Recent changes to the UK's inheritance tax regime have implications for non-domiciled individuals, the author of this article argues.

The status of non-domiciled residents in the UK has been eroded in recent years by a succession of Labour, coalition and Conservative administrations. The status retains a value, however. With a UK budget looming, and the taxation of wealthy persons remaining a sensitive political issue, we return to this topic. To address it is Lana Corrienne Mallon, who is senior wealth planner at Lombard International Assurance, the provider of wealth structuring and succession solutions. 

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The special relationship that non-domiciled persons (non-doms) have had with the UK has been long established and is invaluable to both parties; inward investment from non-doms was met with a carved out tax position for individuals who were not likely to stay forever in the UK, and it allowed appropriate tax planning to be put in place while recognising the territorial scope of the “taxman”. 

Revision of the deemed domicile rules (reducing the residency test from 17 to 15 of the last 20 tax years), the introduction of the remittance basis charge and protracted political uncertainty has seen a decline in the number of individuals classified as non-doms in the UK. The immediate effect of the above is, of course, to income and capital gains taxation, with the deemed domicile rules having an ultimate impact on UK inheritance taxation.

The latest meaningful evolution of the UK IHT environment for non-doms was felt in the Finance Act 2017. It was a perfect example of the “creeping scope” of UK IHT - now applying UK IHT to UK property owned by non-UK residents – irrespective of their non-dom status. It highlights that understanding when and how UK IHT applies can be a challenge, even for the most competent of tax advisors. Some of the more complex issues include understanding the application of IHT double tax treaties, which country has taxing rights or which law of succession is to apply. For clients who are not familiar with the UK regime and its intricacies, this can seem impossible and the impact (or cost) of getting it wrong is very real. 

Other issues can intensify the discussions around inheritance tax and succession planning. Sometimes it is personal: such as divorce, age and retirement, the international movement of children and grandchildren or climate. Sometimes it is financial: performance of the stock markets, the “health and wealth” of a country’s currency or changes in a jurisdictions tax regime. Sometimes it’s political.

January 2020 gave rise to mutterings of the March Budget setting out surprise changes to UK IHT and a possible introduction of a wealth tax. Although not directly aimed at non-doms, the Chancellor’s focus on balancing an increase and reallocation of investment with a “decade of renewal” for the UK economy and wider Conservative voters’ reactions, may be at odds with that suggestion. 

This ambiguity is supported by the short timeframe between “Brexit day” of 31 January and “Budget day” of 11 March - it may be a surprise if there were sweeping changes to tax policies in that interim, but on the other hand, it may be the motivation needed to make changes. Nonetheless, the symbolism of the UK Budget shouldn’t be underestimated, it is after all the first UK Budget in 47 years as a non-EU member state. 

January 2020 also saw the release of a report from a cross-party group of UK politicians (the APPG) suggesting that the current regime for UK IHT was “ripe for reform”. The key message of the report was that IHT should be traded for a general gift tax at a lower flat rate of 10 to 20 per cent, but of particular note for non-doms is the report’s proposition that residency could circumvent domicile as the connecting factor for IHT. Indeed, this would be more aligned with EU and other jurisdictions that look at habitual residence to determine taxation, and more simple for those UK resident non-doms. Whether any of this leads to fruition is uncertain, but the report makes for interesting reading. 

It is fair to say that in the aftermath of Brexit, and more poignantly the December 2019 election, the UK IHT landscape has the potential to change quickly and dramatically – in which direction is not clear. Focus will be on the Budget on 11 March and what it will entail; however, a changing tax landscape is nothing new for UK resident non-domiciled persons and their advisors. What will be key, is effective and timely planning to ensure that it doesn’t hit where it hurts.