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Private client briefing for October 2015

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The long awaited consultation paper is published on the new deemed domiciled proposals for non-doms who have been UK resident for 15 out of 20 tax years. HMRC makes amendments to the inheritance tax residence nil-rate band (RNRB) legislation and publishes a consultation document on downsizing and the RNRB. There is useful IHT guidance and reminders in the latest HMRC Trusts and Estates Newsletter, as well as updated guidance on offshore disclosure facilities, and research findings published by HMRC into the impact of ATED on taxpayers.

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Radical changes for non-doms proposed

The government has nowublished its consultation document on reforms to the taxation of non-doms. In Summer Budget 2015, the government announced that from April 2017 it would treat non-doms who have been resident in the UK for at least 15 of the past 20 tax years as deemed UK domiciled for all UK tax purposes. The consultation document contains draft legislation for comment, although controversially not yet in relation to the crucial, complex issues surrounding offshore trusts. The changes will be legislated in Finance Bill 2016. See

Why it matters: From their 16thear of residence, all non-doms will be deemed UK domiciled and will no longer be able to use the remittance basis of taxation. Long term UK resident non-doms will instead pay tax on an arising basis, effectively putting them on the same footing as UK domiciliaries. Their foreign assets will also be subject to inheritance tax (IHT), in the same way that their UK assets have always been, again putting them on a par with UK domiciled taxpayers.

Trusts, set up by non-doms and holding foreign assets, will remain outside the scope of IHT even after the non-dom becomes deemed UK domiciled. This is a very valuable benefit for non-doms approaching 15 years of UK residence. Interestingly, the consultation document specifically mentions ‘offshore’ trusts; of course, trusts do not necessarily need to be offshore to be excluded property trusts.

The proposals do not just affect foreign born non-doms. An individual born in the UK with a UK domicile at birth, who later moved abroad and acquired a foreign domicile of choice, will automatically be treated as UK domiciled for tax purposes as soon as he becomes UK resident again, even if only for a short period. In contrast, if he was born abroad but in all other respects the facts are identical, he can return to the UK and will only be deemed domiciled after 15 years of residence. The emphasis on the place of birth is surprising and irrational, as well as potentially contrary to EU law.

Whether the changes lead to an exodus of non-doms or to an increase in tax take remains to be seen.

IHT residence nil rate band provisions

Changes to the proposed IHT residence nil rate band provisions have been announced. First, HMRC announced updates on 15 September 2015 to cl 9 of the Finance (No. 2) Bill 2015, which will bring in the new IHT residence nil rate band (RNRB) under new ss 8D–8M of IHTA 1984. The RNRB will be introduced for homes that pass on death on or after 6 April 2017 to direct descendants of the deceased in estates worth broadly under £2m. The recent updates broaden the definition of ‘closely inherited’ to include spouses and civil partners of direct descendants, as well as widows, widowers and surviving civil partners of direct descendants who predeceased and had not remarried at the time of the death. See

Second, on 18 September 2015, HMRC published a consultation document with a short response deadline of 16 October 2015, covering how to make sure that those who wish to downsize, move into residential care or give away their own home are not discouraged from doing so. The consultation document provides further details on how the RNRB can be preserved in such circumstances and the conditions that need to be met. It also seeks views on the practical difficulties in implementing the proposals. See See

The detail of how the RNRB will operate is covered at

Why it matters: There is still no clarification about whether it will be possible to use IHTA 1984 s 144 to qualify for the RNRB. Gifts of the home into a discretionary will trust, even where all the beneficiaries qualify as direct descendants, do not currently fall within the ‘closely inherited’ rules; and there is no comfort from HMRC that s 144 read back would be available if the home is appointed to one or more direct descendant discretionary beneficiaries within two years of death. Practitioners were hopeful that HMRC might address this point in the recent amendments to cl 9 of Finance (No. 2) Bill 2015, but no mention was made. In addition, it is not clear whether a cash gift in the deceased’s will to direct descendants, where the home is subsequently appropriated to the children by the personal representatives (PRs) in lieu of the cash gift, would be eligible for the RNRB. If it is eligible, this perhaps highlights the discrepancy if an outright appointment of the home to direct descendants from a discretionary trust using s 144 does not qualify.

Practitioners may be surprised at the generous circumstances in which somebody who has downsized will still be eligible for the RNRB on their death, including where the property has been given away during the deceased’s lifetime, rather than sold.

