Bob is a UK resident with a foreign domicile. He is a high earner in the UK and has been concerned that he has not been able to take advantage of the perceived tax advantages of his domicile. He has decided to buy a second home in the UK. Is there any merit in his buying the property through the offshore trust that he already has in place?
On the face of it, there should be advantages but how strong they are is debatable. Much depends on what happens in respect of the domicile rules and we know that this is something that the Government is set on changing. The consultation process is already fairly well advanced.
The first point is that there would not be any inheritance tax advantage. As the house is in the UK, it would not be excluded property, so the gift with reservation rules would apply. Bob would be supplying the funds and would be occupying the property.
A foreign property would work better in this respect although there has been the suggestion that the Capital Taxes Office is looking less favourably than before at excluded property trusts where an interest is retained.
Then there is the capital gains tax issue. If Bob and his wife were to buy the property in their own names, it would be subject to CGT in their hands. For principal private residence relief, their first home in London would have to be the one elected.
In principle, if it were to be bought by the existing offshore trustees, there would not be a charge to tax when the property is sold but this is where the ifs and buts start.
There could be a chance that Bob will become UK domiciled, perhaps in the not too distant future. If the deemed domicile rules for inheritance tax were to be extended to CGT and income tax – a possible option – he would fall foul of them although he does have the advantage of having spent some years working and living abroad.
If he could remain non-domiciled, there should not be a charge arising when the property is disposed of and capital distributions can be made to him. However, should he be UK domiciled when the property is sold, he would face CGT charges.
There is, however, a potential sidestep. Bob might go and work abroad again but this is not definite. With a young family, it might not be attractive to move, particularly just for tax purposes, which is never a great idea. It would help the CGT problem but then it would also do this if the property had been bought in his own name, anyway. As long as he could satisfy the temporary non-residence rules for CGT, there would not be a charge on disposal. Of course, this would not take into account the tax regime in the country in which he became resident.
There is also a potential problem regarding the rent-free occupation of trust property. The Inland Revenue could treat the value of rent forgone as a capital gain each year. While Bob remains non-domiciled, this would not be a problem but his wife is both resident and domiciled in the UK. The CGT charge could be considerably exacerbated by supplementary charges, not to mention what would happen were Bob to become UK domiciled.
The question of offshore companies would seem to be a non-starter because it would be very difficult to achieve all the requirements for a company to be non-resident when Bob and his wife are UK resident and ordinarily resident and are occupying the company's only asset in the UK.
One could then think of his buying the property and giving it to the company, with the shares being held in the trust, but this seems to be far too complicated and possibly expensive for something that may fail anyway.
Last but not least, it would be a lot simpler and more straightforward to buy it in their own names.
Having considered these problems, it has been decided that a trust is worthwhile. The initial costs are not prohibitive and it is felt that although circumstances may change, they quite possibly may not and it would be a shame to look back and wish that a trust had been used. It would have to be a new trust, with Bob having an interest in possession, to avoid any conflict with the assets of the existing trust.
Bob is happy to go with this and feels that at last his foreign domicile may be of some use.