Rule changes backdated to April 2017 make UK domicile even stickier and could bring expatriates into range for UK taxes more quickly.
Updated 18 December 2017
Changes to the UK domicile regime have come into force after being put on hold over the summer – and could prove costly for expatriates.
Following delays caused by the unexpected snap general election in the summer, the Finance (No.2) Act 2017 received Royal Assent in November, with confirmation that the domicile reforms take effect retrospectively from 6 April 2017.
Whether you are planning to move to another country or currently live abroad and thinking about returning to the UK – even temporarily – these changes could affect your tax liabilities. Make sure you understand what the new rules mean for you and your family.
- 1. New time thresholds make UK domicile ‘stickier’
Previously, it was possible to shed your UK domicile of origin (if you are British-born) after living abroad for three years and acquiring a domicile of choice in your new country of residence. Now it will take four years, during which time you will be generally subject to UK taxation, including inheritance taxes on your worldwide estate. However, it is notoriously difficult to shake off UK domicile when it comes to inheritance tax, so do not assume that time abroad will shelter your estate.
See more about determining or changing your domicile
Meanwhile, the time threshold for non-domiciles living in the UK has reduced. Now, foreign-born residents will automatically be deemed UK-domiciled for all tax purposes after living in Britain for 15 out of the last 20 tax years – previously 17/20. At this point they become subject to UK inheritance tax as well as income and capital gains taxes on their worldwide income and gains, even if they are domiciled overseas.
These measures alone are expected to net the UK Treasury £995 million in extra revenue by April 2021.
- 2. Returning Britons can be taxed immediately
Britons living offshore long-term may no longer be able to claim ‘non-dom’ status if they move back to the UK, even if their permanent home is overseas and they intend to eventually return there.
Under the new rules, if you were born in the UK (having a UK domicile of origin) and then acquire a domicile of choice in another country, as soon as you return to Britain you are deemed UK-domiciled. This immediately puts you in the firing line for UK income and capital gains tax.
This can prove particularly costly for expatriates who unexpectedly or temporarily relocate to the UK, for example, due to family illness or for children’s education. In this case, wealth and financial planning that has been structured to be tax-efficient for a life overseas could instantly become exposed to UK taxation.
However, a 12-month grace period is in place for inheritance tax purposes to avoid capturing Britons who plan to stay only temporarily in the UK. Unless you have been resident in the UK for at least one of the two years before returning, therefore, you should not be immediately liable for UK inheritance tax. If you have a Will, you should prioritise updating your Will and consider restructuring your assets to factor in your new tax liability.
- 3. All UK homes fall within inheritance tax range
Before 6 April 2017, inheritance tax would not generally apply to UK residential property owned through a corporate structure, which in turn was directly or indirectly owned by a non domicile, known as an ‘enveloped dwelling’. Now, regardless of how it is owned, all UK residential property is subject to inheritance tax.
This further diminishes the previous tax advantages of holding UK properties in this way. With such structures often used for significant property portfolios, this change is likely to prove profitable for HM Revenue and Customs. By April 2021, they expect to collect an extra £245 million from inheritance taxes on UK residential properties held through offshore companies.
No tax relief is available for ‘de-enveloping’ property. So if you hold UK residential property within an enveloped structure, take care to understand all available options and associated costs, and review alternative methods to manage your inheritance tax exposure going forward.
See more about effective tax planning
What action should you take?
Domicile and cross-border taxation are highly complex, so specialist advice is essential, especially if you are considering relocating or a significant amount of inheritance tax is potentially at stake. Our experts can help you determine your domicile status, how UK inheritance tax interacts with local succession taxes in your country of residence, and what steps you can take to minimise unnecessary taxes for your heirs.
If you are looking to potentially return to the UK – even temporarily – take personalised advice as soon as possible, ideally before leaving the country to enable any tax-efficient restructuring of your wealth and assets. However, as these latest changes are new and untested, it is a good idea to review your financial planning in any event to make sure it remains suitable for your unique situation and goals.
See more about moving abroad or returning to the UK
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices, which are subject to change. Tax information has been summarised; individuals are advised to seek personalised advice.