Non-doms: Shaken to the foundations
Thursday, 14 June 2012 10:47 AM
By Mike Fleming
This year’s budget brought several changes to the landscape for ‘non-doms’ (people resident in the UK but domiciled elsewhere) owning or seeking to acquire UK property. With some reforms still undergoing consultation and not due to be introduced until April 2013, it’s impossible to give definitive advice at this stage on how non-doms should own UK property. However, it’s important to assess the possibilities and explore what the best property ownership options may be for non-doms in 2013 and beyond.
First though we need to properly understand the history of non-doms. The concept of non-dom status has its roots in colonial times and extends back to 1799, when legislation was introduced to eliminate the need for UK-residents who owned estates overseas to pay UK tax on the income from that source, as long as it wasn’t channelled back into the UK.
In 1914 this condition - that wealth generated by non-doms overseas would only be taxable in the UK if brought into the country – was formalised as the ‘remittance basis’. This remained largely unchanged until April 2008, when legislation was passed to oblige any non-domiciled individual wishing to take advantage of the remittance basis to pay a statutory amount of £30,000 per year, if they had been resident in the UK for seven or more of the previous nine years.
This was introduced in response to growing concerns that non-doms were gaining many benefits from living in the UK for extensive periods of time without giving enough back to the economy. This year’s budget proposed to increase this charge to £50,000 for those who have been resident in the UK for 12 or more of the previous 14 years, with effect from April 2013.
Even with this annual levy, the UK has remained an attractive place to reside for non-doms due to the favourable conditions surrounding property ownership. Historically, and currently, it’s usual for non-doms to acquire UK property through offshore companies which enables them to avoid UK Inheritance Tax (IHT) at 40 per cent. Further benefits to this system include the possibility for the ‘real’ owner to remain anonymous and for ownership of the property to be easily transferred through shares in the company, without the need to change the name in which it is owned. This also bypasses the payment of Stamp Duty Land Tax (SDLT), obviously a major advantage.
However, proposals in this year’s budget threatened critical changes to the outlook for non-doms who either own or seek to own UK property. The first proposal, which took place with immediate effect, requires a massive 15 per cent of SDLT to be paid on the purchase of properties over £2m by ‘non-natural persons’, which encompasses offshore companies. With this avenue for investment in UK property looking distinctly less lucrative, what other options are worth taking into consideration?
Many non-doms will be tempted to look into owning their UK property as an individual to avoid this hefty SDLT liability. While it’s true that if the property is to be their main residence, the individual should be eligible for PPR (principal private residence) relief, this must be weighed up against the fact that on the death of the owner, whoever inherits the property will be liable to IHT at 40 per cent (if the value of the property exceeds £325,000). Of course, if the person who inherits the property is the spouse of the deceased, they will be totally exempt from IHT – provided the surviving spouse is domiciled in the UK. However, it’s important to note that if the spouse is classed as non-dom and has not been resident in the UK for 17 of the last 20 years, only £55,000 of the property’s value (excluding BPR and APR) will be exempt from IHT and the rest will be potentially chargeable at 40 per cent.
Alternatively, if the property is bought or continues to be owned by a company, overseas or otherwise, it is now likely that in 2013 it will be caught by Capital Gains Tax (CGT), although the trap of IHT will be avoided. It’s possible that, whether or not you are classed as a non-dom, it may in fact be more tax-efficient to own property in the UK through a UK-based company, to avoid the 15 per cent SDLT charge.
Due to the complex nature of UK tax legislation, at the moment it’s not possible to give hard-and-fast answers to the question of how non-doms should most profitably own and invest in UK property from April 2013 onwards. It may be that we see more non-doms setting up trusts whereby property can be sold via the transfer of trust companies. However there are complex issues underlying such a strategy, which can only be addressed when we know exactly what the ever-shifting legislative sands say.
Mike Fleming CTA. TEP. is tax director at Straughans Chartered Accountants.
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