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  • Non domiciled tax changes (3) – The Inheritance Tax (“IHT”) changes (including revisions to excluded property)

    23 November 2016

    Andy Wood

    Non dom tax changes – The Inheritance Tax (“IHT”) changes (including revisions to excluded property rules)

    Updated to reflect Finance Bill 2017


    Although this may be a case of teaching grandma to suck eggs (were grandma’s ever particularly proficient at such an activity?) but IHT is primarily focused on one’s domicile position rather than residence.

    The rule is that if one is domiciled in the UK then one pays UK IHT on worldwide assets. If that person is non-resident at the point of death it is irrelevant – unless he intends to reside outside the UK indefinitely and franks that intention with physical residence outside the UK.

    If one is non-domiciled then the starting point is that one is only subject to IHT on UK assets. Foreign assets being outside the UK’s clutches.

    However, unlike what we have seen historically for income tax and capital gains tax, this special treatment for non-doms has had a limited shelf life. Once a non-dom has been resident in the UK for 17 out of 20 tax years then he has become ‘deemed domiciled’ for IHT purposes only. One can therefore fairly regard the income tax and CGT proposals discussed in earlier notes as a way of catching up with the existing position for IHT.

    Furthermore, there is an IHT ‘tail’ meaning that is one has been domiciled or deemed domiciled for IHT purposes one will remain so for three years.

    The new deemed domicile rule for IHT purposes

    The non dom tax changes leave us with a 15/20 year test under newly amended draft IHTA 1984, s267(1)(b).

    We also have an all new special rule for ‘former or returning UK domiciled residents’. They will get a one year grace period before the new rule applies. However, in the second year of residence, they will be deemed domiciled for IHT Purposes.

    It is clear what actions should be taken here. If one is not currently deemed domiciled then one should make sure that you revisit the date on which you will become so under the new rules. In other words, underline a different date on the calendar.

    As we will see in the next section, it is still possible to create valid excluded property trusts. However, it may well be that one has to do this earlier than previously anticipated (and indeed it may be necessary for an individual to create such a structure prior to 6 April 2017).

    Former or returning domiciled residents should make themselves very clear of the consequences of their special status – for IHT, capital gains tax and income tax purposes.

    Excluded property


    Typically, an excluded property structure would involve a non-UK trust that held shares in a non-UK company. That Company would then invest in assets – both in the UK or overseas. In many cases, it might also include a UK main residence.

    An excluded property structure created by a non-dom, and not yet deemed dom, individual would act as a shelter from UK IHT net for all the assets contained within it in perpetuity. This is even the case if the non-dom creating the trust subsequently became deemed dom.

    This treatment is still the case even where the underlying assets were located in the UK. One might say that the structure had the effect of transforming UK assets in to foreign ones for the purposes of UK IHT.

    For UK main residences, the benefits of holding them through such a structure have been largely eroded by things such as the Annual Tax on Enveloped Dwellings (“ATED”) and Non-Resident Capital Gains Tax (“NRCGT”). However, people may have taken the decision that these new taxes on existing structure were a price worth paying for the ongoing IHT protection.

    However, the Government has clearly lost patience….

    What’s happening to excluded property?

    The initial announcements on the non dom tax changes back in Summer 2015 were slightly mixed in their message. On one hand, the technical team were saying that the changes would revolve around revisions to the excluded property rules.

    However, at the same time, the HMRC propaganda machine were declaring that UK residential property ‘no matter how held’ would be subject to UK IHT. This second statement clearly suggesting something much wider in scope.

    Thankfully, as things stand at the moment, the damage is limited to a recasting of the definition of excluded property and not a wider set of provisions.

    The definition essentially excludes UK residential property from the definition of excluded property. As such, UK residential property cannot, and no longer will be, within the definition of excluded property.

    As confirmed in Finance Bill 2017, this will include certain loans which are related to UK residential property.

    It is worth reiterating that any other property will continue to be protected following the non dom tax changes – whether that is different types of UK property or the assets are based overseas.


    Of course, there are a number of complications in these new proposals which are touched upon in the consultation document.

    Originally, in the ConDoc, there were plans to deal with situations where there was a switch from residential to non-residential use. They had suggested that any such change of use would have a two year tail. However, this has been scrapped in Finance Bill 2017.

    The Government will bring in rules dealing with mixed use property.

    The Government has also incorporated a Targeted Anti-Avoidance Rule (“TAAR”) in to the new rules. As such, one must be aware that being too clever in one’s planning could be self-defeating.

    Planning in relation to UK residential property

    As described above, these non dom tax changes only revise the definition of excluded property. They do not operate a more general principle that UK residential property, no matter how held, will be subject to UK IHT.

    For example, UK residential property which is protected by virtue of, say, the UK / India or UK / Pakistan capital tax treaty is not impacted by these changes.

    One could still make use of Employer trusts to protect such property from an IHT charge (and also 10 year charges.)

    Finally, one could also utilise a QNUPS to protect such property from UK IHT. Such a pension scheme will benefit from statutory exemptions.

    Furthermore, if one has an existing excluded property trust with UK property in it, one should be able to port such assets from the excluded property trust to the QNUPS prior to 6 April without any adverse tax charges. Though the appropriateness should be considered on a case by case basis.

    Action points

    • Where one has an Excluded Property Trust, then consider what the breakdown is between UK and non UK assets. Planning (eg decanting in to a QNUPS) should be considered in respect of the former, though the structure will remain effective for the latter;
    • It is still possible create an excluded property trust before one becomes deemed dom. However, consider the acceleration of the new date of being deemed domiciled under the new rules?
    • No de-enveloping relief – consider how to deal with structures holding main residence structures?
    • Generally do not use a company for new main residence structures – the ATED provisions perhaps make this a worse option (for tax purposes) when compared to holding it in own name;
    • UK B2L properties – consider QNUPS, Employer Trusts, other structures. In other words, approach IHT as if you were a UK domiciled person.

    We trust that you have found our wander around the IHT part of the non dom tax changes of interest. If you or any of your clients have any queries about the non dom tax changes then please get in touch


    Articles in this series:

    Part one: Setting the scene and what is domicile?

    Part two: The income tax and CGT changes (including rebasing, mixed fund rules and Business Investment Relief)

    Part three: The Inheritance Tax (“IHT”) changes (including revisions to excluded property)

    Part four: Returning non-doms – a tax pariah?

    Part five: The changes in relation to trusts

    Part six: A summary of actions and planning ideas