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Changes to UK’s domicile rules

The UK’s Summer Budget of 2015 included measures to remove the “fundamental unfairness” in the non-domicile regime. Following a period of consultation, we now have a good idea of what the position will be from April 2017. While the reform is mainly aimed at foreign nationals living in the UK, it also affects Britons leaving the UK or returning after living abroad.

Your domicile status is the key factor in determining if you are liable to UK inheritance tax on your worldwide assets (assets in the UK are always liable). If you are a UK domicile, or you are deemed domicile under HM Revenue & Customs (HMRC) rules, your estate is liable to tax at 40%, above the tax free allowance of £325,000.

Whether you are leaving the UK or returning to live there again, you need to understand the implications of the reforms for your inheritance tax planning and seek advice on how to best structure your assets.

The main consultation has ended and further guidance and consultations regarding this issue have been released by HMRC. The following is not yet final, but it is likely to be the position from April 6, 2017.

1. The deemed UK domicile period will be extended to five years.

2. Those with a UK domicile of origin returning to live in the UK for more than a year will be deemed to be UK domiciled even if they have an actual domicile in a different country.

3. Non-domiciles living in the UK will be deemed to be UK domiciled once they have been UK resident for 15 out of the last 20 UK tax years.

4. If a UK domicile acquires a domicile of choice outside the UK and subsequently settles a trust whilst non-UK domiciled, the excluded property rules will not apply if they resume residence in the UK.

5. Where a UK residential property is held within a corporate structure (known as an ‘envelope’), this will be exposed to UK inheritance tax from April 6, 2017. No relief will be given for de-enveloping.

Domicile issues for expatriates

Currently, if you have a UK domicile of origin and have left the UK to live abroad, you can adopt a ‘domicile of choice’ in your new country. You need to consider your new country of residence as your permanent home and cut various ties with the UK.

Even if you adopt a domicile of choice outside the UK, HMRC will continue to treat you domiciled in the UK for inheritance tax purposes – ‘deemed domicile’ – if you were domiciled in the UK in the previous three years, or you were resident in the UK for income tax purposes for at least 17 out of the last 20 years ending with the year in which you died.

This three-year period increases to five years from April 2017. So it will take you at least five years before you can escape UK inheritance tax.

This also means that if you return to the UK for anything more than one year, if you had a UK domicile of origin you will be deemed UK domiciled again and back in the inheritance tax net.

If you had settled a trust while you were non-UK domiciled, it will then be treated as a UK domiciled trust.

This could undo previous inheritance tax planning, so if you are thinking about resuming UK residence, you should ideally review your position prior to returning. You should seek advice as soon as you decide to move back so that any restructuring of assets can be done tax-efficiently.

Enveloped UK residential property

Where a UK residential property is ‘enveloped’ in a corporate structure, it will become liable to UK inheritance tax from April 6, 2017.

How the charge will be collected is not yet clear, although the law will include a liability on any person who has legal ownership of a property, which would include the directors of a company that owns the property. It is likely that where a trust is involved, the liability may fall on the trustees.

There will specifically be no tax relief on de-enveloping such properties, so when weighing up the pros and cons of keeping the structure, you need to consider all of the costs involved in de-enveloping.

Domicile is a complex area of law, particularly for inheritance tax purposes. If you get it wrong, your heirs could be faced with a large and unexpected tax bill. You need to seek specialist, professional advice to ensure to determine what the best solution is for you and your family.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.

By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. |