It was no surprise, therefore, that George Osborne, in his first Budget as chancellor of a Conservative government, took the opportunity to crack down further on the beneficial non-dom tax regime.
In the event, his announcements, all to take effect from April 2017 following a period of consultation, went further than expected and effectively amounted to a three-pronged attack, aimed at both restricting the length of time for which individuals can remain non-domiciled, the available benefits and narrowing the definition altogether.
To this end, non-doms who have been resident in the UK for more than 15 out of 20 tax years will be deemed domiciled in the UK. Currently there is no limit on how long non-doms can benefit from the remittance basis of taxation, so that they are only taxed on foreign income gains brought to or used in the UK, provided the appropriate charge is paid.
Individuals are currently deemed domiciled for IHT purposes once they have been UK resident for 17 out of 20 tax years. In addition restrictions will be introduced to restrict the fairly widespread practice of non-doms owning UK homes through an offshore company/ trust structure so that they are outside the UK IHT net.
To some extent the popularity of such arrangements has been eroded in recent years due to the imposition of an annual charge on properties owned in a corporate structure but the changes announced today (8 July) will abolish the IHT benefits of owning property in this way altogether.
Finally, as anticipated, individuals who are born in the UK will no longer be able to inherit the foreign domicile of their parents.
In addition, as anticipated a new IHT free main residence allowance will be introduced in addition to the Nil Rate Band (which will remain frozen at £325,000 until April 2021) which will apply when the family home is left to the children/grandchildren.
The introduction of this new relief will be staggered so that it will be £100,000 in 2017 to 2018 rising to £175,000 by 2020 to 2021. Any unused relief can be transferred to a surviving spouse/civil partner; so that by 2020 to 2021 the maximum amount of IHT relief available to a surviving spouse will be £1m.
The allowance will also be available when individuals have downsized on or after 8 July 2015 although the precise mechanism will be consulted upon. The relief will, however, only be fully available on estates with a net value of up to £2m and thereafter the benefits will be tapered away and disappear altogether for estates worth more than £2.35m.
Although many households will benefit, the new allowance will undoubtedly add an additional layer of complexity to the IHT regime.
Jenny Wilson-Smith, lawyer for the private client & tax department, Boodle Hatfield
