Blog
Rayner my parade! The importance of specialist advice.
Jemma Brimblecombe
British by birth, I moved to the US 25 years ago for work reasons and now plan to move back with my family — my American wife and our two children. I understand there are special tax rules for returning domiciled people. What do I need to be aware of and should I transfer any assets into my wife’s name to reduce my potential tax liabilities?
If you were born in the UK and have a UK domicile of origin, the tax rules for ‘formerly domiciled residents’ (FDRs) will apply. Spouses without a common domicile are treated very differently for tax purposes by the UK.
Whilst FDRs are deemed domiciled whenever they are UK resident (subject to a one-year grace period for inheritance tax (IHT) purposes), non-FDRs are only deemed domiciled once they have been UK resident for at least 15 of the preceding 20 tax years. The FDR rules now cover income tax and capital gains tax (CGT).
That said, for income tax and CGT purposes, exposure to UK tax will still largely be assessed under the Statutory Residence Test — which assesses a person’s status related to the number of days they spend in the UK — not domicile test. However, an FDR will be deemed UK domicile for income tax and CGT purposes as soon as they become UK resident. The most significant consequence of this is that an FDR will not be able to benefit from the remittance basis of taxation while resident in the UK, under which tax on foreign earnings and gains is paid only if the funds are transferred to the UK.
For IHT, a formerly domiciled individual will be deemed UK domicile from the start of their second tax year of continuous UK residence. From that point, their worldwide estate would be subject to IHT while they remain UK tax resident, and possibly for a short period afterwards.
In terms of planning while you are still overseas, you should be aware that trusts set up by FDRs who become deemed domiciled under the FDR rule are taxed on the arising basis on foreign income and gains within their offshore trusts (in line with the taxation of trusts settled by an actual UK domicile).
In contrast, your non-FDR spouse could establish an offshore trust and later become deemed domiciled under the 15-year rule but still benefit from a form of tax-protected offshore trust. This type of trust will prevent the non-UK assets from being subject to IHT. As the US Estate Tax threshold is considerably more generous than the UK, this may result in a significant tax saving, although tax advice should be sought before the transfer of any assets.
This protected status will, however, be lost if your wife acquires an actual UK domicile or if the trust falls foul of the rules at any time.
This article was first published by the Financial Times on 18/08/22.
FURTHER INFORMATION
If you would like any further information or advice about the topic discussed in this blog, please contact Laura Harper or our Private Client team.
ABOUT THE AUTHOR
Laura Harper is a partner in the Private Client team. She advises both UK resident and non-UK resident/domiciled individuals, families and trustees on a wide variety of UK tax, trust law and international estate planning issues, including the planning to be undertaken when moving to or from the UK. She also has extensive experience working on cross-border matters and structuring involving family-owned businesses.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
You may also be interested in:
Blog
Preserve it and save: how conditional exemption can protect your heritage... and your wallet
Charles Richardson
Blog
Suspension of the UK’s Refugee Family Reunion scheme: an afront to the principle of family unity
Oliver Oldman
Share insightLinkedIn X Facebook Email to a friend Print