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Significant changes are in prospect to the taxation treatment of UK residents who are domiciled outside the UK at general law and the inheritance tax (IHT) treatment of UK residential property. What follows is a summary of the present position so far as we understand it and is subject to enactment of the relevant legislation.
Historically UK taxation has depended to a degree on the “domicile” of the taxpayer with favourable treatment for those domiciled outside the UK at general law.
Non-UK assets of non-UK domiciles have been “excluded property”, outside the scope of IHT.
For many years certain provisions have deemed a long-term UK resident to be domiciled within the UK for IHT purposes and once caught world-wide assets are within the scope of IHT.
Prior to becoming deemed domiciled within the UK it is possible to create a trust to hold non-UK assets, unit trusts and OEICS which will be “excluded property” and outside the scope of IHT even if the settlor later becomes domiciled within the UK at general law or under the deeming provisions.
The Government proposed in the July 2015 Budget that deemed domicile should from 6 April 2017 apply for all taxation purposes i.e. for income tax and capital gains tax (CGT) too. The relevant period is to be 15 out of twenty years (as compared with the current 17 out of twenty years for IHT purposes).
The New Rules
On 18 August 2016 a further Consultation Document was issued (and promptly reissued the next day) and the current proposals are as follows:
From 6 April 2017 UK residents who have been tax resident within the UK for at least 15 out of the previous 20 tax years will be deemed domiciled within the UK for the purposes of income tax, CGT and IHT. In other words they will be caught at the beginning of the 16th year of residence.
Leavers who have acquired a deemed UK domicile will have a four-year tail (as now) for IHT purposes and a six-year tail for income and CGT purposes. However, should they resume UK residence in year five they will once again be deemed domiciled for IHT purposes.
UK Residential Property
Historically non-UK domiciles would typically shift the situs of UK property assets by having them owned by non-UK companies, the shares in which were “excluded property” in the hands of the owner and outside the scope of IHT.
If becoming deemed domicile was a concern the shares would be held by trustees so that they would remain “excluded”.
From 6 April 2017 all UK residential property is to fall within the scope of IHT.
In the case of corporate ownership the value of the shares attributable to the UK residential property will potentially be taxable.
Occasions of charge will include:
- The death of the owner with shares in his free estate
- The death of a life tenant with an “estate” interest in possession in a trust owning shares
- The death of a person with shares treated as forming part of his estate under the reservation of benefit rules
- The death within seven years of the previous owner if the shares are the subject of a lifetime gift
- The transfer of shares during lifetime to a relevant property trust
- Ten-year charges on relevant property trusts
- Proportionate or “exit” charges on assets leaving the relevant property regime.
Debt may reduce the taxable value but the Government have said that connected party loans will not be deductible.
It had been anticipated that some tax relief would be afforded to “de-enveloping” operations designed to extract the property from corporate structures but the Government has announced that no such relief is to be forthcoming.
HMRC are to have the power to impose a charge on indirectly-held property when they are aware that an IHT liability has arisen.
Some clients may have to continue paying the annual tax on enveloped dwellings (ATED) as a cheaper alternative to “de-enveloping” even though there will no longer be a prospective IHT saving.
Note that gifts of shares in a non-UK company prior to 6 April 2017 will be transfers of “excluded property” without the normal seven-year survival requirement that applies to PETs.
Terry Jordan, BKL Tax, firstname.lastname@example.org