to be taken when non-doms are considering coming (or returning) to the UK to live or where they are considering purchasing residential property in the UK. For those non-doms who currently hold property in the UK in an offshore company structure, thought will be needed to consider whether the property should be taken out of that structure, particularly if the property is currently subject to an annual ATED charge or may be in the future. This needs to be balanced with any possible capital gains tax (CGT) charge which may arise on such a transfer. Given that non residents only became subject to CGT from April this year and that there is the option to use the market value as at April 2015 as the base cost, a transfer sooner rather than later to minimise any CGT charge may well be advised. The government has advised that it will consult on the proposed changes with the consultation document expected in the next few months so it is hoped there will be some further clarity shortly.
As with UK domiciliaries, there is still planning which can be done and the key to this is to do so at an early stage. We can help you through the process of buying a property in Scotland, advising on the tax implications and planning opportunities which arise.