Overseas Chambers of Peter Harris

Maison de la Boucterie
Rue de la Boucterie
Saint Saviour
Jersey, JE2 7ZW

Foreign residential property: to be Deemed Domiciled or not to be Deemed UK domiciled? What is the question?

December 7th 2016

Waging against a sea of troubles might not be as difficult as it might seem.

This is addressed to those who are likely to be affected by the change in fiscal domicile status to which they will be subject in April 2017. They will become subject to deemed benefit legislation on indirectly held foreign residential property.

I will not add to the glut of intellectual input on the draft non-dom legislation published this week saving to state the following as an aside, but an important one, for those Non-Doms to be brought into the UK tax net who retain property overseas.

At least two categories of individuals are affected by what I am going to say next:

  1. Individuals with a UK domicle of origin who return to the UK, or are considered to have returned; and
  2. Individuals with a foreign domicile of origin, e.g. Russian, Greek, etc. who have spent more than 15 years out of the previous 20 tax yars in the United Kingdom without acquiring a legal domicile of choice.

Both sets of individuals who will be affected by the changes to take effect in April 2017 include a large number of previously non-domiciled persons owning significant residential property assets abroad, which will become subject to UK income Tax, Capital Gains Tax and Inheritance Tax. Certain of these properties will have been structured so as to achieve a degree of separation or relative anonymity for their "economic" owners.

Those properties will shortly become liable to deemed benefits rules, subjecting the newly domiciled owner, through any corporate structure to income tax on the benefit of having the property available to them, or their family.

This will be the case if such property is owned by Non-doms deemed to be domiciled in the United Kingdom, whether on return from abroad or those who will be over the 15 year residence period.

It is essential that anyone with a domicile of origin within the United Kingdom who has or who is intending to move back to the United Kingdom take advice immediately regarding the effect on any SCI or French property owned directly or indirectly before moving back. This also applies to Italian, Spanish and Portuguese property

The income tax charge on the deemed beneficial occupation through a foreign company will be significant enough to justify consideration as to how the property is held.

May I suggest  that clients take advice, from an expert, on the possibility of carving out the usufructuary enjoyment in  French, Italian, Spanish and Portuguese properties from this deemed benefit test by simply extricating  the usufruit property right from the structure and putting in their own name.  Care has to be taken here so as to ensure that the notarised "carve out" cannot be treated as a settlement by HMRC.  That is where my advice in the form of an opinion can be useful.

It is important to choose the adviser carefully as the degree of knowledge of what a usufruit actually consists is very limited in the United Kingdom, and contrary to certain assertions made, it is a Part 1 ITA 1984 issue, and not a deemed settlement.  What is worse, there is little point in asking a French lawyer or accountant to advise on what a trust or a settlement is as the concept is alien to them and is outside their legal culture as well.  One French Senator - who admittedly had a vested interest in propagating falsehood on the matter- was even heard to state authoritatively that a trust was a contract, poor man.

There is, I stress, no authority upon which HMRC can rely to sustain its current attempt to treat these foreign law property rights as settlements in flagrant disregard of the English Courts' historical treatment of foreign property rights as defined in cases such as Dreyfus. Memec is frequently cited, but is of no authority or application in this context.

The usufruit dismemberment is neither a CGT nor an IHT settlement, but it may be a distribution of an asset, as opposed to a form of deemed "settlement".

If done prior to April 2017, the income tax savings could be significant, and there will be means of keeping the trust property out of or at least in a position where there is room for manoeuvre in an internationally mobile family.

However it does mean that the effective interest will be in the public domaine.

Contact Peter on peter.harris@overseaschambers.com for an initial assessment and advice.

Whilst not necessarily appropriate in every case, I would be happy to advise offshore corporate managers, trustees and their clients in achieving this, as it will also have substantial positive effects upon Automatic Exchange of Information and Common Reporting Standard.