There are significant changes in UK tax facing Irish domiciled individuals ('non-doms') living in the UK.
Until 5th April 2017, Irish domiciled individuals can benefit from being able to shelter non-UK income and gains from UK tax indefinitely, under the so-called “remittance basis”. Non-UK assets can be kept outside the scope of UK inheritance tax until they became domiciled in the UK, or deemed domiciled.
To claim the remittance basis, Irish domiciled individuals must pay a flat charge of £30,000, £60,000 or £90,000 a year, depending on their length of UK residence. Under the old rules, which are about to end, where an Irish domiciled individual has been UK tax resident in 17 of the previous 20 tax years, they became “deemed domiciled for inheritance tax only”, and their worldwide estate became subject to inheritance tax.
All this is about to change as a result of the UK Government’s plans, unveiled last year, to abolish indefinite non-dom status. The result will diminish the difference in tax treatment between UK domiciled persons and those long-term UK residents (including Irish domiciled individuals) who claim non-UK domicile status.
The new UK 'non-dom' rules
From 6th April 2017, Irish individuals living and tax resident in the UK for more than 15 of the previous 20 tax years will no longer be able to benefit from the "remittance" basis of tax since they will acquire a "deemed domicile” status in the UK under the proposed new rules.
This new measure will apply to income tax, capital gains tax and inheritance tax.
In short, this eliminates the possibility of claiming the remittance basis of taxation once an individual has been UK resident for 15 tax years. Hence, the personal worldwide income, gains and assets of deemed domiciled individuals will automatically be subject to UK tax.
Crucially, those Irish individuals who have been UK tax resident for 15 tax years and who may have been planning for the old deemed domicile rules will now have to reassess their plans. Quickly.
Below are some basic options they may wish to consider:-
This may offer an opportunity for those who will become deemed domicile as a result of the changes to settle an offshore trust before 5 April 2017.
An Irish resident individual who is already deemed domiciled in the UK can minimise exposure to tax through the use of a “freezer trust”. To do this, the taxpayer makes use of a trust set up by a neither UK domiciled nor deemed domiciled family member, from which the taxpayer cannot benefit.
He either lends funds or sells assets to the offshore trust in exchange for an IOU. The trust then uses the income generated from investments to repay the debt.
It should be noted here that until the draft legislation is circulated ahead of receiving Royal Assent in Summer 2017, tax advisers and their clients cannot be certain that existing structures or proposed planning will be successful.
Pensions – Qualifying Recognised Overseas Pension Scheme (QROPS) and Qualifying Non UK Pension Scheme (QNUPS)
While the primary reason for using QROPS and QNUPS is for pension planning, they can also offer Inheritance Tax protection. As with the suggested measures for existing trusts, the investment would grow tax free until such time as the individual wishes to receive a pension.
Family Investment Companies (FICs)
A FIC operates in a similar way to a discretionary trust. Its governing documents include bespoke provisions covering the distribution of profits and the treatment of capital of certain shares in the FIC, which allows for a potentially exempt transfer (PET) of the shares in the FIC to other family members, which would not be subject to UK inheritance tax, should the donor survive seven years.
Another benefit for choosing a FIC is that the controlling shareholder has greater control than they would in a trust.
The family members would be the shareholders and could be directors of the company (if it is an onshore FIC) and therefore able to choose the company’s investments and also the extraction of funds, by salary or dividends.
The Government also intends to reduce corporation tax on onshore FICs to 17% by 2020. However, onshore FICs can result in tax being paid twice. Not only will the FIC be subject to corporation tax on its profits, but dividends paid from taxed income would be taxed again when paid to family members.
But if the FIC is used as a ‘piggy bank’, profits can be collected in the FIC and paid out to family members free from UK tax once they are no longer UK tax resident.
Business Investment Relief (BIR)
BIR allows individuals to remit capital, foreign income and gains to the UK to invest in a qualifying business without incurring a liability to income or capital gains tax. This means that future growth might be subject to UK corporation tax at a lower rate as opposed to UK income tax which would otherwise be due on foreign income if capital remains invested abroad.
It would be necessary to claim the remittance basis and, where necessary, pay the remittance basis charge in the current tax year, and those funds would have to be used only for qualifying investments, around which there are many restrictions.
This relief also extends to UK investment property businesses.
Business Property Relief (BPR)
Once an individual has already become deemed domiciled then an investment of capital, foreign income and gains can be made in a qualifying investment that could qualify for BIR and also BPR. BPR can provide an inheritance tax shelter on the company’s shares and a reduction of IHT against business assets, such as commercial property used in the business.
It should be noted that this will only be advantageous to businesses carrying out a genuine trade, for example letting businesses do not qualify for BPR.
Resetting the clock
The most extreme means of planning for the new deemed domicile changes is to avoid becoming deemed domicile in the first place. An individual may leave the UK for six tax years in order to “reset the clock”.
Previously it was only necessary to leave the UK for four tax years in order to lose deemed domicile status; however, the new 15-year rule shall require individuals to leave the UK for at least six tax years instead.
In summary, these are the options, as they stand now, for Irish domiciled individuals living in the UK.