A great deal has been written about the proposed abolition of the concept of “domicile” as a determinant of a person’s UK tax profile. We have set out below some present thoughts on this topic.
The expected changes
In July and August this year Government released policy papers that made clear its intention to legislate so that from April 2025:
(a) an individual’s tax profile will be determined by residence and the concept of domicile will no longer be relevant;
(b) UK resident settlors who have an interest in non-resident trusts will pay tax on trust income and gains once they have been UK resident for four years;
(c) the concept of “excluded property status” will no longer apply to protect trust assets from inheritance tax;
(d) IHT will apply to worldwide assets after ten years of UK residence and there will be a ten-year “inheritance tax tail” for those leaving the UK[i];
(e) new arrivals to the UK will not pay any income tax or gains tax (on non-UK income and gains) for four years – these gains can also be brought to the UK tax free;
(f) the present rules under which income and gains arising to offshore structures are attributed to UK resident individuals will be replaced – but not until April 2026.
Certain transitional measures are expected: (i) in respect of historic gains and income that have arisen within an offshore trust; (ii) to enable excluded property trusts to be restructured; (iii); and (ii) in respect of rebasing for capital gains tax.
More detail will be available on 30 October this year although it is not clear whether draft legislation will then be available.
What to do?
In many cases you should plan what to do now but not take any steps until the detail of the legislation is known. One exception might be if you intended to take a particular course in any event, the certainty of doing so within the present (known) tax environment might be attractive.
Assuming the legislation is introduced in its presently expected form you might consider the steps below.
(a) For existing trusts
(i) benefit from the remittance basis this year – taking income from trusts of companies and upbasing the value of non-UK assets;
(ii) collapsing the trust – clearly a significant step and one that requires estate planning and trust advice – not just tax;
(iii) remove UK resident settlor / spouse / children /grandchildren as beneficiaries – precisely who would need to be removed and how remains to be seen;
(iv) bring the trust on-shore – this can be done simply by appointing UK resident trustees;
(v) consider trust beneficiaries becoming non-UK resident;
(vi) interpose a UK company (or bring a non-UK company into the UK) so that investments are taxed at corporation tax rates;
(vii) make distributions now to non-resident beneficiaries; or
(viii) follow an investment strategy that enables gains and income to be rolled-up, for example investing within a life insurance bond wrapper.
(b) For individuals
Steps (i); (v) and (vii) are like to be relevant to consider in respect of their own affairs. Individuals (and trusts) might also consider rebasing capital values now. Leaving the UK is one obvious step to take and depending on your circumstances it is possible to spend a generous amount of time in the UK without becoming UK resident.
Conclusion
Paying tax on worldwide income and gains is a concept with which our US clients are familiar – and many argue that the example of the US demonstrates that worldwide taxation is not an inhibitor of growth. Time will tell how wealth creators react to the proposed changes in the UK.
[i] The Government has explained it plans engagement with stakeholders to refine this proposal
