Law changes unveiled in Chancellor George Osborne’s Budget 2013 that aimed at cracking down on offshore tax evasion mean that non-domiciled people living in the UK need to act now to avoid hefty fines.
These non-doms may not be aware of the changes, but they need to check their tax position to avoid the risk of stiff penalties from HM Revenue and Customs (HMRC).
One of the biggest issues facing non-doms is for those who have bought valuable homes through a company as properties worth more than £2 million are now subject to a new annual charge.
The charge itself is on a sliding scale depending on the value of the property, and ranges from £15,000 to £140,000.
Many of London’s priciest homes are held in companies, especially by wealthy Americans, and they will need to unwind the arrangements to avoid the new annual charge.
Inheritance tax
The new charge will be levied on all properties in a corporation regardless of whether the owner lives in the UK or overseas.
Lisa-Jane Dupernex, a solicitor at law firm Speechly Bircham, said that homes which are held by a corporation need reviewing to avoid the charge.
She said: “Non-doms use corporate structures to avoid the 40% UK inheritance tax which is levied at the time of death.
“Non-doms must now work out whether it is better to pay the charge against the benefit of inheritance tax protection that comes with corporate ownership.”
The issue is clouded for American non-doms since the US levies its own estate tax on US taxpayers no matter where they are living in the world.
Non-doms should act now
Possibly the easiest solution is for a non-dom to transfer ownership of a property to a new trust.
Ms Dupernex added: “Non-doms must act without delay because the new charge is calculated on a pro-rata daily basis for residential properties and they can restructure their affairs at a minimal cost and also avoid a large charge being levied.”
There’s also another issue for non-doms to consider because a little-publicised part of the new rules will now prevent the borrowing of money against the UK property in a bid to reduce its value for inheritance tax purposes.
Legislation now prevents the debts from being deducted against the UK property – though this is complicated since the law allows borrowing to take place after the property is bought and if the money is invested in non-UK assets.
Many non-doms also do not appreciate that they must make a full declaration of their worldwide assets to HMRC – and pay a potential charge of £50,000 if they have been living in the UK for more than 12 years.