Also, even if the RNRB operates to reduce or remove the IHT liability on the family home, it will probably still need to be sold to share out the estate between the deceased’s children. With the addition of the generous downsizing rules and the widening of the ‘closely inherited’ definition, surely the simplest solution would have been to increase the normal IHT nil rate band (perhaps limited to estates worth up to £2m) rather than introduce such complexity? The difference in tax take would be negligible.

IHT clarifications

HMRC has issued three useful pieces of IHT clarification in its latest Trusts and Estates Newsletter (see

  • HMRC has confirmed that it will generally treat a usufruct (the right to use and enjoy another’s property during one’s lifetime) as an interest in possession trust for IHT purposes, in line with previous guidance in the newsletter of April 2013. See
  • It has reminded practitioners of the reporting requirements in relation to lifetime gifts made by a deceased individual, which are to be treated as normal expenditure out of income. This follows increasing numbers of incomplete forms IHT403. See
  • A new version of form 41G(Trust), which is used to register a new trust with HMRC. See

Why it matters: There had been commentary that HMRC might have changed its approach to usufructs. However, HMRC has explained that this perception has arisen from cases settled because HMRC applied its approach to the facts of each case as it understood them to be. In each case, the difference between the value reported by the taxpayer and the value emerging following HMRC’s approach was not sufficient to warrant pursuit. It is helpful to have this clarification.

Normal expenditure out of income is a generous IHT exemption for HNWIs, and it helps to have clear guidance of what HMRC expects in the way of reporting requirements. In particular, HMRC reminds practitioners to pay careful attention to completing pages 2 and 6 of form IHT403 properly; otherwise, it will take HMRC much longer to decide whether the exemption applies and practitioners (and their clients) will have to incur the costs consequences of further HMRC questions about the deceased’s income or expenditure.

HMRC has enhanced form 41G(Trust) to include a reminder to complete authorisation form 64-8 if a professional agent is acting, with links to this form and guidance, as well as guidance on trusts for vulnerable people. All of this is useful for practitioners.

Early end to offshore disclosure facilities

In early October, HMRC updated the detailed guidance and Memorandum of Understanding for each offshore disclosure facility for the Isle of Man, Guernsey and Jersey. It confirmed that these will now close on 31 December 2015, in the same way as the Liechtenstein disclosure facility (LDF), instead of 30 September 2016 as originally scheduled.

Why it matters: Individuals with historic UK tax irregularities who are considering using these disclosure facilities to place their tax affairs on the right footing should know that there is now a very short window in which to do so. HMRC has made it clear that tax evaders have nowhere to hide.

ATED: views and behaviours

Following the introduction of the annual tax on enveloped dwellings (ATED) in April 2013, HMRC commissioned research to understand the impact on enveloping and de-enveloping behaviour. The research involved 40 interviews with individuals who own enveloped properties, representatives of companies that own or manage property envelopes, and their agents. The research suggests that ATED (and 15% SDLT) has discouraged the initial enveloping of properties. However, it seems that where an envelope already exists, very few are de-enveloping their property. See

Why it matters: The most common reasons cited for enveloping properties were IHT planning and privacy. Avoidance of SDLT by transferring company shares was not mentioned as a main reason for enveloping. Also, ‘most owners of envelopes had not considered de-enveloping in the future – primarily because the cost of ATED did not outweigh the benefits of the envelope, or because the CGT cost associated with de-enveloping was perceived to be too great’. It seems likely, however, that more people will de-envelope when the IHT changes from April 2017 are introduced, after which there will be scarcely any good reasons for maintaining enveloped properties.

What to look out for

  • The consultation period for the reforms to the taxation of non-domiciles ends on 11 November. A further consultation document is expected in late autumn covering the Summer Budget 2015 proposal that UK residential property held through an offshore company and currently excluded from IHT should be within the charge to IHT. This would bring into charge all residential property owned by an offshore company whose shares are held by a non-dom or by a trust set up by a non-dom.
  • Same-day addition rules targeting IHT avoidance using pilot trusts (new ss 62A–62C of IHTA 1984) will come into effect with royal assent of Finance (No. 2) Bill 2015.
  • The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2015 strengthening the disclosure of tax avoidance schemes (DOTAS) ‘hallmarks’, which describe the new detail of arrangements that will now be disclosable in relation to inheritance tax avoidance, are due to be laid before Parliament in the autumn, following a consultation which ended in September.