Inheritance tax is one of those things that we prefer not to consider, but are obliged to think about on occasion. At such times, it’s necessary to review our tax position and take measures to ensure the beneficiaries of our estate aren’t left with any nasty surprises. Naturally, good planning is an important part of this.
As you’re probably already aware, UK inheritance tax (IHT) is charged not only upon death, but can also apply to gifted assets or those settled into trust. Recent changes to the UK IHT legislation for non-domiciled individuals mean that for those whose permanent home is outside the UK, now is a good time to review their tax position. Here, we outline the key changes and what they mean for non-domiciliaries.
The changes in summary
Until recently, non-domiciled individuals could remain in the UK for 17 out of the previous 20 tax years before becoming UK domiciled for UK IHT purposes. On 6 April 2017, however, this changed. As of that date, the number of years of UK residency has been reduced to 15 years, meaning that some residents have become UK domiciled for IHT purposes sooner than expected.
As a non-domiciliary, individuals are only charged UK IHT on their UK ‘situs’ assets, i.e. those located in the UK. If they have been living in the UK for 15 of the previous 20 tax years, however, UK IHT will apply to their worldwide estate.
In order to reclaim their non-domicile status for UK tax purposes, those who fall into this category must be resident outside the UK for a minimum of six years. While their assets will no longer be considered UK domiciled for IHT purposes after four complete tax years, six must pass before they can return to the UK as a non-domiciled individual for UK IHT.
What the changes mean for non-domiciliaries
Inevitably, the above changes to UK inheritance tax for non-domiciled individuals impact people in different ways. Those already living in the UK can look to settle their international assets into an overseas trust before being deemed a UK domiciliary. Since a trust retains the domicile status of the settler at the date it’s settled, it remains non-UK domiciled regardless any subsequent changes in the domicile status of the individual.
The introduction of changes around property ownership impacts non-UK residents with UK residential properties. Debts taken out against a property and used in such a way that the funds aren’t chargeable to UK IHTwill not be allowed as a deduction when calculating the IHT position. In other words, let’s assume Mr S buys a property in cash for £500,000 and later takes out a mortgage on it in order to buy another property in Spain. A deduction is no longer allowed for the mortgage; the full £500,000 would be charged to UK IHT.
Review your tax position
If you have non-domicile status in the UK and wish to review your tax position, contact an IHT specialist today. A professional can offer comprehensive information on the changes to inheritance tax laws and help you to minimise the amount of UK IHT you will be liable for.