Monday, August 22, 2016
The UK Government has published further details of its proposal to amend the inheritance tax rules for non-domiciled individuals.
The changes were announced at the 2015 Summer Budget, and will prevent non-doms from escaping a UK inheritance tax (IHT) charge on UK residential property through use of an offshore structure, and bring to an end the permanent non-dom status for tax purposes.
According to the consultation document, "individuals who are non-domiciled in the UK currently enjoy a significant advantage over other individuals for IHT purposes." UK-domiciled individuals are liable to IHT on their worldwide property, whereas non-doms are only liable on property that is situated in the UK.
Any residential property in the UK owned by a non-dom directly is within the charge of the IHT. However, the Government said that it is "standard practice for such individuals to hold UK residential properties through an overseas company or similar vehicle. Where this is the case, the property of the individual consists of overseas shares which will be situated outside the UK and are therefore excluded from IHT."
The Government plans to bring residential properties in the UK within the charge to IHT where they are held within an overseas structure. This charge will apply both to individuals who are domiciled outside the UK and to trusts with settlors or beneficiaries who are non-domiciled. The changes will come into effect from April 6, 2017.
The Government will remove UK residential properties owned indirectly through offshore structures from the current definitions of excluded property provided by the Inheritance Act 1984. Shares in offshore close companies and similar entities will no longer be deemed excluded property if, and to the extent that, the value of any interest in the entity is derived, directly or indirectly, from residential property in the UK. Where a non-dom is a member of an overseas partnership that holds a residential property in the UK, such properties will no longer be treated as excluded property for IHT purposes.
The Government intends that the new charge should be based as far as possible on other definitions of residential property that currently exist within tax legislation.
The consultation will close on October 20.