Scope of Inheritance Tax for non-Domicile UK asset holders
Since 6th April 2017, an individual has been domiciled in the UK* if they have been UK residents for at least 15 out of the past 20 tax years.
*(Even though they may continue to have a non-UK domicile under general law).
Where an individual is UK domiciled or deemed domiciled at the date of the taxable event. Their global assets are within the inheritance tax charge, subject to specific reliefs or exemptions. All UK assets are under inheritance tax, regardless of your status.
Individuals who are neither domiciled nor deemed domiciled in the UK are only liable to inheritance tax regarding their UK assets. Their non-UK assets are ‘excluded property’ and outside the scope of IHT.
Since 6 April 2017, the shares of an overseas company holding UK residential property are considered UK assets for IHT purposes. There is no charge to IHT on shares in overseas companies owning UK commercial property. However, you are liable now for capital gains tax. When you dispose of the asset, for gains made from April 2015 until the date of sale.
The beneficiary’s domicile or residence status is irrelevant for UK inheritance tax purposes.
Rate of Tax
Every individual has a Nil Rate Band (currently £325,000) to offset against his chargeable assets.
Since 6 April 2017, an additional Residential Nil Rate Band may be available. If the deceased’s primary residence (or equivalent value) is inclusive in their chargeable estate.
The Residential Nil Rate Band increases yearly to a maximum of £175,000 in 2020/21. Gradually tapers away where the chargeable estate is worth more than £2 million.
Inheritance Tax Amount
The IHT rate is 40% above the nil rate band applicable to your estate.
Spouses and civil partners
Assets passing to a spouse or civil partner are generally exempt from UK IHT without limit. However, there is one exception to this rule. When assets pass from a UK-domiciled spouse to a non-UK-domiciled spouse. In this instance, the spouse exemption is limited to £325,000.
If some or all of an individual’s nil rate band is unused on their death. The proportion of the deceased’s new nil rate band (including any new residential nil rate band) can be in gift to the surviving spouse.
Election for a non-domiciled spouse as UK domiciled.
A non-domiciled spouse or civil partner can make an election to be designated UK domiciled for inheritance tax purposes. This option may be favourable for a mixed domicile couple where the UK-domiciled spouse first passes away. In this case, if the non-domiciled surviving spouse models as UK domiciled for IHT purposes. Any assets received by that spouse will be exempt from inheritance tax.
If the surviving spouse did not make the election, only assets up to a value of £325,000 would be exempt.
Therefore, by making the election, inheritance tax can be deferred to the second death.
The potential drawback to making the election is the worldwide assets of the surviving spouse. They are within the inheritance tax charge, as for any other UK-domiciled individual.
The election lapses once the electing spouse has been a non-UK resident for four years. The spouse regains their non-UK domicile status for IHT purposes. Their non-UK assets will fall outside the scope of the UK inheritance tax law and are allowed significant IHT savings.
This type of planning can be beneficial when a mixed domicile couple is a resident overseas. Otherwise, the electing spouse returns to their home country (or elsewhere) following the death of their UK-domiciled spouse.
Non-UK assets settled into an offshore trust by a non-domiciled individual before they become deemed domiciled are ‘excluded property’. They are outside the charge to UK inheritance tax (provided there is no underlying UK residential property).
The assets of the trust will continue to enjoy excluded property status. The settlor becomes domicile in the UK because they have been living as a UK resident for 15 of the last 20 tax years.
Trusts settled by non-UK domiciled individuals can also benefit from significant income tax and capital gains tax advantages.
UK residential property interests
It was joint planning for non-domiciled individuals to hold UK real estate through an offshore company. Which may, in turn, have been held by offshore trustees. This is to avoid a charge to IHT on real estate. The overseas shares were non-UK assets and therefore excluded property. In the hands of the non-domiciled individual or trustees (if held through a trust structure). There needed to be a look-through to the underlying UK real estate.
However, changes to the legislation, effective 6 April 2017, are now to bring all UK residential property within the scope of UK IHT. Particular loans can be in use to purchase UK residential property. A property under construction or adapted for residential use is present as residential property for these purposes.
Two Year Tail
Suppose the shares of a non-UK company or an interest in an overseas partnership that holds UK residential property are on sale. The sale proceeds remain within the scope of inheritance tax for the following two years.
The loan is payable or the security/guarantee is released. The consideration received (or any asset purchased with that consideration) will continue to be subject to IHT for two years following the loan repayment.
Double Tax Treaties
The terms of a tax treaty provide an exemption from UK IHT to a UK residential property interest. The UK legislation will override the terms of the tax treaty unless a liability to inheritance tax or an equivalent tax (however small an amount) arises in the other jurisdiction.
Non-UK domiciled individuals benefit from significant planning opportunities to minimise or avoid liability to UK inheritance tax.
In particular, you can hide non-UK assets from inheritance tax by settling those assets into an offshore trust before acquiring deemed domicile status in the UK.
The protection from inheritance tax can continue even after the settlor has become deemed domiciled. This allows the assets to be in hand to future generations free of UK inheritance tax.
Planning is essential as it can save your estate lots of money, but it has to be effective and efficient.
Please feel free to contact us at www.careysuen.com if you have any questions.