A ‘Ways and Means’ resolution is due to be considered in the House of Commons tomorrow, 6 September, following which a new Finance Bill will be published and voted on by MPs, probably in the following few days.
The Finance Bill is expected to include all the changes to the non-domicile regime that had been proposed to take affect from April, but which were postponed after the Conservative government unexpectedly called a General Election. As a result of the snap election, more than half of the then 135 provisions in the Finance Bill were scrapped, with the expectation of being reintroduced after the election.
Under the proposed new non-dom system, non-UK domiciles who have resided in the country for more than 15 of the past 20 tax years would automatically be deemed UK-domiciled, even if they have maintained a domicile overseas.
Residential property in scope of IHT
Another change is that UK residential property held within a corporate, partnership or trust structure by deemed domiciled individuals will fall into the scope of inheritance tax liabilities as a result of proposed ‘look through’ powers. Non-dom status for Britons who return home but claim to have a permanent home abroad is also due to be removed.
Chris Groves, partner at international law firm Withers, said the changes would drive people away from the UK whose presence would otherwise be good for the economy, rather than raise more taxes.
“The new policy approach is a step change in how non-doms are treated. As a result, some of those affected are leaving the UK – they no longer feel welcome here. Brexit is also a contributing factor. If you are a wealthy European, the UK no longer feels like it wants you here.
“So, this is not going to be a tax-raising measure for the UK economy – it will result in there being less people to tax. Wealthier people who choose to make their home here are good for the UK; they spend money here, they generate tax revenues, create employment and so on. But fewer of them are going to be doing this from now on.”
Gordon Andrews, financial planning expert at Old Mutual Wealth said: “The Finance Bill is expected to go through Parliament imminently, and will finally legislate for two key changes impacting non-UK domiciles.
“Firstly, the time period for becoming deemed UK domicile will reduce from 17 out of 20 to 15 out of 20 tax years. Once someone becomes deemed UK domiciled their worldwide assets will become subject to UK inheritance tax on death, so there is a key financial planning requirement for anyone approaching the 15-year deadline.”
He said it may be possible to take action, such as sell any overseas property, place assets into a trust, or even leave the UK prior to reaching the 15-year deadline, but such decisions need to be carefully thought through.
“Once someone becomes deemed UK domiciled they also lose the ability to pay tax under the remittance basis. For those currently benefitting from this favourable tax regime, they may find they need to declare their overseas income and gains in the UK for the first time once they become deemed UK domiciled.”
The second key change impacting non-domiciles, Andrews identifies, relates to those holding property in the UK through an overseas corporate structure (commonly known as enveloped dwellings). These structures will become subject to IHT for the first time.
“Often these structures contain significant property portfolios, so the IHT liability could be eye watering. Those impacted need to ensure they take steps to ensure their beneficiaries are able to pay the UK IHT bill on death. Setting up a life insurance policy or using a trust can help ensure liquidity for beneficiaries on death.
“These changes were originally due to take effect from 6 April 2017, and despite being removed from the Finance Bill, and then subsequently put back in, the effective date is expected to remain unchanged – and may therefore apply retrospectively from 6 April 2017.”
