Friday Highlight 

How to help your non-dom clients with IHT

How to help your non-dom clients with IHT

They say change brings opportunity, so the optimists among you can rejoice (maybe) because, thanks to the present government, a whole new range of clients need your advice (perhaps)

Why the equivocation? Well, until recently, it seemed certain that changes affecting the taxation of non-UK domiciliaries (non-doms), which were included in the March 2017 version of the Finance Bill 2017, would come into effect on 6 April 2017, as planned.

Then the election was announced. Suddenly the imperative was to get a semblance of the Finance Bill onto the statute books before parliament dissolved.

Something had to give and that something, among other things, was the removal of all the proposed non-dom tax changes legislation.

However, the government has confirmed its intention to bring forward the same provisions in a new Finance Bill, should it be returned to power; so if there has been a reprieve, it may be only temporary.

In fact, the prevailing view is the reprieve is illusory because the reintroduced provisions will have retrospective effect from 6 April 2017.

And therein lies the opportunity, because the new law would see all non-doms liable to inheritance tax (IHT) on their UK residential property. 

When are non-doms exposed to IHT?

Generally speaking, non-doms are only exposed to IHT on their personally held UK situated assets. In addition, every non-dom benefits from the IHT nil rate band, meaning that currently no IHT is payable on the first £325,000 of UK situated assets on death, assuming no lifetime gifts of UK situs assets.

UK residential property is a UK situs asset, of course, but in the past, non-doms wishing to own UK residential property would simply purchase it through an offshore company.

By interposing the company between themselves and the UK property, their ownership was of the shares of the offshore company – a non-UK situs asset not liable to IHT – and so, on the non-dom’s death, the UK property passed free of IHT to the next generation.  

What about long-term UK resident non-doms?

The position of long term UK resident non-doms is slightly different. Once they had been resident in the UK for 17 out of the past 20 UK tax years (the new rules propose a reduction to 15 out of the previous 20 UK tax years), they become deemed UK domiciled for IHT purposes, regardless of what their actual domicile is.

Ignoring old estate duty double tax conventions, which can save the day in a few limited circumstances, deemed UK doms are liable to IHT on their worldwide, personally held assets. 

Non-UK situated assets held in offshore trusts where the trust was created, and the transfer occurred, prior to deemed UK dom status starting, continued to be sheltered from IHT.

Offshore companies

If the government’s changes come to pass, the use of offshore companies to own UK residential property will no longer provide an IHT shelter. This will be the case for all non-doms, regardless of whether they are UK resident or not, or are deemed UK domiciled or not.