UK Domicile and residential property rules are changing as of April 2017 and many people could be caught in the tax trap unless they act quickly.
Whilst the changes proposed for 2017 are still out for consultation, it is widely accepted that the timeframe for being deemed domiciled in the UK will be shorter.
It is also highly likely that all UK properties, regardless of whether or not they’re held offshore, will be liable to inheritance tax. Let’s take the timeframe for being classed as a UK resident for tax purposes, first.
For a long time it has been the case that if you were resident for 17 out of the past 20 years you become deemed domiciled in the UK for inheritance tax purposes. That’s now changing to 15 out of 20 (i.e. it will apply from the start of year 16.
Affected individuals who are UK resident will be taxable on worldwide income and gains as they arise and will be within the scope of worldwide inheritance tax on their worldwide assets. This is being referred to as the long-term resident rule.
There is to be no transition period for those already in the UK and being deemed UK domicile will only be shed by leaving the UK for five tax years. What that does mean though is that returning non-doms (i.e. those who have been away for at least five tax years) will then be able to spend an other 15 years in the UK before becoming deemed domiciled.
The other change is known as the returning resident rule. This concerns individuals who moved away after being born in the UK; upon their return they will automatically be deemed to be UK domiciled.
‘Returning residents’ considering a move back to the UK should take the opportunity to assess their structures. It is vitally important to set up the structure before moving to the UK though to avoid any tax pitfalls.
The second major change concerns the way inheritance tax is treated on UK residential property.
We know that UK residential properties of £500,000 and over will be liable to ATED (Annual Tax on Enveloped Dwellings) following changes which are due to come into force in April this year. This will not apply to residential properties let out on an arm’s length agreement with no restricted persons residing in the property.
However, the UK Government is going a step further for April 2017 and is likely to introduce rules on excluded property, so that trusts or individuals owning UK residential property through an offshore company or other vehicle will pay inheritance tax on the value of the property in the same way UK domiciled individuals do.
Inheritance tax will, therefore, be imposed on the value of UK residential property owned by the offshore company and would include:
- The death of the individual wherever resident who owns the company shares
- A gift of the company shares into trust
- Distribution of the company shares out of trust
- The ten year anniversary of the trust
- The death of the donor within seven years of having given the company that holds the UK property away to an individual
- The death of the donor or settlor where he benefits from the gifted UK property or shares within seven years prior to his death.
In addition, the scope of the inheritance tax charge will have no minimum charge, as in the case of ATED, and various ATED reliefs will not apply. As such all residential property of any value above available nil rate bands will be subject to IHT, without any reliefs available.
We will need to see how the consultation process plays out, but alterations to the classification of being UK domiciled and the inheritance tax changes on residential properties are coming in 2017 regardless of how they might be tweaked.
Whilst both the domicile and property changes are cause for concern, they do give people who may be caught in these rules the opportunity to look at their assets and reassess them. And we would advise that they take the time to do so before it is too late.
Director of Alex Picot Trust
If you want to know more about how you can avoid this tax trap call us on 01534 753753.