As it stands, if an individual who is not domiciled but is resident in the UK (a ‘non-dom’) dies, they might only be subject to inheritance tax (IHT) on assets that are situated in the UK. Assets situated outside of the UK may therefore fall outside of the UK IHT net.
In 2017, significant changes were made to the non-dom tax rules. As part of those changes, if an individual was resident in the UK for at least 15 of the 20 years immediately before the tax year in which the individual died, they would be ‘deemed’ to be domiciled in the UK for IHT purposes. Individuals affected could therefore suffer IHT at a rate of up to 40% on their worldwide assets.
Any 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 is likely to result in many wealthier individuals leaving the UK at haste if they are exposed to IHT on their worldwide assets.
Instead of raising an amount of over £3bn, as some research has suggested, scrapping the regime could dramatically backfire. It could result in a large proportion of the existing tax revenues from non-doms, nearly £8bn in the 2020/21 tax year, falling away and the chancellor having to raise taxes even further on other UK taxpayers to help fill the gap.
We already see in practice that non-doms consider their residency position when they become ‘deemed domicile’ for IHT purposes, and their assets become exposed to IHT in the UK. Similarly, many non-doms look at restructuring the ownership of their assets prior to their arrival here to mitigate their exposure to IHT.
One asset class which is proving an IHT conundrum for non-doms is cryptocurrency. Confusion over whether it is a UK asset or not for non-doms will be a significant barrier for some non-doms that own such assets and are exploring a move to the UK.
For capital gains tax (CGT) purposes, HMRC’s guidance indicates that a cryptoasset’s location “will be determined by the residency of the beneficial owner”. The position for IHT is less clear cut.
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 indicates that, in line with HMRC’s view for the CGT rules, it is the residency of the beneficial owner of the cryptoasset that is relevant. Although 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 strict position still remains in limbo. If the location of a cryptoasset is determined by the non-dom owner’s residency status, it would mean they are exposed to IHT.
Given the volatility and risk associated with the space, 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 consider their ongoing residency status, or simply not move here in the first place. The potential IHT liability could be triggered at a high value on death, and the executors could then see the cryptoassets rapidly drop in value, with no relief from IHT to account for this.
This just gives a flavour to the complications that non-doms can face in relation to just one asset class that is, as it seems from the case law, exposed to IHT. If the non-dom rules are materially changed or abolished, bringing more non-doms into the IHT net then we can expect a significant number to consider their positions and whether to remain in the UK.