Reforms to the Taxation of Non-UK Domiciled Individuals

These are to take effect from 6 April 2017 and are as follows:

• Non-UK domiciled individuals with a domicile of origin outside the UK will be deemed to be domiciled in the UK for all tax purposes - income tax, capital gains tax (CGT) and inheritance tax (IHT) on all overseas assets - after they have been UK resident for 15 out of the last 20 tax years.

Currently someone is deemed domiciled for IHT laws if they have been UK tax resident in at least 17 out of the previous 20 years.  They will no longer be able to use the remittance basis charge from their sixteenth year of residence.

• Individuals who are domiciled in the UK at the date of their birth will revert to a UK domicile for tax purposes whenever they are resident in the UK, even if under general law they have acquired a domicile in another country. The government will consult on whether split years of UK residence will count towards the 15 years for this purpose (as with the current IHT rule) or whether complete tax years of residence are required.
• Non-UK domiciled individuals will no longer be able to shelter UK residential property from IHT by holding it through an offshore company or other offshore vehicle. This will apply to property held through companies owned by both individuals and trustees.

Current Position

Individuals who are domiciled in the UK are liable to IHT on all their worldwide assets, subject to reliefs and exemptions. However, individuals who are neither UK domiciled nor deemed domiciled for IHT purposes (non doms) are only subject to IHT on assets they own in the UK. Foreign assets owned by non-domiciliaries are excluded from the scope of IHT (such assets are referred to as 'excluded property').

As IHT is only charged on UK property held by non-doms, it is relatively easy for non dom to own property through an offshore vehicle so as to secure an IHT advantage on UK property in a way not available to a person domiciled in the UK. This is referred to as ‘enveloping’ the property: the offshore company owns the UK property beneficially and the individual owns the shares of the company.

Proposal

The government intends to amend the rules on excluded property so that trusts or individuals owning UK residential property through an offshore company, will pay IHT on the value of such property in the same way as UK domiciled individuals. The measure will apply to all UK residential property whether it is occupied or let and of whatever value.

IHT will be imposed on the value of UK residential property owned by the offshore company on the occasion of any chargeable event. This would include:

• The death of the individual wherever resident who owns the company shares
• A gift of the company shares into trust
• The 10 year anniversary of the trust
• Distribution of the company shares out of trust
• Death of the donor within 7 years of having given the company holding the UK property to an individual
• Death of the donor or settlor where he/she benefits from the gifted UK property or shares within years prior to his/her death

Proposed changes builds on the existing measures introduced to discourage ownership of UK residential properties through companies:

• In March 2012 – the government introduced a 15% SDLT on corporate purchases of residential property where purchase price was more than £2million (this threshold was subsequently lowered to £500,000 from March 2014)|
   
• In April 2013 - Annual Tax on Enveloped Dwellings (ATED) came into effect to tax UK residential properties held through corporate structure worth more than £2million (this threshold was reduced to £1million from April 2015 and will be further extended to residential properties valued at more than £500,000 from 1 April 2016).
   
• ATED was introduced in Finance Act 2013 to ensure that people enveloping residential people in corporate vehicles pay a price for that privilege by a higher SDLT rate on entry into the corporate structure and ATED. It is targeted only at residential property held through a company where it is occupied rather than let out to an unconnected person (properties let to unconnected parties qualify for relief and are therefore exempt from the ATED charge).
   
• In April 2015 – all non-residents are now within the CGT regime to the extent that they own residential property that is subject to ATED (whatever its value and nature – there are no reliefs except for principal private residence (PPR) – non-residents will be able to claim relief on the sale of their main or only UK residence, but only in respect of gains attributed to tax years during which the individual has stayed overnight on at least 90 occasions in the property.)

Under the present IHT regime many non doms would not consider de-enveloping because the cost of ATED does not outweigh the current benefits of the envelope and in the case of let property, ATED does not apply anyway.

The proposed IHT charges on top of the ATED charges may lead to an increase in non-doms taking properties out of corporate structures and putting them into personal ownership known as 'de-enveloping'.  Whilst de-enveloping may now be more attractive, there are likely to be CGT and potentially other tax issues in taking the property out of the corporate structures.

CGT implications

Where a property which is subject to ATED is sold or transferred out of the company, it may be subject to ATED-related CGT at 28%. This would only apply to a gain arising on the disposal based on the number of days the property was subject to ATED as a proportion of the relevant ownership period (from 6 April 2013 to the date of disposal).

The extent that any gain by the offshore company is not taxed to ATED-related CGT it may be subject to Non-Resident CGT attributable to any chargeable gain since 6 April 2015.

SDLT

If the property is de-enveloped, and the property is the only asset and there are no liabilities other than the share capital, HMRC has said in its recent guidance that no SDLT will be charged. However where the property is subject to a loan, there may be SDLT implications.