Expats Beware2015 Summer Budget to affect your offshore

investments from April 2017

UK expats, whether living in the country or abroad should be especially aware of the 2015 Summer Budget where the then Chancellor George Osborne announced that foreign domiciled home owners would be subjected to the same IHT charges as British home owners.

These changes will take effect on 6 April 2017.

Before we get to the details of the new inheritance tax ruling, it is important for UK expats to check their domicile status in the UK even though they have lived abroad for many years and may no longer be a UK resident or at least think they are. They may still remain domiciled even if they have their permanent home in another country and NOT in the UK. If this is the case YOU WILL therefore be subjected to an IHT liability depending on the value of your assets.

Previously, HMRC’s stance on domicile has been very vague. An expat is non-domicile as long as they can prove to HMRC that they really intend to remain in his new country indefinitely, own a property and have no significant ties to the UK. Should an expat write to the HMRC detailing the facts and circumstances of their current situation and ask about their domiciliary, HMRC will simply tell them to consult a tax expert!

The new ruling has taken care of that ambiguity as it serves to abolish the permanent non-UK domicile status in order to create a fairer tax environment. Foreign domiciled individuals that have been UK residents for 15 out of 20 years are to be deemed domiciled in the UK for income tax, capital gains and inheritance tax purposes.

Simply putting it, from April 2017 onwards, if you are an expat (any nationality) and own property in the UK, you will be subjected to the aforementioned IHT, of course depending on the value of the asset. Secondly, expats with a UK domicile of origin - where a child takes their father’s domicile of origin, or of a single mother, at birth, not necessarily the country where you were born – who wishes to establish their permanently home abroad will still be deemed a UK domicile for at least five years after they leave.

Currently, they only need three years in order to lose their UK-domicile status. Apart from that, those who have left the UK and acquired a non-UK domicile of choice - acquired by moving permanently to another country - will have their UK domicile status resurrected on the day of their return to UK soil, even if they return before 6 April 2017.

They could no longer remove their UK-domicile status simply by proving their intentions. Because of this, UK taxes will not be favourable towards trusts that were created whilst non-resident as it will no longer have excluded property status, and thus subjected to a 40% IHT liability, where the ten year anniversary charges and exit charges will apply.

Currently, UK residential properties owned via offshore company or other structure by foreign domiciles were not subjected to IHT. They also pay annual tax on enveloped dwellings (ATED) introduced in 2013 to keep their companies in offshore structures. As of April 2017, all residential properties, whether held directly or indirectly, will be liable to UK inheritance tax, even if the property is let.

Examples of properties held indirectly are those owned via offshore companies, partnerships or offshore property trusts. Thus, non-domiciled individuals are not only exposed to inheritance tax, they still have to continue paying ATED to keep their properties in offshore structures.

Worse still, unwinding these structures (or “de-enveloping”) will also incur other unforeseen expenses such as ATED-related Capital Gains Tax, non-resident CGT or Stamp Duty Land Tax (“SDLT”), with no relief being offered by the government. The bottom line is, the non-domiciled residents are left with two choices: (1) pay ATED charges indefinitely with

no corresponding inheritance tax protection, or (2) incurring CGT and/or SDLT in de-enveloping now.

Expats who are UK-domiciled and still wish to remain so should also take note of the new changes in IHT rulings known as Transferable Main Residence Allowance (TMRA). Currently, if expats with UK-domiciled status want to pass their properties or anything else of monetary value to their descendants, they will be subjected to IHT of 40% only if the property value exceeds £325,000 in 2016/17. Plus, IHT can be doubled to £650,000 because married or civil partners can transfer assets free of tax between each other, which can be subsequently passed on to the beneficiaries free of tax too.

For example, a father can pass on his wealth to the mother upon death tax free. When she dies, she can pass on up to £650,000 without being liable for IHT. The new TMRA is the additional tax-free allowance that can be added onto the existing nil rate band, i.e. £325,000. For example, the TMRA in the year 2017/18 is £100,000, which will be added to the nil rate band, allowing individuals to pass on properties tax free for an amount up to £425,000. In the context of married or civil partners, kids can inherit up to £850,000. By 2020/21, this amount will be £1,000,000.

Inflation and capital appreciation in the recent decades has propelled many individuals into the tax category liable for 40% UK inheritance tax (IHT), which can come as a shock to many. Inheritance tax is considered ‘voluntary tax’ because there are available tax planning devices to mitigate or avoid it, but it requires due diligence and lots of planning, or we might end up selling our £1.3mil family home in order to save our kids a ‘six figure’ tax bill before our passing, just as comedian Ronnie Corbett did.

For further information and ways to become tax efficient, you can contact Duncan at dcameron@farringdongroup.com who can arrange a face-2-face introduction with a specialist or even Skype or conference call overseas as there are many different products we can use to help…don’t let HMRC take 40% !!

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