Countdown to the 2017 non-dom changes: How will you be affected?
The post-Brexit rumour that the government would shelve, or at least postpone, the planned changes to the taxation of non-doms next year was, in fact, only a pipe dream.
In a recent consultation paper, the government reiterated that they remain committed to bringing in substantial changes to legislation in April 2017.
There remains a fair bit of crystal-ball gazing, in that we still await the details of the draft legislation. However, a significant change is that Inheritance Tax (IHT) will be charged on residential properties owned by a non-UK trust or company.
What are the changes?
Currently, UK residential properties held in a trust or company incorporated outside of the UK are not liable to IHT.
From April 2017, the government will 'look through' to the ultimate beneficial owner(s) of the trust or company. Upon the death of the owner(s), the property (or their share of it) will be deemed to form part of their estate for IHT– currently charged at 40% of the value of the estate, less the nil rate band and any exemptions or reliefs.
There is a suggestion that HMRC will obtain powers to prevent the sale of a property where there is an outstanding IHT liability – meaning that there really will be no escape from the changes.
What can you do?
Beneficiaries of non-UK trusts or companies should think carefully about how this change will affect them, and in particular consider:
- Does the trust or company structure still make sense, despite the IHT liability? There may be other good reasons for holding the property this way, such as privacy.
- Is there a better way to hold the property? Perhaps it is time to think about transferring the property to someone to hold in their personal names. Previously, this would not be efficient for IHT but this is now a moot point.
- Non-UK companies may wish to 'de-envelope' – this will avoid the need to continue paying the Annual Tax on Enveloped Dwellings (ATED) as well as bearing the costs of running the company.
- Other taxes may well come into play with any possible restructure, such as Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT).
There are other changes happening too, including:
- The introduction of a "deemed domicile" rule for all taxes if someone has been resident in the UK for 15 out of the last 20 tax years. People who have spent time in the UK in the past or who plan to in the future will need to review their day count and attachments to the UK and consider how this will impact their taxation – for example, if someone disposes of an asset while non-resident but later returns to the UK within the 15/20 year period, CGT may be payable;
- A restriction of access to being 'non-dom' for people born in the UK (with a UK "domicile of origin") who later acquired a domicile of choice elsewhere. While UK resident, such people will be treated as deemed domiciled regardless; and
- New rules affecting the taxation of offshore trusts where the settlor is deemed domiciled. For example, foreign income may well become taxable if any distributions have been made to the settlor, their spouse or civil partner, minor children or minor grandchildren. There will also be an impact on CGT and IHT, although again the details are awaited.
A consultation is running now and it is hoped that a range of draft legislation will be published by the end of the year.
How can we help?
Anyone impacted by the changes should now consult with their accountants and legal advisers to start thinking about the impact these changes will have on them.
Despite the question mark over the exact detail, our message is: be prepared! Understanding the impact of the proposed changes and the options available will be the key to efficient tax-planning.