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If you are investing in UK property or are considering buying, then this is essential reading. The tax rules are changing for overseas owners and these may affect you significantly. London law firm Bircham Dyson Bell summarises the major changes for you below.
The UK Government has published its much anticipated consultation document setting out more details about its plans to make significant changes to the taxation of individuals who are not domiciled in the UK (non doms), following the 2015 Summer Budget when these proposed changes were originally announced. These changes look set to increase significantly the tax exposure of some UK resident non doms.
UK Resident Non Domiciled individuals, or ‘Non doms’, are typically those who live in the UK but originate from another country. The term can also apply to foreign nationals.
Here are five ways these changes are likely to impact on non dom owners of UK residential property investments based on the details contained in the consultation document.
- A non dom who lives in the UK and has been UK resident continuously for 13 tax years by 6 April 2017 could become deemed domiciled in the UK for all tax purposes (deemed domiciled).
The test to determine deemed domicile status will in fact be 15 out of 20 tax years but the way the years are counted means that any part of a tax year in which a non dom is tax resident will count as a year for the purpose of these rules. Precise counting, in accordance with the strict requirements of the test, is therefore vital. - A non dom who becomes deemed domiciled will no longer be able to just pay UK tax on the funds they remit to the UK, perhaps to meet their UK property expenses.
Instead a non dom who is treated as deemed domiciled will be subject to UK tax on worldwide income and gains as they arise. - A non dom who becomes deemed domiciled will be subject to UK inheritance tax (IHT) on the value of all of their assets, not just their UK property.
All non doms who have been resident for an extended period need to be aware that an unexpected death could leave their worldwide estate with a potentially heavy IHT exposure. Planning, which could be as simple as term life assurance, might save a significant amount of tax if the unexpected should happen. - Any UK residential property investment owned by them indirectly via an offshore structure will be subject to IHT from April 2017 regardless of the domicile status of the underlying owner.
It is not clear at this stage how these new IHT provisions will interact with the existing IHT rules which apply to UK domiciled and deemed domiciled individuals. A separate consultation on these proposals is due to be published later in the Autumn. - A non dom who becomes deemed domiciled could be subject to a UK tax charge on their occupation of a UK residential property held in an offshore trust structure.
This is potentially a significant change to how beneficiaries are taxed on benefits received from offshore trusts. In broad terms under the current rules any benefits from a trust will be matched to income and gains within the structure. In the case of a trust where the only asset is a UK residential property occupied by the settlor and their family there are no income and gains in the structure and the beneficiaries occupy the property without a tax charge. Under the Government’s proposals a flat rate of tax could be charged on occupation by a deemed domiciled non dom, regardless of whether there are any income or gains in the structure. The shape of the proposed new rules and their interaction with the current anti-avoidance provisions which operate in relation to UK resident beneficiaries of offshore trusts is still being considered by the Government.
The tax scene for UK resident non-domiciled individuals has changed greatly in recent years. With all these changes it is likely that a structure or arrangement established some time ago will need a critical review and, in some cases, a radical overhaul.
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