Following a further period of uncertainty, given the removal of the draft legislation affecting the taxation of non-UK domiciled individuals from the March Finance Bill 2017, followed by the snap Election, the Government reintroduced a second Finance Bill in early September 2017, the Finance (No.2) Act 2017, which received Royal Assent on 16 November.
Although there had been numerous calls for these rules to be delayed given both their complexity and removal from the first 2017 Finance Bill, both the nature and timing of these changes are finally clear. Briefly, these changes can be summarized as follows, with the last two being the focus of this article:
• For long-term residents, the introduction of a deemed domicile rule for all tax purposes for those who have lived in the UK for 15 of the last 20 tax years
• The ability to rebase foreign sited assets for capital gains tax purposes for certain deemed domiciled individuals
• An ability to cleanse mixed funds for non-doms who have previously claimed the remittance basis
• Certain protections for offshore trusts as well as tainting provisions
• Incremental measures for those born in the UK with a UK domicile of origin to treat them as UK domiciled, should they have left the UK, established trusts, and returned, having acquired a domicile of choice elsewhere• The introduction of ‘look through’ Inheritance Tax rules where UK residential property is held through an offshore company.
Firstly, what about those born in the UK with a UK domicile of origin, who move overseas – could they be affected? It has always been a challenge to be certain that a domicile of choice overseas fully removes one’s self from a UK domicile of origin. Indeed, the common law process involves the severance of all links, and intention to remain in one’s new home indefinitely. With HMRC having withdrawn the facility to secure even a provisional ruling, certainty is not assured. The situation is complicated by the fact that moving away from the location where a change of status has (hopefully) been achieved is effectively undone should that person choose a new home in another country, even if still outside of the UK. This situation is in fact not new. What is new, and with retrospective effect, is that any trust structure that they may have set up while they were non-resident and non-domiciled will not benefit from any favourable tax treatment (such as ‘excluded property’). This rule also applies for any returning non-dom who was born in the UK and who may have returned to the UK at any time before 6 April 2017.
With this in mind, and given the difficulty in confidently changing one’s domicile in the first place, and bearing in mind a change couldn’t have taken place if a return was always intended, planning that a UK domicile has been retained is likely to be the safest approach. Strategies here could include gifts to trust out of normal expenditure, loan trusts, discounted gift trusts and lifetime reversionary interest trusts for those who want a combination of access, control and IHT efficiency on their investments.
Secondly, non-domiciled individuals who held UK residential property through an offshore company (enveloped property) effectively removed IHT until legislation changed in April this year. Such structures would usually be regarded as “excluded property” and were widely and appropriately used. There is no exemption for let properties and no de-minimis amount, so all residential property is now included.
Furthermore, IHT now applies on the value of UK residential property owned by an offshore company following the death of the owner of the company shares, a gift of the company shares into trust, the 10 year anniversary of the trust, and distribution of the company shares out of trust. Also, the death of the donor within 7 years of having given the company that holds the UK property away to an individual and the ‘gift with reservation’ rules need to be considered. Despite calls for a ‘de-enveloping relief’, to mitigate or reduce taxation on companies now ineffective, no relief has been offered.
One planning strategy for such enveloped properties could be for the property shares to be gifted to a VUL (Variable Universal Life) insurance bond. The transfer should incur no UK tax liabilities. Life cover in excess of the property value by 40% should be included to create liquidity and fund the IHT upon the client’s death. The rental yield from investment properties flowing through the company and into the bond could potentially sustain the life cover. Where the property is for personal use and not rented out, further injections of capital might be needed. Given the new additional problems of holding such a property company through a trust, Isle of Man VUL providers can provide a policy nomination which is effective upon death in transferring ownership expediently, without the tax consequences of a trust, or delay, cost and lack of confidentiality associated with a will. For those serious about leaving UK property without an attendant 40% liability to tax, this has already proven to be an appealing option.