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Peter Vaines of Squire Patton Boggs considers the changes announced in the Summer 2015 Budget for trusts and for non-domiciled persons.

Inheritance Tax : Trusts

There has been a great deal of discussion regarding the calculation of the 10 year charge on trusts and in particular where the settlor has established more than one trust. It will no longer be necessary to include non relevant property in the calculation of the effective rate for the 10 year charge and the exit charges. Where property is added to 2 or more relevant property settlements on the same day, they will be aggregated with other trusts which are not already related settlements in calculating the effective rate.

IHTA 1984 s 144 is to be amended so that a distribution or appointment within 3 months of the date of death in favour of the deceased's spouse will be effective.

Non Doms

Serious changes are proposed to the taxation of individuals who are not domiciled in the UK. HMRC say that they will publish a detailed consultation document after the Summer recess - however, it is clear how it is going to work. From April 2017 individuals who have been resident in the UK for more than 15 out of the last 20 years will be treated as deemed domiciled for all tax purposes. This will apply irrespective of the date of arrival in the UK; there will be no special grandfathering rules for those already in the UK.

Those non doms who establish an offshore trust before they become deemed domiciled here under the 15 year rule will not be taxed on trust income and gains in the trust and the existing excluded property rules for inheritance tax will continue.However, they will be charged to income tax (or capital gains tax) on any benefit received from the trust on a worldwide basis.
Children of a non dom will not be affected by any of these changes. They will not become deemed domiciled here just because their parent is deemed domiciled. Their domicile will be determined separately by reference to their own circumstances.

There is a significant change for individuals who had a UK domicile of origin but have acquired a domicile of choice in another country. HMRC do not intend to interfere with this analysis (just as well perhaps as it is a matter of international law and would be rather difficult). However, they do propose that for tax purposes, a person with a UK domicile of origin who resumes UK residence will not be treated as a non dom for UK tax purposes irrespective of their domicile status under the general law. This new rules is intended to apply to all non doms from April 2017, including those who return to the UK before that date.

From April 2017 the new £90,000 non dom charge payable by those who have been resident in the UK for 17 out of 20 years will be redundant because they will be taxable on an arising basis after they have been here for 15 years. The existing £30,000 and £60,000 charges are to remain unchanged.

There will be many people who are going to swim into difficulties as a result of these changes but at least they have nearly 2 years to rearrange their affairs.

More Non Doms

A second announcement relates to UK residential property owned indirectly by a non dom individual. Again, a consultation document will be issued after the Summer recess. At the present time, if a UK property is held by a foreign company, owned by the non dom, the shares in the company are excluded property and outside the scope of UK inheritance tax despite the fact that the value is all contained in the UK property.

The advantages of holding a UK residence in a foreign company have been seriously curtailed in recent years by the 15% charge to SDLT and the (ever increasing) Annual Tax on Enveloped Properties. However, the inheritance tax advantage still exists.

From April 2017, it is intended that all residential property held directly or indirectly by foreign domiciled persons will be within the scope of inheritance tax for example if it is held by an offshore company or partnership. (Holding a property through a trust has not generally been a popular course of action because of the difficulties faced by the reservation of benefits rule and the 10 year charge.)

These new rules apply only to UK residential property - whether it is occupied, let and of whatever value.

It seems that the way this will work is that shares in offshore entities will not be excluded property to the extent that they derive their value directly or indirectly from UK residential property. This looks problematic because companies may have a lot of other assets as well which are not within the charge. HMRC are still thinking about that.

HMRC confirm that the same reliefs will apply as if the property were held directly by the owner of the company. This means that the spouse exemption would apply if the shares are left to a spouse - but it would not apply if the shares are held by trustees unless there is a qualifying Interest in possession.