The new non-domicile laws that could impact on your Inheritance Tax planning

28/05/2021

The issue of Inheritance Tax (IHT) on UK estates for non-domiciled (“non-dom”) Brits has always been an interesting one, and Hong Kong is one of the few overseas jurisdictions where British expats have, until recently, settled and genuinely acquired a new domicile of choice.

Changes in recent years to the way the UK government define non-dom status mean that financial plans you may have set up some time ago could no longer be effective. More seriously, they could impact on the amount of IHT payable by your heirs in the event of your death.

In this article, you will find details of the changes, and how they could impact on you, and your IHT planning.

The advantages of non-UK domicile status

Being a non-dom can be very advantageous for IHT purposes and such a status is therefore a valuable commodity.

The main benefits for IHT purposes are:

  • The value of your estate liable to IHT on your death will generally be limited to the value of your UK-based assets only.
  • Non-UK assets from which a UK asset has derived its value are also generally exempt.. As such, all other worldwide assets will not be liable to IHT.

Your domicile status is critical when it comes to your Inheritance Tax liability, regardless of where you live. Our guide provides a handy outline of this.

Confirming your non-dom status

Historically, there have always been issues around ascertaining your domicile status with HMRC.

The concept of domicile falls under common law principles and so can be subject to a broad interpretation. As such there have been instances of people incorrectly assuming non-dom status, and their families subsequently being hit with an unexpected, and substantial, tax bill.

Historically, a way to clarify your non-dom status may have been to set up a discretionary trust with a value slightly in excess of the IHT nil-rate band applicable at the time. The excess would ordinarily be subject to a 20% chargeable lifetime transfer (CLT) charge for a UK domicile. However, a submission would be made to HMRC with an accompanying professional domicile opinion and statement that would explain how you believe you are no longer UK domiciled and as such the CLT charge is not applicable.

HMRC would then review this and, if in agreement, confirm a non-domicile status and that the CLT charge was not due. This would then provide the confidence of settling a more substantial trust without the danger of triggering a much larger CLT charge.

However, reforms to the taxation of non-domicile introduced by the UK government in 2017 mean that in certain circumstances some trust solutions may no longer achieve their originally intended objectives.

In particular, the changes impact on the status of many Excluded Property Trusts.

Excluded Property Trusts

Excluded Property Trusts (EPT) have been a popular means of tax-planning. They were originally designed for people currently non-UK domiciled, but who believed at some stage that there was a risk they could attain or revert to a UK domicile status.

As we’ve already covered, if you are non-UK domiciled with assets outside the UK, IHT will not be charged on those assets in the event of your death. But should you subsequently become UK-domiciled, then all your worldwide assets will become subject to IHT.

An EPT was able to protect assets held outside the UK so that, if and when your status changed and you became UK-domiciled, the value of the assets under trust would not be liable to IHT.

However, changes to the taxation of non-doms by the UK government in 2017 have had a substantial impact on such trusts.

The impact of the 2017 Finance Act

The 2017 Finance Act, which came into force from 6 April 2017, included new criteria that determined whether someone had non-dom status.

The key change that we’re interested in for the purposes of this article is that the Act added a new category of deemed domicile called “formerly domiciled residents” (FDR’s).

An FDR is someone born in the UK but subsequently domiciled elsewhere – say, Hong Kong. You are a formerly domiciled resident if you:

  • Are born in the UK with a UK domicile of origin
  • Have acquired another non-UK domicile of choice
  • Are then resident in the UK and were resident in the UK in at least one of the two previous tax years.

The main impact of FDR status is that on your return to UK for anything more than a short period, any EPT you have set up will no longer be exempt from UK inheritance tax.

HMRC guidance confirms that you would only have to be resident in the UK for one of the previous two years for the trust to no longer be operative.

It’s time to review your IHT planning

In the light of the changes included in the 2017 Act, we’re seeing a noticeable number of clients contacting us, asking us to help them review their trust arrangements.

Many are long-term expats who have been based in Hong Kong since the 70s and 80s. Thinking they would stay in Hong Kong for good, they set up Excluded Property Trusts to protect their worldwide assets from IHT. They are now finding that, even if they decide to return to the UK for a relatively short period, the trust will no longer be of any use for the desired planning purposes.

Because of this, they are now having to review all their IHT arrangements. It can sometimes be a case of going “back to square one” and having a thorough overhaul of your estate planning.

Get in touch

If you think you might be impacted by the changes we have outlined here, get in touch. You can  contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

We’ve produced a series of client guides covering different aspects of financial planning. Both the Inheritance Tax guide and our guide called Understanding UK residency cover some of the issues in this article.

