TT261: Inheritance Tax (IHT) and the Non-domicile rules

The April Finance Act 2017 was pruned due to the untimely General Election, meaning that much of the legislation which was expected to come into force from 1 April 2017 has not been legislated for.

As expected, the rule changes in respect of the non-doms will go ahead, although there is no clarity on the final legislation, which will make provision (including with retrospective effect) for tax purposes:

  • for and in connection with deeming individuals to be domiciled in the UK; and
  • in relation to settlements with a settlor domiciled outside the UK at any time.

The key changes are:

  1. Individuals who are not domiciled in the UK will be deemed to be UK domiciled for tax purposes if they were resident in the UK for 15 of the past 20 tax years.
  2. A person born in the UK with a UK domicile of origin will be deemed UK domiciled when they resume UK tax residence if they have previously left the UK and acquired a domicile of choice in another country.
  3. All UK residential property owned by a non-domiciled person will come into charge for IHT even if held through an offshore structure.

A non-domiciled individual who is resident in the UK has the option of being taxed on worldwide income and gains or on the remittance basis. With effect from 6 April 2017 individuals that are deemed domiciled will pay UK tax on worldwide income/gains on the arising basis and not on the remittance basis.

There has been no change in the Remittance Basis Charge which remains at £30,000 for residence in the UK for 7 out of the previous 9 tax years and £60,000 for residence of 12 out of previous 14 tax years.

The individual must take steps now to ensure the different elements within mixed fund bank accounts are separated, thereby allowing clean capital to be remitted to the UK in priority to income and gains.

Charging IHT on UK residential property

 UK residential property owned indirectly through offshore structures will be removed from excluded property for UK IHT purposes and IHT will apply whether the overseas structure is owned by an individual or trust.

Where a non-domiciled individual is a member of an overseas partnership which holds a residential property in the UK, such properties will no longer be treated as excluded property.

The proposed changes should mean that the value of UK residential property is charged to UK IHT when it is passed on by an individual no matter how that residential property is held. However, any debts that relate exclusively to the UK residential property will be deductible against the value of that property charged to IHT.

IHT and Residence Nil Rate Band

 The new IHT Residence Nil Rate Band (“RNRB”) has been introduced from 06 April 2017. This is in addition to an individual’s own nil rate band of £325,000 and conditional on the main residence being passed down to direct descendants.

This will allow people to pass on a property to their children or grandchildren and save them thousands in taxes.

The RNRB will start at £100,000 and will increase by £25,000 each tax year until 2020.

The additional threshold will be reduced by £1 for every £2 that the value of the estate is more than the £2m taper threshold.

Any unused RNRB is also transferrable between spouses and civil partners on death.

This means that by 2020/21, couples could escape IHT on up to £1m of their wealth which they can pass on tax free to their children or grandchildren because each spouse or civil partner will have a nil rate band of £325,000 plus a RNRB of £175,000.

So if you are a non-resident individual who has been in the country for 15 out of the last 20 tax years, use caution and check the IHT rules as they apply to you.

Talk to Barnes Roffe today
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