The planned extension of the IHT charge will apply to both individuals who are domiciled outside the UK and to trusts with settlors or beneficiaries who are non-domiciled.
The UK Treasury, which issued a consultation paper on the proposed change late on Friday, said new legislation to implement the change would come into effect from 6 April 2017 and will be legislated as part of the 2017 Finance Act.
Once the legislation comes into effect, the Treasury said: “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 for the purposes of IHT.”
It added that no change will be made to the taxation of UK property which is held by corporate or other structures and which are owned by UK domiciled individuals or by trusts made by UK domiciled individuals.
Non-dom rules coming
The announcement appears to confirm that there will be no delay or indeed any softening of the proposed tightening up of measures surrounding ‘non-doms’, which were announced by the previous chancellor George Osborne and were due to come into effect at the start of the next tax year.
“Post EU referendum, the aspiration for a tax system that balances fairness and international competitiveness remains the same, and the government believes it is still appropriate to proceed with these reforms,” it said.
These are designed to ensure that long-term residents of the UK will be deemed as domiciled for tax purposes once they have been resident for 15 of the past 20 years. It means these former non-doms will have to pay tax on their worldwide income and gains in the same way as an individual who is domiciled in the UK.
“Overall, it remains clear that the government will implement a ‘deemed domicile’ rule across all taxes for those non-domiciled individuals who have been UK tax resident for at least 15 of the 20 previous tax years,” said Mark Davies of tax adviser Mark Davies & Associates.
Some participants in the offshore tax advisory industry had been hoping the new chancellor Philip Hammond would delay the introduction to the changes due to their complexity and the impact they might have on inward investment to the UK.
Equalisation
The Treasury said the reason for its planned change to the IHT rule was because non-doms currently enjoyed a significant advantage over other individuals in this area.
“UK domiciled individuals are liable to IHT on their worldwide property. However, those who are non-UK domiciled are only liable on the property which is situated in the UK.
“Any residential property in the UK owned by a non-domiciled individual directly will be within the charge of IHT. However, 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. This is known as ‘enveloping’ the UK property and the effect is that the property is taken outside the scope of tax,” it said.
Consultation outcomes
The government has now opened a consultation on the new IHT rules, which will run until 20 October, but said the rule change it has outlined has been determined to be the best option and it is currently developing a framework for its implementation including detailed policy design.
The latest consultation paper, which contained the planned IHT change, also added more detail to the overall plan to tax non-doms (…see next page).
