As a starting point, UK Inheritance Tax (IHT) is payable by everyone with assets in the UK or who is tax resident in the UK. In our introductory guide to inheritance tax we reviewed the key thresholds and exceptions relating to IHT in the UK, as well some of the top tips for estate planning for UK domiciled individuals such as gifting, life insurance and business relief. However, if you are non-domiciled in the UK the rules may be different and, in this article, we will look at the considerations specifically relevant to non-domiciled individuals.
Rules for non-domiciles
The rules for whether you are domiciled in the UK or non-domiciled are complex. However, If you are non-domiciled in the UK (please see our Introduction to Domiciles guide), UK IHT works slightly differently and can be very advantageous. Whilst a UK domiciled individual’s worldwide estate is subject to IHT at 40% of their non-exempt estate over the nil-rate band, a non-domiciled individual is generally only taxed on their UK assets.
Careful understanding of what is considered a UK asset is required. Assets that appear to be non-UK initially, but which derive their value from UK property or are linked to UK property through loans, are effectively deemed to be UK assets for IHT purposes.
A non-domiciled individual still has the standard nil-rate band (currently £325,000) and when they are non-domiciled in the UK, but their main residence is in the UK the Residence Nil-Rate Band (RNRB) of up to £175,000 may also be available. It is important to note that the rules on IHT apply even if the individual is not UK tax resident, so any individual with UK assets could have a UK IHT liability.
Issues of which to be aware
As always, any potential advantage is not without complexities that need consideration and professional advice.
Whilst the spousal relief of 100% of exception on transfers to your spouse remains available, this does not apply if a UK domiciled spouse is transferring assets to a non-domicile. In this case, the spousal exception is limited to just £325,000 (in additional to the individual’s regular nil-rate band). It is highly advisable to keep this in mind when drafting wills.
In addition, the concept of being deemed domiciled has a large effect on the IHT rules, as individuals considered as deemed domiciled on death will be subject to IHT on their worldwide assets. Remember that you will be deemed domiciled after 15 years of tax residence, which may mean only being physically resident for little over 14 years. Because the test considers if a person has been resident in the UK for 15 out of the preceding 20 tax years, once a person is deemed domiciled it can take six tax years of non-residence to become non-domiciled again.
Excluded Property Trust
As a non-domiciled individual, if you are likely to become deemed domiciled and, therefore, have your worldwide assets come in scope of UK IHT, some pre-planning can be highly valuable.
If a non-domiciled individual, settles non-UK assets into an Excluded Property Trust (EPT), before becoming deemed domiciled, these assets become ringfenced and outside the scope of UK IHT, even after the settlor becomes deemed domiciled or actually domiciled.
By settling the trust whilst non-domiciled and with non-UK assets, there should be no IHT considerations on establishment and the trust will remain out of scope for UK IHT purposes for future generations to come.
Generally, the trust is discretionary in nature but the settlor could be a potential beneficiary and so has the opportunity to benefit from the trust. Whilst the settlor is not UK domiciled and if the trust has non-resident trustees, there may be also be tax deferral benefits on the income and gains.
It is very important that anyone considering the use of an EPT seek professional advice early in the process to ensure the structure and administration of the trust can be setup properly to meet the individuals needs and expectations.
Conclusion
Estate planning as a non-domiciled individual has its clear advantages but its complexities mean that taking specialist advice early is essential. Our specialist advisors have the experience and qualifications to support you throughout the process, partnering with suitable tax and legal specialists in a collaborative team working on your behalf.
Nathan Prior
Partner, Head of International
nprior@partnerswealthmanagement.co.uk
020 7444 4053
The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information.