On Friday 19 August 2016, the Government published its long-awaited follow-up consultation on the proposals for reform of the taxation of non-UK domiciled individuals, which were initially announced at the Summer Budget in July 2015.
The consultation includes details of the proposals for bringing into the scope of inheritance tax (IHT) UK residential property held by non-domiciliaries through offshore companies and other entities.
The consultation paper also contains a brief discussion of, and request for, ideas for the reform of the rules on Business Investment Relief, a scheme which enables individuals who use the remittance basis to bring their overseas income and gains to the UK without a liability to tax where they do so to make a commercial investment. This part of the consultation is beyond the scope of this guidance.
At the links below, we review the updated and new tax proposals with regard to each of the proposed new measures. We also touch on some planning options in each case for individuals who may be affected by the reforms, which the Government intends to introduce with effect from April 2017.
Summary of the measures
Non-UK domiciled individuals will no longer be able to shelter UK residential property from IHT by holding it through an overseas company or other overseas vehicle. 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 IHT - after they have been UK resident for 15 out of the last 20 tax years. Individuals born in the UK with a UK domicile of origin will be unable to take advantage of a subsequently acquired foreign domicile at any time when they are UK resident (referred to as a 'formerly domiciled resident'). IHT on indirectly held UK residential property
With effect from 6 April 2017, UK residential property held by offshore companies and other similar entities, will no longer qualify as "excluded property" under relevant IHT legislation. The consultation makes it clear that property held through offshore partnerships will be caught by the rules, a point that had been the subject of some debate among advisers. Diversely held vehicles holding UK residential property will be out of the scope of the new charge, but closely held offshore companies, partnerships or similar structures will be within the rules. IHT will be imposed on the value of UK residential property owned by an offshore company or other vehicle on the occasion of a chargeable event. Such events would include the death of an individual who owns the company shares, the re-distribution of the company share capital or the ten year anniversary of a trust, among others. The Government intends to base its definition of 'a dwelling' for the new rules on existing legislation, either the definition used for non-resident capital gains tax (NRCGT) or that used for the annual tax on enveloped dwellings (ATED). This remains under consideration. Valuation provisions are still being considered, but it is likely that where an estate owns shares in an offshore company which in turn owns UK residential property, the estate will be within the charge to IHT to the extent that the share value relates to the underlying property. Further details of how this will work in all circumstances (for example, where a property is held by a company with more than one owner) are still required. Debts relating exclusively to the property (e.g. outstanding mortgages) will be allowable when determining the value chargeable to IHT. Those that are not so related, and loans between "connected parties" will be disregarded. A pro rata approach may be taken in certain situations. Targeted anti-avoidance provisions will prevent arrangements being put in place to avoid or mitigate the charge. Liability and accountability - this will principally fall on executors, trustees and beneficiaries, with an additional liability to be imposed on directors of a company...