The general position for non-UK domiciled individuals
A UK resident AND domiciled individual will pay UK IHT on his worldwide assets.
However, a non-UK domiciled individual will start from the position that he is only subject to tax on his UK assets only. There is one important proviso to this. If the individual has been resident in the UK for 17 out of the last 20 tax years then he is ‘deemed domiciled’ for IHT purposes only. The result is that he is subject to tax on his worldwide assets.
The relevance of Indian domicile for UK IHT purposes
If one is domiciled in India then one should only subject to IHT on UK based assets. Foreign assets are outside the scope of UK IHT for an Indian domiciliary with the correct will in place.
This is by virtue of the UK / India capital taxes treaty which will give taxing rights, on foreign assets passing under a foreign will on death, to India.
This does not seem particularly helpful where the relevant assets are UK property and UK shares. However, the ‘magic’ comes from the ability to transform UK assets in to foreign ones.
This can be done by incorporating the property portfolio in to a non-UK registered Company. In other words, selling the assets to a non-UK registered Company in exchange for an issue of new shares by that Company (rather than a cash consideration).
It is not necessary to engage professional directors of any non-UK company as it is only required that the Company is registered overseas rather than being tax resident outside of the UK.
Regardless of whether the Company is registered or resident overseas then it is likely to pay tax on net rental income in the UK at 20%. Of course, any dividends or salary extracted from the Company would be subject to personal tax.
Do I have to pay the ‘remittance basis charge’ to be considered a non-dom?
No. One is a non-dom as a matter of fact under general law.
The payment of the remittance basis charge, alluded to above, allows one to take advantage of the remittance basis for income and capital gains tax. One can decide not to pay it without any change to your non-domicile status.
There is no similar change to benefit from the IHT advantages highlighted in this note.
Transferring assets to a non-UK Company – tax analysis
The properties could be transferred, at market value, to the new non-UK Company in a tax neutral fashion. This is due to the availability of statutory tax reliefs. Rather than the Company paying cash for the properties, it will issue shares in itself.
The tax benefits of the transfer are as follows:
- IHT. On the basis that you are Indian domiciled, the value of the Properties will be immediately removed from your estate for IHT purposes. This is a 40% tax saving.
- CGT. The properties are deemed to be acquired by the Company at the market value at the date of the transfer. This essentially ‘washes out’ the historic gains. The base cost of the properties is rolled in to the cost of the shares in the Company.
- Rental income. The Company would pay corporation tax at a maximum rate of 20%. This compares to direct ownership where you would pay tax at your marginal rate of tax. This might be at a rate of up to 45%.
The use of the Company allows you to leave cash in the Company having paid just 20% tax. You can then decide how much you wish to take from the Company on an annual basis. This income would be subject to further personal tax.
A note on Stamp Duty Land Tax (SDLT)
The transfer of the properties to the new Company would potentially create an SDLT charge. This is because the newly issued shares would constitute chargeable consideration.
However, this can be addressed (and removed) by formalizing the property business firstly as a partnership before transferring the properties to the new Company.
Agreement of the banks
When transferring properties in this manner, and there are outstanding mortgages on the properties, the Bank can sometimes be a stumbling block.
However, it should be noted that we have implemented this planning without obtaining the Bank’s consent. Generally, this is possible where the legal ownership is not transferred (instead just the beneficial ownership is transferred).
This can be discussed further. Contact us!