by Julia Rosenbloom
Director, Taxation, Friend LLP
The non-UK domiciled individual has, for some time, enjoyed a magical tax status in the United Kingdom. Whilst new legislation introduced over the last few years has eroded some of the benefits, the mythically named “non-dom” still has preferred tax treatment over and above the “UK dom” and they should take steps to exploit all the opportunities available to them.
This article will highlight some areas of interest from a tax point of view in the context of non-doms acquiring UK property.
Who is a non-dom?
In a logical world, this would be an easy question to answer given its significance from a tax point of view but, alas, the tax world is rarely logical. There is no statutory definition of domicile but there are various factors that are taken into account.
Individuals are born with a “domicile of origin” and, in this regard, individuals acquire a domicile at birth that matches their father’s (whilst sex discrimination law has infiltrated many areas, the law of domicile is not one so the mother’s domicile is not relevant). This means that even if one was born in the UK, it is still possible to establish a non-UK domicile. A non-dom living in the UK will need to demonstrate an intention to return to or settle in the other country as well as strong and sustained links to that country in the interim. A non-dom actually living in that country is obviously in the strongest position.
A person who has a UK ‘domicile of origin’ will have to show that he or she has left the UK behind once and for all and put down roots permanently in another country in order to cease being UK-dom.
Domicile should not be confused with residence. An individual may be domiciled in one country and resident in another for tax purposes.
UK tax issues on acquiring a property
Everyone (whether non-dom or UK dom) should consider tax when they acquire a property. They should consider taxes on acquisition, taxes during the course of their ownership and the taxes that could apply when they sell.
The table below summarises the major taxes as relevant to non-doms (both resident and non-resident) acquiring UK property directly in their own name:
|
|
UK resident |
Non-UK |
|
Stamp Duty Land Tax (“SDLT”) |
Payable if land situated in UK |
Payable if land situated in UK |
|
Inheritance Tax (“IHT”) |
If property is situated in the UK, it is subject to IHT at up to 40% |
If property is situated in the UK, it is subject to IHT at up to 40% |
|
Capital Gains Tax (“CGT”) |
CGT payable |
No CGT (subject to being non-UK resident for at least five complete tax years) |
|
Income Tax (“IT”) |
If rental income is received, it is chargeable to IT |
If rental income is received, it is chargeable to IT (potentially subject to the non-resident landlord scheme)
|
Tax planning opportunities
The exact acquisition structure to be recommended when acquiring a UK property depends on a variety of factors and there is no “one size fits all” option. The intention of this article is to highlight a few key areas.
Inheritance tax (“IHT”)
IHT is payable at 40% on death to the extent an individual’s chargeable estate exceeds £325,000 (being the nil rate band). What a non-dom could decide to do to counter this IHT charge is to move the UK property overseas. Such suggestion is often met with a confused look until I explain that they can do this by holding the UK property in a non-UK resident company. The non-dom, therefore, holds a non-UK asset (shares in an overseas company) which, in turn, saves them 40% IHT. This only works if the non-dom is not long term resident in the UK (which, for these purposes, broadly means 17 out of the last 20 tax years). If they are long term resident, they are deemed domiciled (for IHT purposes only) and alternative methods must be considered.
An individual who is not deemed dom but could become so in the future because of a longer term intention to reside in the UK may also consider including a trust (of which they are a beneficiary) in this arrangement i.e. as a shareholder of the overseas company. This ensures that the “excluded property” status of the asset is preserved even if the individual becomes deemed dom in the future.
Capital Gains Tax (“CGT”)
From a CGT point of view, it may be that using a “standard” offshore company means that, if the company sells the property at a gain, the gain is attributed to the non-dom anyway for CGT purposes (if they are UK resident). This attribution can be avoided by using a special type of offshore company, known as a “Protected Cell Company” or “PCC”. Such a company can also be used by UK doms for CGT mitigation.
There may also be CGT advantages to including a trust. Where a non-dom establishes a non-UK resident trust, it enjoys its own special CGT regime. If the non-resident trustees sell the UK property at a gain, no CGT is payable at that time. Rather, the gain is “stockpiled” (which, in layman’s terms, means “the trustees keep a note of it”) and then it is only if the trustees distribute capital to a UK resident beneficiary that CGT becomes payable. So, the trustees could either reinvest the sale proceeds in other assets or distribute at an appropriate time and/or to an appropriate (i.e. non-resident) beneficiary.
As far as the non-dom is concerned, they could break the structure if they wish and permanently avoid CGT either during a period of non-UK residence or during a year in which they have made a remittance basis claim (in the latter case, provided they are prepared to leave the funds offshore).
Income Tax (“IT”) and Stamp Duty Land Tax (“SDLT”)
I have not made any detailed mention of IT or SDLT. The UK tax regime seeks to charge IT on UK source income and rental income from a UK property falls within this category. There is a raft of anti-avoidance legislation which makes it difficult to avoid the IT charge but this should be considered on a case by case basis.
As far as SDLT is concerned, the top rate of SDLT is now 5%. SDLT is a value based tax and the 5% rate kicks in at £1 million for acquisitions of residential property. SDLT planning is a whole separate article but it may be possible to mitigate this liability and specific advice should be taken.
Conclusion
This has been a relatively quick canter through what is a very complex area. Non-doms continue to enjoy significant tax planning opportunities and these should be exploited as much as possible. Ideally such matters would be considered as part of the acquisition process but they can also be considered where a non-dom already owns a UK property personally but wishes to now take some planning steps.
Contact:
Julia Rosenbloom, Tax Director at Friend LLP. 0121 633 2000 or julia.rosenbloom@friendllp.com
Eleven Brindleyplace, 2 Brunswick Square, Birmingham B1 2LP, Portman Square House, 43-45 Portman Square, London W1H 6HN
Nothing in this article should be taken as constituting advice and specific advice from an appropriate professional should be taken in every case. Whilst every effort has been taken to ensure the accuracy of the content, the writer takes no responsibility for actions taken purely as a result of reading this article.