Expats Encouraged to Act on Inheritance Tax Changes

By HopwoodHouse, 12 August, 2015

One of the changes contained within the budget this year was a reform of the way non-doms are taxed. For the most part, these rule changes affect non-doms who are currently residing in the UK, but there are also some measures that will affect UK nationals living abroad. British expatriates are therefore being encourage to act sooner rather than later to ensure they are ready for the new rules.

Some of these reforms are good news for expats. For example, they will soon benefit from increased rates of inheritance tax relief on their main UK residence. There is already Principle Private Residence (PPR) relief in place, allowing exemption from capital gains tax when such properties are sold by their expat owners, assuming said owner occupies the property for a minimum of 90 days of the year.

However, inheritance tax relief worth £175,000 will also apply to such properties over and above the existing £325,000 per person zero tax rate. Both the existing rate and the newly-introduced relief will be doubled for couples, allowing family homes to benefit from tax exemption on the first million pounds of their value.

There are catches, however. It will take until 2020 for the new inheritance tax relief system to fully take effect, and it will not apply to estates with a total value of over £2,350,000.

Expats who hold residential investment properties will also be subject to some changes when it comes to inheritance tax, and these are not so positive. Softening the effects of inheritance tax on these assets is set to become decidedly more difficult than it has been before. Up until now, a popular solution was to use an overseas company to purchase the property, so that technically the individual's investment would not be the property but instead shares in the property. For those who had achieved non-dom status, this was sufficient to shelter the property from tax upon the investor's death, but new rules will bring properties owned in this way within the scope of UK inheritance tax.

Those who currently own such properties are advised to restructure the companies through which they hold the properties. If the property is owned by a trust, rather than by other, simpler corporate structures, then this should still help to mitigate the tax bill when ownership of the investment is transferred through inheritance.

Those long-term expats who have established a new domicile of origin overseas are in the enviable position of having their global assets exempted from UK inheritance tax altogether, but any assets back in the UK are not included in this immunity. Placing all possible assets into trusts to permanently remove them from the remit of UK inheritance tax – even if they later returned to having the UK as their domicile of origin – has long been standard practice. Returning to the UK temporarily would also see them only taxed on income originating or remitted in the UK, just like any other non-dom.

Once again, this is being shaken up. The moment such expats return to the UK, they will be subject to full UK tax and will cease getting tax relief from trusts or capital gains. There is no real way around this, but non-dom status will at least be reinstated as soon as they leave the UK and return to their overseas domicile once more.

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