On 6 April 2017 we saw significant changes to the taxation of non-UK domiciled individuals ('non-doms'). The key changes included the extension of UK inheritance tax ('IHT') to all UK residential properties and a new rule that applies to non-doms who have been resident in the UK for 15 of the previous 20 tax years and who will now be treated as UK domiciled for all tax purposes.
We summarise some of these complex rules below.
UK RESIDENTIAL PROPERTIES
Non-doms were only subject to UK IHT on their UK assets. To minimise their exposure to IHT, non-dom investors had traditionally invested in UK residential properties through offshore corporate structures. This took the value of the UK residential property outside the scope of UK IHT.
Since 6 April 2017, where UK residential property is held in a non-UK company, the company is effectively tax transparent and the underlying property is exposed to IHT. This is the case whether the company is owned by individuals or trustees of an offshore trust.
Clients are advised to dismantle (or "de-envelope") the company and have the property owned directly by family members or a trust. This is because holding a UK residential property using a company may no longer be UK tax efficient post-6 April 2017. However, de-enveloping the existing structure can itself trigger significant UK taxes and the position needs to be considered carefully to minimise any UK tax liabilities.
LONG TERM UK RESIDENT NON-UK DOMICILIARIES
Previously, non-doms were able to live in the UK indefinitely and still claim to be 'non-UK domiciled'. This enabled them to be taxed on the favourable remittance basis, which meant they were only subject to UK income tax and capital gains tax on their UK source income and capital gains.
They were also able to have been subject to UK income tax and capital gains tax on their non-UK source income and capital gains but only if they elected to 'remit' them to the UK. The term 'remit' is very wide, but generally means where they, or people connected to them, bring the money – or bring assets bought with the money – to the UK or otherwise benefit from it in the UK.
Since 6 April 2017, non-domiciled individuals who have been resident in the UK for 15 of the previous 20 tax years will be treated as UK domiciled for all tax purposes. This means, from the start of their 16th year of being UK tax resident they will be liable to:
- inheritance tax on their worldwide estate; and
- income tax and capital gains tax on their worldwide income and capital gains on an arising basis.
Individuals who are caught by these rules should take advice to consider what steps they can take to minimise their exposure to UK tax.