Changes To Rules For Individuals Not Domiciled In The UK
From 6 April 2017, new rules come into effect for individuals who are not domiciled in the UK. In very broad terms, a non-UK domiciled person is someone for whom the UK is not their long term home or the place they intend to be when they die.
Special tax rules apply to someone who is non-UK domiciled to reflect the fact that their permanent home is not in the UK. These tax rules were formulated over time to encourage non UK domiciled individuals to come here, many of whom were business people bringing wealth and jobs into the UK. In recent years, the rules have changed to such an extent that it seems unlikely that it is still attractive for non UK domiciled individuals to come here.
Two of the basic changes which will take place on 6 April are:
- Anyone who has been resident in the UK for 15 out of the last 20 years will be ‘deemed’ to be domiciled in the UK for all UK tax purposes. Prior to this new rule, those who had been resident for 17 out of the last 20 years would be deemed domiciled for Inheritance Tax (IHT) purposes, but could remain non-UK domiciled for capital gains tax and income tax purposes. Those who now become deemed domiciled in this way will be liable to UK tax on all overseas income and capital gains on personally held assets and the ‘remittance basis’ (which allows certain non-domiciled individuals to be taxed only on the income and gains brought into the UK) will not be available to them. UK IHT will apply to all their worldwide assets.
- From 6 April, a person who was born in the UK but who has lived abroad for many years, acquiring a domicile of choice outside the UK, will be treated as UK domiciled immediately they return to live in the UK.
Rules relating to offshore trusts
The rules relating to trusts established outside the UK for non-UK domiciled individuals are also changing.
Any trusts set up before 6 April 2017 by an individual who is non UK domiciled, which is to hold assets situated outside the UK, will be ‘excluded property trusts’ for IHT purposes and free of IHT as long as the underlying assets do not include UK residential property.
All capital gains and foreign income retained in the trust will be outside the UK tax net.
However, if a person who has become ‘deemed domiciled’ in the UK adds assets to a trust set up before 6.4.17, the trust loses this special ‘excluded property’ status. The special status is also lost if the person becomes not just ‘deemed’ domiciled for tax purposes but actually domiciled in the UK. This is a change since previously the status of the trust would remain even if the person who set it up later became UK domiciled. When this happens, all future capital gains and fresh foreign income in the trust becomes taxable on the person who set up the trust if he is then UK resident – whether or not he actually receives any benefit from the trust.
Another important change from 6 April relates to offshore trusts that own shares in an offshore company, which in turn owns UK residential property. At present, the shares are non-UK assets and not within UK inheritance tax – and the residential property is owned not by the trust but by the company, so it is also outside UK IHT. From 6 April, the shares in such structures will be treated as UK assets to the extent of the value of the UK residential property owned by it and as a result, the property will fall into the UK IHT net.
It will however still be possible to hold UK commercial property in this way.
Where an individual born in the UK has lived abroad for many years and has acquired a domicile of choice elsewhere, he may in the meantime have set up an offshore trust to hold some non-UK assets. This is the ‘excluded property’ trust mentioned above. If that individual returns to live in the UK, he will immediately become UK domiciled for all purposes and after a period of 12 months, the offshore trust will lose its excluded property status. If the individual leaves the UK to return to live abroad, the trust will reacquire its excluded status, after he has been gone for 12 months.
Some careful planning will be required by the trustees of such trusts to monitor the residence of the ‘settlor’ of the trust and to deal with the new reporting and compliance for tax that will be required.