UK nationals who have moved to the Isle of Man in recent years, and trustees and directors who manage offshore structures set up by non-domiciliaries, need to review the impact of changes to inheritance tax.

Proposed changes to the ‘deemed domicile’ rule are due to take effect from 6 April 2017.

There will be a change in the calculation basis and a broadening of the scope of taxation for those individuals who are deemed domiciled from 2017/18 onwards. They will no longer be in a position to avail of the remittance basis of taxation and will be fully chargeable to tax on foreign income and capital gains.

Andrew Cardwell, Tax Director at PwC Isle of Man, said: ‘UK residential property is again under fire, and structures that are used to protect property from UK inheritance tax will be ineffective for the tax year 2017/18 onwards.

‘Offshore structures settled by non-doms will be more generally impacted, once the settlor becomes deemed domiciled. There are concessions that could effectively replicate the remittance basis for foreign income; capital gains tax (CGT) liabilities could also be deferred for as long as the trustees do not provide benefits to the settlor.’

The good news is that, with the remittance basis no longer available to these longer-term UK residents, there will be a greater rationale for settling an offshore trust prior to becoming deemed domiciled. Two further changes that may be advantageous are also worthy of note:
• Asset rebasing – protecting capital gains inherent on foreign assets from CGT to the extent that the growth relates to periods up to 5 April 2017; and
• Mixed funds – seemingly a one-off opportunity in 2017/18 for non-doms and trustees of offshore structures to correct any historic errors they may have made in mixing various sources – capital, income and capital gains – in bank accounts offshore

The changes will affect Foreign domiciliaries who have been UK resident for the long term; those who have recently left, or are due to leave the UK, for an indefinite stay abroad; trustees of offshore trust structures settled by non-UK domiciliaries; and those managing offshore structures that hold UK residential property for the purpose of inheritance protection.

Andrew explained: ‘UK nationals who have moved to the Isle of Man in recent years should be aware that the changes may expose them to inheritance tax for longer than they might have expected under the proposals, although by far the biggest impact will be witnessed by trustees and directors who manage offshore structures set up by non-domiciliaries. They will need to think carefully about how the new provisions will impact at trust and company level and whether any pre-emptive planning should be considered in anticipation of these changes.’

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