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Inheritance tax changes for non-doms with UK property wider than expected, said expert


Changes to bring UK residential property owned by non-UK domiciled individuals (non-doms) within the UK inheritance tax net are wider than expected because they catch loans to finance the acquisition of a UK property said Fiona Fernie, a tax expert at Pinsent Masons, the law firm behind Out-law.com.

Under current rules, if a non-dom owns a UK residential property directly, that property will be potentially subject to UK inheritance tax when he or she dies. However, if the property is instead owned through an offshore company, the shares in the company will not be within the scope of UK inheritance tax.

The changes are designed to bring the value of the shares in an offshore company within the scope of UK inheritance to the extent that their value is directly or indirectly attributable to UK residential property. Interest in partnerships which hold UK residential property will be caught in a similar way.

The detail of the proposals, which were first announced in July 2015, was revealed when draft clauses for next year's finance bill were published last week.

The proposals will catch loans made by a non-dom to enable an individual, trustees or a partnership to acquire, maintain or improve a UK residential property or to invest in a close company or partnership which acquires, maintains or improves a UK residential property. They will also bring assets used as collateral for such a loan within the potential ambit of UK inheritance tax.

Fernie said that the proposals mean that a non-UK domiciled individual with no other connection to the UK could potentially be subject to UK inheritance tax on death because he or she has lent money to a family member to buy a UK home. She said that there are also concerns that the changes could bring in an element of double taxation in some situations such as where offshore trusts make loans to a settlor to buy a UK property.

The provisions will apply to existing arrangements as well as those entered into after the rules come into force, provided the event which triggers an inheritance tax charge, such as a death, occurs after 5 April 2017.

Residential properties held through companies and other structures are already subject to the annual tax on enveloped dwellings (ATED) and to higher rates of stamp duty land tax when purchased.

"Many non-doms with UK property interests held through offshore structures have been waiting to see the detail of the changes before deciding whether to unwind structures or otherwise restructure their investments. Some will have previously taken the view that the ATED charges were outweighed by the inheritance tax (IhT) benefits of a corporate structure. Now that the IhT benefit has been removed, continuing with a corporate structure will look unattractive for many," Fiona Fernie said.

"However, care needs to be taken as dismantling structures can result in capital gains tax and stamp duty land tax charges and the government has ruled out any kind of relief from tax charges arising from restructuring. The ongoing ATED costs will need to be weighed against these potential tax liabilities," she said.

"Any non-dom holding UK property through an offshore structure or lending money to be used in relation to UK property needs to take advice as soon as possible," Fernie said.

At the same time the government is modifying the deemed domicile rules so that from 6 April 2017, an individual will be deemed domiciled in the UK for income tax and capital gains tax purposes if they have been resident in the UK for at least 15 out of the last 20 tax years. Once deemed UK domiciled, an individual will no longer be able to use the remittance basis of tax and their foreign and UK assets will be subject to inheritance tax. The remittance basis means that foreign income and gains are not subject to UK tax as long as they are not brought (remitted) to the UK. To access the remittance basis, longer term UK resident non-doms need to pay an annual remittance basis charge.

Fiona Fernie said that one concern with the changes to the deemed domicile rules was how offshore trusts would be affected. One proposal the government was considering was that if benefits were received from the trust by the settlor or a close family member, all future trust income and gains would be taxed on the settlor as they arose. Instead the draft legislation provides that deemed domicile beneficiaries of offshore trusts will be taxed on benefits they receive to the extent that the benefits can be matched against trust income or gains. If a close family member of the settlor receives a benefit, the settlor will be taxed instead on matched trust income and gains.

The rules mean that non-doms will continue to be able to shelter their non-UK assets from inheritance tax as long as the assets are transferred into trust before they become deemed domiciled, Fernie said. In addition, non-doms will not pay capital gains tax on historic gains that accrued on non-UK assets acquired before they became deemed-domiciled. Instead the value of those assets will be rebased for CGT purposes to their April 2017 value.

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