Summer Budget 2015: Implications for Isle of Man resident individuals

Monday 18 January 2016

By Phillip Dearden, Director - Tax, Equiom Solutions

The UK Budget of July 2015 was the first of a new Conservative administration. It included a proposal to treat all individuals who were born in the UK but who left and became domiciled elsewhere as UK domiciled immediately upon a return to the UK, with a knock-on effect for trusts that they have created.

Domicile and Inheritance Tax

In the UK, Inheritance Tax (IHT) is levied on estates that exceed the nil-rate band at 40%. The main attaching concept for IHT is domicile, unlike most UK taxes which rely on residence. Domicile is a more long-term concept than residence; residence is where someone lives currently, domicile is the place that they consider to be their ultimate long-term home. For most people residence and domicile are the same place and, for most, it never changes. However, people who move between jurisdictions may change their residence as they move to a home in a new country but their domicile will only change if the new place of residence is a permanent home. This is relevant for people who move to the Isle of Man as, if they wish to cease to have an exposure to UK IHT, they need to make the move permanent and achieve a Manx domicile. Those who are Manx domiciled also need to be careful about holding UK assets as these remain within the scope of IHT.

Returning Non-domiciliaries

The proposal contained in the Summer Budget will affect individuals who were born in the UK and who moved from the UK to the Isle of Man and hoped to achieve an Isle of Man domicile. It is now proposed that individuals born in the UK with UK-domiciled parents who have left the UK will be automatically treated as UK domiciled upon their return to the UK. This will affect, for example, individuals who have moved to the Isle of Man on a permanent basis and who hoped to have achieved a domicile in the Island. If such individuals return to the UK and become UK resident, even temporarily, they will be treated as UK domiciled. The provision will only bite if an individual has also been resident in one of the two previous years, so it will not catch very short-term visitors to the UK.

Furthermore, it is provided that such individuals will not benefit from any favourable tax treatment in respect of trusts that they have set up prior to returning. This provision has the potential to cause a lot of discomfort as many individuals will have set up trusts believing themselves to be non-domiciled but now, if they return to the UK, they may prejudice the tax position of trusts created many years ago. A consultation document is expected on these provisions shortly and individuals in this position should be very cautious about a return to the UK until they understand how this change might affect them or trusts that they have created. This issue could affect individuals who have already returned to the UK.

These new provisions are expected to have effect from 6 April 2017. There has been a consultation process and draft legislation has subsequently been produced. The proposals are not yet set in stone but it does appear that they will be implemented largely as per the draft legislation.

Summary

The inclusion of the provision to automatically treat returning non-domiciliaries as UK domiciled was something of a surprise as, in most cases, the facts would allow HMRC to treat UK persons who return to the UK after an absence, even a long one, as UK domiciled on return. Nevertheless, the proposal is there and the sting in the tail is the proposal to bring trusts created by such persons while they were abroad within the scope of IHT. Individuals who may be caught by this provision should take advice before they return to the UK.