John Goodchild of Pemberton Greenish takes us through the chancellor's big changes
As many will already know, the chancellor announced significantly tougher rules for non-domiciled individuals (non-doms) which will be effective from 6 April 2017. Broadly, these will be:
> A new 15 out of 20 year deemed domicile rule for /all taxes/ ('the 15/20 year rule');
> A new special deemed domicile rule for returning UK domiciliaries ('the returning dom rule'); and
> A new 'look through' rule which will charge UK residential property to inheritance tax regardless of whether it is held indirectly by a structure created by or for a non-dom.
The 15/20 year rule
This new rule will focus on how many years you have been UK tax resident, so very wealthy non-doms will almost certainly plan very carefully to try to ensure non-residence in order to preserve the remittance basis (they only pay tax on money from abroad they bring into the UK). Consequently, residence will become a real battleground. And this will not just involve the relatively new statutory residence rules, introduced on 6 April 2013, but also the old opaque law on tax residence.
Some non-doms may work very hard to preserve their residence status in another country if that will result in them being able to claim treaty relief against UK income tax and capital gains tax. (Treaty relief for IHT is tricky as there are relatively few treaties.)
If a non-dom becomes non-resident before 6 April 2017 they will not be caught by the new rule. However, once a non-dom is governed by the new rule it will be more adhesive than the current IHT 'run-off' rule.
> Becoming non-resident should break liability to income tax and capital gains tax immediately since residence is a pre-requisite for liability to those taxes on foreign income and gains generally (except in relation to UK residential property).
> But there will now be a five-year run-off period during which a departing non-dom is subject to IHT on a worldwide asset basis. Departing non-doms will need to consider how they cover the IHT risk during the five year run-off period. Maybe life insurance will have a role.
Trusts set up before the individual becomes deemed domiciled will enjoy IHT 'excluded property' status – except in relation to UK residential property (see below).
The government statement that non-doms will be taxed on income and gains within trust structures by reference to benefits received suggests that ownership of assets by offshore trusts may be advantageous.
The returning dom rule
This is a new rule, stating that a person with UK domicile of origin who also has UK tax residence on or after 6 April 2017 will be deemed domicile for all tax purposes. It really raises the stakes on the domicile of origin issue.
Establishing an individual's domicile of origin isn't always straightforward but the importance of getting it right on the domicile of origin or resuming non-residence before 6 April 2017 is reinforced by two factors. First, there is potentially a five-year run-off period before a returned non-dom can throw off that status by becoming non-resident again.
Second, there can be a serious knock-on effect on trusts created while actually not UK-domiciled. Trusts which were previously outside the scope of IHT will come within it. Also, a returned non-dom settlor will be taxed on all income and gains within the structure on an 'arising' basis.
The new IHT 'look through' rule for UK residential property
Once again, UK residential property has been singled out for special treatment and the IHT legislation will be amended so that it 'looks through' offshore companies and other structures so that the underlying UK residential property is brought into charge.
This loss of protection against IHT may encourage some families to consider 'de-enveloping'. But, there may be tax costs involved in that. The Government has said that it will consider the costs involved in de-enveloping during the consultation but we will have to wait and see what relief, if any, they provide.
Families will obviously need to reconsider their strategies for dealing with IHT in relation to valuable UK residential property.
John Goodchild is a partner and head of private wealth at Pemberton Greenish