Tax Planning For Non Doms Anticipating UK Domicile

Discussion of steps in anticipation of UK domicile tends to be focused in terms of IHT and deemed domicile. Once the 17 year threshold is crossed acquisition of a deemed UK domicile can't be avoided.

However it shouldn't be forgotten that a non dom whose main home is in the UK acquires an actual UK domicile of choice once it is clear that he intends that the UK will remain his home permanently/indefinitely.

Inheritance tax

The main result of acquiring an actual or deemed domicile is that the individuals worldwide assets are within the scope of UK inheritance tax.

It is of course possible for the individual to mitigate this eg by gifting assets more than 7 years prior to death. However this is not always possible eg due to the reservation of benefit rules or pre owned asset provisions.

However, there is one strategy that can be effective. This is to create an offshore trust prior to becoming a UK domiciliary. This would hold foreign property as an excluded property trust. As such the foreign assets would be outside the scope of UK IHT. Subsequent changes in domicile would be irrelevant.

Note that the IHT advantages of the trust can be achieved if the trust is UK resident. This is because the residence of the trust is immaterial in determining excluded property status. However it is essential that the trust holds foreign assets.

However, this doesn't apply for income tax or CGT. In fact this usually makes a UK resident trust unattractive.

CGT

The concept of deemed domicile doesn't apply to CGT. However, should a non dom acquire an actual UK domicile, gains on foreign assets cease to be eligible for the remittance basis and become subject to CGT on the arising basis. The same applies to gains realised in any offshore trust of which he is a settlor and he and his children are beneficiaries.

There are 2 areas where CGT planning in anticipation of a change in actual domicile is worthwhile.

1. Base cost

Under CGT rules there is no updating of base cost when a non resident becomes resident or when a non dom becomes UK domiciled. Therefore gains would include the full historic gain.

This would indicate that a disposal of foreign assets should occur prior to the acquisition of UK domicile. However its not quite this simple. This is because rebasing triggers a gain which is taxable if remitted.

The next point is that it's essential that the individual has an actual foreign domicile at the time of the disposal. If not, there would be an immediate charge to CGT. Therefore they need to be certain of their actual domicile (which is not always a simple task).

Subject to this a transfer into an offshore company or trust could be a useful option to rebase the value.

2. Trust distruibutions

Should the non dom be a beneficiary of an existing offshore trust, trust distributions prior to the acquisition of a UK domicile should be considered. This arises because trust distributions to non doms qualify for a number of reliefs.

It can therefore make sense to effect capital distributions before there is any risk of the individual having a UK domicile. This is so even if the recipient is the settlor, for while capital payments made to him after the acquisition of a UK domicile can't be taxed by reference to current gains (as those are taxed on him on an arising basis) they can be matched with certain trust gains of past years.

As with updating the base cost this strategy shouldn't be implemented if there is doubt about the individuals domicile status.

Income tax

There is little scope of anticipatory planning for income tax.

However, there may be some classes of foreign income whose receipt can be accelerated eg dividends paid by a controlled company. In this case tax is avoided providing the non dom uses the remittance basis and the income is not remitted.

Exclusion of the settlor?

If the non dom is a settlor of an existing settlor interested trust, the issue of whether he should be excluded prior to him acquiring an actual UK domicile should be considered.

Exclusion is attractive as assuming his wife is excluded as well this prevents the income being taxed under the settlement rules.

However the transfer of asset rules may still apply (subject to the motive defence). In addition the exclusion does not apply for CGT purposes unless the settlors children and in some cases grandchildren are excluded as well.