The issue of Inheritance Tax (IHT) on UK estates for non-domiciled (“non-dom”) Brits has always been an interesting one, and Hong Kong is one of the few overseas jurisdictions where British expats have, until recently, settled and genuinely acquired a new domicile of choice.

Changes in recent years to the way the UK government define non-dom status mean that financial plans you may have set up some time ago could no longer be effective. More seriously, they could impact on the amount of IHT payable by your heirs in the event of your death.

In this article, you will find details of the changes, and how they could impact on you, and your IHT planning.

The advantages of non-UK domicile status

Being a non-dom can be very advantageous for IHT purposes and such a status is therefore a valuable commodity.

The main benefits for IHT purposes are:

  • The value of your estate liable to IHT on your death will generally be limited to the value of your UK-based assets only.
  • Non-UK assets from which a UK asset has derived its value are also generally exempt.. As such, all other worldwide assets will not be liable to IHT.

Your domicile status is critical when it comes to your Inheritance Tax liability, regardless of where you live. Our guide provides a handy outline of this.

Confirming your non-dom status

Historically, there have always been issues around ascertaining your domicile status with HMRC.

The concept of domicile falls under common law principles and so can be subject to a broad interpretation. As such there have been instances of people incorrectly assuming non-dom status, and their families subsequently being hit with an unexpected, and substantial, tax bill.

Historically, a way to clarify your non-dom status may have been to set up a discretionary trust with a value slightly in excess of the IHT nil-rate band applicable at the time. The excess would ordinarily be subject to a 20% chargeable lifetime transfer (CLT) charge for a UK domicile. However, a submission would be made to HMRC with an accompanying professional domicile opinion and statement that would explain how you believe you are no longer UK domiciled and as such the CLT charge is not applicable.

HMRC would then review this and, if in agreement, confirm a non-domicile status and that the CLT charge was not due. This would then provide the confidence of settling a more substantial trust without the danger of triggering a much larger CLT charge.

However, reforms to the taxation of non-domicile introduced by the UK government in 2017 mean that in certain circumstances some trust solutions may no longer achieve their originally intended objectives.

In particular, the changes impact on the status of many Excluded Property Trusts.

Excluded Property Trusts

Excluded Property Trusts (EPT) have been a popular means of tax-planning. They were originally designed for people currently non-UK domiciled, but who believed at some stage that there was a risk they could attain or revert to a UK domicile status.

As we’ve already covered, if you are non-UK domiciled with assets outside the UK, IHT will not be charged on those assets in the event of your death. But should you subsequently become UK-domiciled, then all your worldwide assets will become subject to IHT.

An EPT was able to protect assets held outside the UK so that, if and when your status changed and you became UK-domiciled, the value of the assets under trust would not be liable to IHT.

However, changes to the taxation of non-doms by the UK government in 2017 have had a substantial impact on such trusts.

The impact of the 2017 Finance Act

The 2017 Finance Act, which came into force from 6 April 2017, included new criteria that determined whether someone had non-dom status.

The key change that we’re interested in for the purposes of this article is that the Act added a new category of deemed domicile called “formerly domiciled residents” (FDR’s).

An FDR is someone born in the UK but subsequently domiciled elsewhere – say, Hong Kong. You are a formerly domiciled resident if you:

  • Are born in the UK with a UK domicile of origin
  • Have acquired another non-UK domicile of choice
  • Are then resident in the UK and were resident in the UK in at least one of the two previous tax years.

The main impact of FDR status is that on your return to UK for anything more than a short period, any EPT you have set up will no longer be exempt from UK inheritance tax.

HMRC guidance confirms that you would only have to be resident in the UK for one of the previous two years for the trust to no longer be operative.

It’s time to review your IHT planning

In the light of the changes included in the 2017 Act, we’re seeing a noticeable number of clients contacting us, asking us to help them review their trust arrangements.

Many are long-term expats who have been based in Hong Kong since the 70s and 80s. Thinking they would stay in Hong Kong for good, they set up Excluded Property Trusts to protect their worldwide assets from IHT. They are now finding that, even if they decide to return to the UK for a relatively short period, the trust will no longer be of any use for the desired planning purposes.

Because of this, they are now having to review all their IHT arrangements. It can sometimes be a case of going “back to square one” and having a thorough overhaul of your estate planning.

Get in touch

If you think you might be impacted by the changes we have outlined here, get in touch. You can  contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

We’ve produced a series of client guides covering different aspects of financial planning. Both the Inheritance Tax guide and our guide called Understanding UK residency cover some of the issues in this article.

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