Brexit uncertainties may be giving
fresh impetus to many UK resident non-UK domiciliaries who are thinking about
their residency plans. However, for res
non-doms, it’s important not to lose sight of another key tax change now on the
horizon – the change in the Inheritance Tax (IHT) deemed domiciled rules.
A person is deemed domiciled for
IHT purposes if he has been resident in the UK for not less than 17 out of the
last 20 tax years, ending with the tax year in question. Even a day’s residence in a tax year will
cause that tax year to count as a UK residency year. That’s why a little over 15 calendar years of
continued residence can be enough to cause a person to be deemed domiciled, if
he takes up residence in the UK right at the end of a UK tax year. Being deemed domiciled for IHT purposes means
that all of a person’s estate (broadly that means his directly held assets
wherever situated in the world) are subject to 40% IHT on death. This is regardless of his actual
domicile. Planning can be undertaken to
shelter assets from exposure to IHT before a non-dom becomes deemed domiciled
but it is easy to miss the deadline.
Once a person is deemed domiciled,
it will take three complete UK tax years of non-residency to lose the deemed
domiciled status. So exposure to IHT can
continue even after the non-dom has left the UK.
Draft legislation, currently set
to be included in the Finance Bill 2017, reduces the 17 year threshold. It is proposed that, with effect from 6 April
2017, UK tax residency of at least 15 years out of the last 20 years in which
the year of assessment falls will suffice to cause a person to be deemed
domiciled.
As a consequence, res non-doms who
are already deemed domiciled under the 17/20 year rule and who decide to leave
the UK on or after 6 April 2017 will have to remain non-resident for a minimum
of five complete tax years before they lose their exposure to IHT. Res non-doms who will be affected by this but
who leave in the current UK tax year will be taxed under the old rules, where
deemed domiciled status is lost after three complete tax years outside the UK.
The above position is
modified if the person is actually domiciled in one of the few countries with
an Estate Duty Double Taxation Treaty with the UK (such as France, Italy and
India) or is a widow/widower and has elected to be
deemed UK domiciled. All other res non-doms:
take note!
