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There was a lot of focus on the preferential tax treatment for non-UK domiciled individuals (non-doms) ahead of the recent Autumn Statement and whether these tax advantages may be restricted in the future. Whilst the chancellor steered away from any significant changes this time, it is likely that opposition cries to remove, or at least reform, the preferential tax regime for non-doms will remain on the political agenda for some time.

Political issues

Recent political attention surrounding the taxation of non-doms has been primarily focused on the potential income tax and capital gains tax (CGT) benefits for such individuals, but any changes made in the future might also be extended to the advantageous inheritance tax (IHT) treatment they benefit from as well. Many commentators believe a change to these rules could lead to an exodus of non-doms from the UK.

Currently, if a UK resident non-dom dies, they might only be subject to IHT on assets that are situated in the UK. Assets situated outside of the UK may therefore fall outside of the UK IHT net.

Deemed domicile

In 2017, significant changes were made to the non-dom tax rules and as part of those changes, provisions were introduced that mean that if an individual was resident in the UK for at least 15 of the 20 tax years immediately before the tax year in which they pass away, they are deemed to have been domiciled in the UK for IHT purposes. Individuals impacted by this rule could therefore suffer IHT at a rate of up to 40% on their worldwide assets, as opposed to just those assets situated in the UK.

Further change?

Notwithstanding this, any new changes to the non-dom tax regime need to be considered very carefully by the chancellor. Rather than raising additional revenues for the exchequer, simply abolishing the regime may result in many wealthier non-doms leaving the UK in haste if they are exposed to IHT on their worldwide assets.

Rather than raising over £3bn additional tax revenues, as , scrapping the regime altogether could dramatically backfire. It could instead result in a large proportion of the existing tax revenues from non-doms, , falling away and the chancellor having to raise taxes even further on other UK taxpayers to fill the gap.

We already see in practice that non-doms reconsider their tax residency position when they become ‘deemed domiciled’ for IHT purposes and their assets thereby become exposed to IHT in the UK. Similarly, many non-doms look at restructuring the ownership of their assets prior to their arrival in the UK to mitigate their exposure to IHT.

Cryptoasset uncertainty

One asset class that is proving an IHT conundrum for non-doms is cryptocurrency, in particular in respect of the question of where it is situated for IHT purposes. This could prove a significant barrier for some non-doms exploring a move to the UK whilst owning such assets.

For CGT purposes, that for many cryptoassets, their location ‘will be determined by the residency of the beneficial owner’. So cryptoassets held by a UK resident non-dom, will likely be treated as UK assets for CGT purposes.

The position for IHT is less clear cut and it is necessary to look at more general legal principles relating to the situs of property. Some cases before the courts have considered the location of cryptoassets, its lex situs in legal parlance, and have led some to interpret that it is the domicile of the individual that owns the cryptoasset that is relevant.

Other more recent case law, such as the , indicates that, in line with HMRC’s view for the CGT rules, it is the residence of the beneficial owner of the cryptoasset that is relevant. However, mention was made in this case that, ‘the location of control of a digital asset, including by the storage of a private key, may be relevant to determining whether the proprietary aspects of dealings in digital assets are governed by English law’. So, the position still remains somewhat in limbo, but if the situs is determined by the non-dom owner’s residence status, that would mean that a non-dom owning cryptoassets personally will be exposed to IHT on the value of those assets at any time they are resident in the UK.

As a result, non-doms moving to the UK are likely to explore whether it may be beneficial to establish a trust or company structure to hold their cryptoassets, rather than hold them personally, the difficulty with this being that the risk associated with cryptoassets may deter independent trustees from holding such assets on the individual’s behalf.

Given the volatility and risk associated with cryptoassets, highlighted by the recent troubles with the FTX exchange bankruptcy, any non-doms with significant personal exposure in the crypto space are likely to be concerned by the IHT risk and may well reconsider their ongoing residency status. In extreme circumstances, the IHT liability could be triggered at a high value on death, but the executors could then see the cryptoassets rapidly drop in value, with no relief from IHT to mitigate this.

Potential consequences

This just gives a flavour to the complications that can face non-doms in relation to just one asset class that is, as it currently appears from the UK case law, exposed to IHT. If the UK non-dom tax rules are materially changed or abolished, bringing more non-doms into the IHT net, we can expect a significant number to consider their position, including whether to remain in the UK.

For more information, please get in touch with Chris Etherington or your usual 91̽»¨contact.