Changes bring tax treatment into line with UK-domiciled residents.

We are on the verge of the implementation of the changes to the non-domicile (‘non-dom’) regime announced in the summer 2015 Budget.

Until now, offshore companies, whose shares have been classed as non-UK, were excluded from inheritance tax (IHT) in the hands of non-domiciled persons.

As this is quite a fundamental change in how IHT will be levied on offshore companies, related definitions are amended.

From 6 April 2017, the definition of excluded property is amended in the Inheritance Act 1984 to include the value of offshore company shares for IHT insofar as they derive value from UK residential property.

A new subsection (3E) has been inserted in section 48 of the act:

‘In a case where the settlor of property comprised in a settlement is not domiciled in the United Kingdom at the time the settlement is made, the property is not excluded property by virtue of subsection (3) or (3A) at any time in a tax year if the settlor was a formerly domiciled resident for that tax year.’

A new Schedule A1 has been inserted before Schedule 1, referenced in section 6 (1) and section 48(3). As per Schedule A1:

 

1   (1) Property is not excluded property by virtue of section 6(1) or 48(3) (a)

at any time if or to the extent that its value is attributable to a chargeable interest that is exclusively in or over land which –

a)  consists of a dwelling at that time, or

b)  consisted of a dwelling at any time in the period of two years ending with that time.

(2)       In this paragraph ‘chargeable interest’ has the same meaning as in Part 3 of the Finance Act 2013 (annual tax on enveloped dwellings).

(3)       Land consists of a dwelling for the purposes of this paragraph if it consists of a dwelling for the purposes of that Part.

(4)       The powers conferred by section 114 of that Act and section 116(8) (a) of the Finance Act 2003 apply for the purposes of this paragraph.

2   (1) In determining whether (or the extent to which) property situated outside the United Kingdom is excluded property, no regard is to be had to any arrangements the purpose or one of the main purposes of which is to secure a tax advantage by avoiding the effect of paragraph 1(1).

(2) In this paragraph –

‘tax advantage’ has the meaning given in section 208 of the Finance Act 2013;

‘arrangements’ includes any scheme, transaction or series of transactions, agreement or understanding (whether or not legally enforceable and whenever entered into) and any associated operations.’

There are three main elements to the reforms:

  1. They ensure that the tax treatment of the most long-term UK resident non-doms is brought in line with UK-domiciled residents. Tax will be charged on worldwide income and gains. The reforms also mean that a UK-born individual whose domicile of origin was in the UK cannot choose a foreign domicile and then subsequently return to the UK as a non-dom.
  2. They ensure that non-doms cannot hold a UK property indirectly (for example, through an offshore company). This closes the loophole that a large number of non-doms use to avoid paying UK IHT.
  3. The government sets out a package of reforms to business investment relief to incentivise inward investment into UK businesses. This is designed to allow non-doms to bring more overseas income and gains into the UK to support economic growth and investment.

Article from ACCA In Practice