If a person is non-UK domiciled for UK income tax and UK capital gains tax purposes, but has been resident in the UK for 17 of the last 20 years, that person will be deemed-domiciled for UK inheritance tax purposes.

The consequence of this is that any transfer into a discretionary trust will give rise to a life-time IHT charge of 20% of the value of the assets transferred.

Possible options available to a person who is UK deemed-domiciled for UK inheritance tax purposes and who will become UK deemed-domiciled for UK income tax and UK capital gains tax purposes include:

Trust Option

• If the UK IHT deemed-dom settlor wishes to benefit from the settled assets, the 20% lifetime IHT charge (and periodic and exit charges) cannot be avoided but the settlement will enable the deferral of payment of any UK income tax and UK capital gains tax. Note that an additional 20% will be payable if the settlor should die within seven years;

• Until 5^th April 2017, there is no deeming provision for income tax or capital gain tax purposes and as the assets are non-UK situs, there is no reason for the settlor to be excluded from benefit;

• In certain circumstances, it may be possible for the UK IHT deemed-domiciled settlor to lend assets to a discretionary trust which has been already settled. This may shelter future income and gains but the sum lent will still remain within the individual’s estate. This includes scenarios in which assets are sold to a trust with a debt left outstanding. HMRC have indicated that in respect of repayment on demand loans, a loan on non-commercial terms e.g. a low or nil rate of interest and which remains outstanding as at 6^th April 2017 will generally be regarded as a provision of property for the purposes of the settlement. Consequently, where after 5 April 2017 a loan has not been repaid or adjusted to commercial terms, the condition at new sub paragraph 5A(1)(e) would be met. The provision at 5A(1)(e) will apply equally where the loan was initially for a fixed period but falls to be repaid after 6 April 2017 such that it becomes a repayable on demand loan. There will however be a transitional provision so that the condition is not regarded as met where, before 6 April 2018, the loan is either repaid in full together with any outstanding interest or made subject to fully commercial terms.

Non-Trust Options

• Bonds: the assets, in respect of which protection is sought, can be applied as premium to purchase a life insurance bond. In these circumstances, there is no UK IHT charge on the transfer of the assets and the assets will benefit from ‘gross rollup’ for the purposes of UK income tax and UK capital gains tax. However, it should be noted that UK income tax will be payable under the chargeable events regime and care should be taken to avoid infringing the Personal Portfolio Bond rules;

• Annuity: the assets, in respect of which protection is sought, may be used to purchase a living annuity. This can be for life or a fixed term and capable of surrender. There is no IHT charge on the transfer of the assets and, if the annuity is purchased for the purpose of providing a pension, the annuity should allow UK income tax and UK capital gains tax deferral until sums/assets are actually paid to the annuitant.

• QNUPS: the assets, in respect of which protection is sought, may be paid into a Qualifying Non-UK Pension Scheme (QNUPS). The assets must be of a value which is reasonable in the circumstances and capable of providing future pension benefits to the member – there is no UK IHT charge on the transfer of the assets into the QNUPS and subject to any intentional delay or avoidance of taking benefits, no UK IHT charge on death though if the Finance Bill 2017 is enacted as drafted, there will be an income tax charge on all lump sum payments including death benefit lump sums.