The effect of deemed-dom status will be that an individual’s worldwide assets will be subject to UK inheritance tax (‘IHT’) and, for UK resident individuals, their worldwide income and gains subject to UK tax as they arise.
There will also be implications for deemed-doms with interests in offshore trusts: the gains and income arising to the trust will be taxed on them unless the trust qualifies for ‘trust protection’. Either way, a deemed-dom who receives a distribution from an offshore trust will face higher UK taxes than when they were non-dom. The ‘Winter’ Finance Bill also introduces a series of anti-avoidance rules for those who receive distributions; one to note being that distributions to ‘close family’ of a settlor will be taxed on that settlor in some circumstances.
Non-doms holding UK residential property through an offshore company or partnership (enveloped property) will also be affected. Such a structure previously offered an IHT shelter, but with effect from 6 April 2017, this will no longer be the case. The shares or partnership interest will be subject to IHT on the death of the non-dom, or if there is a trust within the structure, there could be a ten yearly IHT charge. Loans taken out to purchase the property could also be subject to IHT.
Non-doms should review their UK tax status and calculate their deemed-dom date. They will need six tax years out of the UK to ‘re-set the clock’, and they may want to factor such periods into their future plans. There is a two year window from 6 April 2017 to separate foreign bank accounts into pots of clean capital, income and gains, so that deemed-doms can bring capital into the UK without a tax charge, and this opportunity should be used.
Those with affected UK residential property could consider de-enveloping it, subject to the UK tax implications; but otherwise they should ensure their Will is structured efficiently from an IHT perspective.
In terms of offshore trusts, a review will be essential and great care must be taken if the trust qualifies for ‘protected’ status to ensure this is not lost. There could also be advantages to making distributions before 6 April 2018 before the planned anti-avoidance measures.
The reforms represent a major taxation overhaul and there is no doubt that many non-doms could be worse off; but there are also concessions and opportunities that are there to be used, and with organisation and careful planning, non-doms should be able to structure their affairs to minimise the impact.
Camilla Wallace is partner and head of the Private Client Group, Wedlake Bell LLP
Please click here to read this article, first published in Spear’s on the 2 November 2017.