There was little discussion at the time about what measures a Conservative government might introduce so George Osborne took some by surprise in his recent budget by announcing reforms to the taxation of UK resident but non-domiciled individuals (RNDs) and overseas owners of UK residential property through the proposal of two measures due to take effect on 6 April 2017.
The first measure proposed says that after being UK resident for 15 tax years, RNDs will be treated as UK ‘deemed domiciled’ for all three major taxes – IT, CGT and IHT. After this deadline, their entire worldwide estates are subject to IHT and the remittance basis of taxation will no longer be available for non-UK income and gains.
This still allows a significant period of time during which non-UK assets can be shielded from UK tax. However the importance of good planning will increase. For example, the 15-year period can also be restarted if the RND spends five years living outside the UK.
Second measures
The second measure says that UK residential property will now be subject to IHT no matter how it is owned. The rule will affect many of those who hold properties indirectly, for example via a company. These means a £5 million flat in Eaton Square, for example, will now be subject to IHT of up to £2million.
Fortunately these proposals are not the wholesale change in tax rules that the Labour party had proposed before the last general election but instead continue a pattern of incremental tax changes. Individuals affected by these changes have until 6 April 2017 to plan and the government is having to consult on the detail of how the proposals will be implemented.
However, the changes are likely to affect a significant number of the residents and properties in the UK’s most desirable areas, whether they are full time residents, second home owners or properties held by investors. For some, living in the UK will become more expensive and the potential costs of owning UK residential property continue to rise.
RNDs, and non-resident owners of residential property, should prioritise a review of their affairs and seek tax advice so they are best positioned to make changes, if necessary, once the detail of these proposals becomes clearer. These rules make clear that you should review any tax advice you rely on regularly. Advice given only two or three years ago may now be very out of date.
