For non-UK domiciled clients, there are two key sets of changes.

The first relates to the availability of the remittance basis and the second to the inheritance tax (IHT) treatment of UK residential property. We deal with each in turn.

1. Domicile

Current position
Currently, a UK resident individual not domiciled in the UK can use the “remittance basis” of taxation for income and capital gains purposes and (unless deemed domiciled) is only subject to IHT on assets in the UK.

  • The remittance basis means they are only taxed on non-UK income and gains that are brought to the UK. This is accessed without charge for the first seven years of residence.
  • After seven years there is a £30,000 annual charge, after 12 a £60,000 annual charge and after 17 years a £90,000 annual charge.
  • For IHT purposes, after an individual has been UK resident for 17 out of 20 years they become “deemed domiciled”. This means their worldwide estate is subject to IHT.

The changes

  • From April 2017, the remittance basis of taxation will cease to be available for individuals who have been UK resident for more than 15 years out of the past 20 years. A person will also become UK deemed domiciled for IHT at the same time, replacing the 17 out of 20 rule with the 15 years out of 20 rule.
  • New rules will also be introduced to target individuals who were born in the UK to UK domiciled parents but who leave the UK and acquire a foreign domicile.  These individuals will not be able to maintain that foreign domicile if they resume UK residence in the future (i.e. their UK domicile will automatically return when they resume UK residence regardless of their links to other countries).

Initial observations

  • For the first 15 years of residence, the remittance basis is still available. We do not expect the annual charges will change, but the £90,000 bracket will no longer apply.
  • For clients who are already resident, their previous years of UK residence will count towards the 15 years, i.e. they may automatically be barred from using the remittance basis on 6 April 2017 if they have been in the UK for more than 15 out of 20 years on that date.
  • The time it takes to “re-set” a domicile clock by leaving the UK will increase from 4 years to 5 years.
  • The change does not affect common law domicile and the impact this has on succession.

2. IHT treatment of UK residential property

Current situation
As mentioned above, individuals who are not UK domiciled (and not yet deemed domiciled) are subject to IHT only on any property situated in the UK. If, however, they held UK property through an offshore company or certain other structures, it was possible to “block” IHT from applying.
This use of offshore companies led to the Government introducing the annual tax on enveloped dwellings (ATED) two years ago. ATED was intended to discourage individuals from using offshore corporate structures for residential property by imposing an annual charge on those corporates. Importantly, the structures still “blocked” IHT.

The change
From April 2017, all UK residential property will be within the IHT net whether held directly or indirectly in any type of structure (apart from certain structures such as diversely held companies). It appears that trust/debt arrangements will also be caught.

Initial observations

  • Offshore companies will no longer give protection from IHT in relation to UK residential properties. This is even if the property is let.
  • The rules will apply to all non-doms, including those who are non-UK resident.
  • The new rules do not apply to commercial property or other UK assets. They will continue to have IHT protection if held through certain offshore structures.
  • The usual reliefs from IHT may apply so, for instance, a transfer to a spouse will qualify for relief.
  • However, there is a trap here. If a trust/company structure has been used and the settlor is a beneficiary of that trust, the spouse exemption is unlikely to apply.
  • There will be additional legislation to ensure reporting and enforcement.
  • For those individuals who decided to keep their properties in offshore structures and now pay ATED, the news that the structures no longer provide IHT protection will be unwelcome. Worse still, they may face a capital gains charge on unwinding the structures. But the announcement indicates there will also be a consultation on the costs of extracting properties from these offshore structures.

It appears that ATED will continue to apply once this change is brought into force, notwithstanding the extension of IHT to residential properties held in offshore structures.

If you have any queries with regards to the above please do not hesitate to contact us at enquires@wiltongroup.com.