Inheritance Tax: reforms to the taxation of non-domiciles
Published 9 December 2015
© Crown copyright 2015
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Who is likely to be affected
Individuals resident in the UK who are not domiciled here under general law, non-resident individuals formerly resident in the UK and trustees of trusts created by those individuals if they were born in the UK with a UK domicile of origin at birth.
General description of the measure
The measure will broadly align the existing Inheritance Tax (IHT) deemed domicile provisions for individuals with the proposed changes for Income Tax and Capital Gains Tax (CGT).
This will mean that an individual will become deemed domiciled for IHT if they have been resident in at least fifteen of the previous twenty tax years (the long-term residence rule).
The measure will also provide that individuals born in the UK with a UK domicile of origin at birth who subsequently acquire a domicile of choice elsewhere will be deemed domiciled for IHT purposes whilst they are resident in the UK, provided they were resident in at least one of the previous two tax years (returning UK domiciles). Overseas property settled into trust by returning UK domiciles while they were domiciled elsewhere will also be subject to IHT once the individual has been resident in the UK in at least one of the previous two tax years. However once the individual leaves the UK and ceases to meet the residence conditions, that trust property will be excluded for IHT.
Policy objective
The measure will harmonise the IHT deemed domicile provisions for long term UK residents so that they are broadly in line with the proposed new deeming rules for Income Tax and CGT.
It will also ensure that individuals who are born in the UK, with a UK domicile of origin at birth and who reside in the UK are treated for tax purposes in the same way as an individual domiciled in the UK under general law. It also means that when an individual who was born in the UK and who had a UK domicile of origin has created a trust whilst they were non domiciled, that trust will be subject to IHT, whilst they are UK resident, in the same way as a trust which had been created by somebody who was domiciled in the UK.
Background to the measure
The measure was announced at Summer Budget 2015 as part of a series of reforms to the tax rules for individuals who are not domiciled in the UK, including new deemed domicile provisions for Income Tax, CGT and IHT.
A technical paper was published on the same day setting out an overview of the proposals. A consultation document seeking views on the best way to deliver reforms to the deemed domicile provisions was published on 30 September 2015.
The consultation on these changes closed on 11 November 2015. Stakeholders have emphasised the importance of publishing the detailed provisions on these reforms as early as possible.
HM Treasury will publish a response to the consultation in early 2016, alongside further draft legislation covering the Income Tax and CGT aspects of these reforms. Any further changes required to the draft IHT provisions, including transitional provisions, will be published at that time.
Detailed proposal
Operative date
The measure will have effect on and after 6 April 2017.
Current law
Section 267 of the Inheritance Act 1984 (IHTA) contains the current rules relating to persons treated as deemed domiciled in the UK for IHT purposes.
Section 48(3) IHTA sets out the current rules which determine whether overseas property comprised in a settlement will be excluded property for IHT purposes such that it is not subject to IHT trust charges.
Proposed revisions
Individuals who become deemed-domiciled having been resident for 15 of the past 20 years
Legislation will be introduced in Finance Bill 2016 to amend section 267 IHTA to bring the current rules relating to persons treated as deemed domiciled in the UK broadly into line with the proposed changes for Income Tax and CGT. The amended section will provide that an individual will become deemed domiciled for IHT purposes if they have been resident in the UK for at least 15 out of the previous 20 tax years rather than 17 out of the 20 tax years ending with the tax year in question.
For long-term residents who created trusts while they were non UK domiciled there will be no change to the current treatment of trust assets for IHT. In these circumstances, the UK trust assets are chargeable and the foreign assets (‘excluded property’) are not.
Individuals who are born in the UK with a UK domicile of origin
The legislation will also introduce a separate rule into section 267 to provide that an individual born in the UK with a UK domicile of origin who has acquired a domicile of choice elsewhere will become deemed domiciled for IHT purposes if at any time they are resident in the UK and have been resident in the UK in at least one out of the two previous tax years (the residence condition).
Section 48(3) will be amended to provide that any foreign assets settled into trust by returning UK domiciles while they were domiciled elsewhere will no longer be excluded property in relation to events on or after 6 April 2017 whilst the settlor meets the residence condition.
Summary of impacts
Exchequer impact (£m)
| 2015 to 2016 | 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|---|
| - | - | Negligible | Negligible | Negligible | Negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
The measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
The changes will only affect a small number of personal representatives dealing with the estate of a deceased person, trustees and other individuals who are liable to IHT.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
The government has no evidence to suggest that the measure will have any adverse equalities impacts.
HM Revenue and Customs (HMRC) does not hold data on the protected characteristics of all those potentially affected but this measure should not have an impact on any of those groups sharing protected characteristics. Impact on business including civil society organisations
This measure will not have any impact on businesses and civil society organisations.
Operational impact (£m) (HMRC or other)
The additional costs or savings for HMRC in implementing this change are anticipated to be negligible.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Tony Zagara on Telephone: 03000 585265 or email: antonio.zagara@hmrc.gsi.gov.uk