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01/10

Non-domiciles face even tougher restrictions under new rules proposed

The non-domicile consultation paper, issued yesterday (Sept 30, 2015), introduces tougher restrictions for non-domiciles beyond those already announced in the Budget.

-1- The tougher restrictions will make it harder, once someone becomes UK domiciled, to lose their UK domiciled status after they leave the country.

Currently, if a non-domicile has been in the UK for 17 out of 20 years, they become liable to UK IHT on their world-wide assets. If they leave the UK and die within 3 years of leaving, the estate will still be liable to UK IHT on their world-wide assets. Under the new proposals, the 17 out of 20 years reduces to 15 out of 20 (which was expected) but now the 3 year IHT tail has been increased to at least 6 years.

The new proposals state they will not lose their UK domicile status until ‘the later of the date that they acquire a domicile of choice in another country, or the point when they have not been resident in the UK for 6 years’. So in reality this 6 year IHT tail could be much longer depending on how quickly they acquire another domicile of choice.

These rules also apply to those born in the UK who are leaving the UK for the first time, helping to align the rules for domicilliaries.

-2- The tougher restrictions will make it harder for non-domicile spouses electing to be UK domicile to lose the UK domicile status once they leave the country.

Currently, under legislation introduced in 2013, a non-domicile spouse (of someone who is UK domiciled) can elect to become UK domiciled. This makes it possible for estates to be passed between spouses completely free of IHT. Once the spouse becomes UK domiciled that decision is irreversible whilst they live in the UK. Currently, if they leave the UK they remain UK domiciled for 4 tax years. Under these new proposals, the 4 year time frame will increase to 6 years.

New proposals also impact UK expats returning to the UK

As expected, the new proposals also target UK born citizens who spend time overseas and then return to the UK. Anyone born in the UK, with a UK domicile of origin, who leaves the UK will immediately be deemed UK domicile upon their return to the UK. The new proposals make it clear that even if they put their money into an Excluded Property Trust, upon return to the UK the assets would still become liable to UK tax. This is likely to come into effect for anyone returning to the UK after 6 April 2017, regardless of when they set up their trust.

Gordon Andrews, financial planning expert at Old Mutual WealthGordon Andrews, financial planning expert at Old Mutual Wealth comments:

“The new proposals demonstrate the Government are taking a tougher stance both on non-domiciles and on UK expats returning to the UK.

“Non-domiciles who have been in the UK for 15 or more years out of 20 need to make alternative plans or be deemed domicile for UK IHT purposes and lose the option to choose the remittance basis of taxation. The increase in the time it takes to lose the UK domiciled status is also a key consideration as anyone who dies within six years of leaving the UK will suffer IHT on their worldwide assets.

“Those born in the UK, but have been domiciled in another country, also need to ensure they seek financial advice before they return to the UK. Trusts, such as Discounted Gift Trusts and Loan Trusts, could now be much more effective than Excluded Property Trusts.”