Excluded Property Trusts and UK non-domiciliary reform

We released an article in May on UK non-domiciliary tax reforms which are due to take effect in April 2017. Since we published our article, the UK has voted for Brexit which has created uncertainty in stock markets, currency markets and also potential uncertainty in the tax world. Whilst the new rules for taxing non-UK domiciled individuals are expected to come into force from April 2017, there are, however, rumours circulating around the tax world which suggest the impact of Brexit may keep the UK Government busy dealing with other matters. The end result possibly being a further delay in the introduction of the new rules for taxing non-UK domiciliaries.

To briefly recap, the key changes are likely to be that non-UK domiciled individuals will become deemed UK domiciled once they have been resident in the UK for 15 out of 20 tax years (as opposed to 17 out of 20 tax years under the current rules), ie individuals will become deemed UK domiciled for tax purposes earlier under the proposed new rules. Once an individual becomes deemed UK domiciled, all of their worldwide assets fall within the charge to UK inheritance tax. The second major change is that once an individual is caught by the new deemed UK domicile provisions, they will be taxed in the UK on their worldwide income and capital gains (ie, they will no longer be able to claim the benefit of the remittance basis of taxation). This could, depending on the individual’s circumstances, result in a significant increase in the total UK tax payable post April 2017.

In order to avoid these proposed rule changes fundamentally changing the UK tax position of a non-UK domiciliary, consideration should be given to taking positive action now. There is a relatively simple solution to this potential increase in UK tax payable. Before these new rules come into force (ie before April 2017, assuming the rules are introduced as planned), establish an excluded property trust. An excluded property trust should ensure non-UK situs assets remain outside the scope of UK inheritance tax (regardless of whether an individual subsequently becomes deemed UK domiciled), it will also shelter those assets from UK capital gains whilst the assets remain in the trust. The UK Government and HMRC are fully aware of excluded property trusts and their use by non-UK domiciliaries. There are specific UK tax provisions which apply to excluded property trusts and, therefore, their use in these circumstances should not be considered aggressive tax planning.

Put simply, spending a little effort now to establish an excluded property trust could save 40% UK inheritance tax, plus assets can potentially grow free from UK capital gains tax. Making a trust takes time, the assets that form the trust can take time to be transferred and tax and legal advice will need to be sought to ensure that all relevant aspects are considered. Consequently, time may be running out to take advantage of the excluded property regime and its associated UK tax savings.

If these changes affect you then do please get in touch at your earliest opportunity so that we can help you.

Kevin Loundes, Senior Tax Manager – kevin.loundes@abacusiom.com

Stewart Fleming, Group Managing Director – stewart.fleming@abacusiom.com

Stephen Colderwood, Business Development Manager – stephen.colderwood@abacusiom.com