Inheritance/Estate Taxes

UK: Changes to non-domiciled rules in Finance Bill (No 2) 2017

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Changes to the UK non-domiciled rules that were excluded from the Finance Bill 2017 are to be included in the Finance Bill (No 2) 2017. The Bill is to be published and considered by parliament in September 2017 following the summer recess. Updated draft legislation and explanations on the changes to rules on deemed domicile were published in July 2017, and when passed they will take effect from 1 April 2017.

The provisions relating to non-domiciled individuals include the following measures:

Deemed domicile

New deemed domicile rules provide that a non-domiciled individual will be treated as domiciled in the UK for all tax purposes in a tax year if that individual has been resident in the UK for at least 15 of the last 20 years.

The new rules will also provide that a non-domiciled individual who was born in the UK with a UK domicile of origin is to be treated as domiciled in the UK for income and capital gains tax purposes in any tax year in which that individual is UK resident; and the individual will also be treated as domiciled in the UK for inheritance tax purposes after one year of UK residence.

Rebasing relief

Individuals who are deemed domiciled from 6 April 2017 because they have been resident in the UK for 15 of the last 20 years can rebase their foreign located capital assets to market value on 5 April 2017 for purposes of capital gains tax. Consequently on a future sale of a foreign asset only the gain from 6 April 2017 to the date of sale would be liable to capital gains tax. This will apply automatically unless the taxpayer elects for the provision not to apply.

Segregation of mixed funds

Any non-domiciled individual who has been taxed under the remittance basis prior to 2017/18 will be able to rearrange mixed funds held in non-UK bank accounts and segregate them into their constituent parts. This is a transitional arrangement for the 2017/18 and 2018.19 tax years and applies only to nominated transfers of money from a mixed account to another account.

This is a useful measure because income and capital gains taxable under the remittance basis are treated by the law as remitted before non-taxable income. So if there is income taxable under the remittance basis and also non-taxable capital in a bank account any remittance from that account will be treated as a remittance of taxable income or gains rather than of the non-taxable element. By separating out the non-taxable element into a separate account the taxpayer can arrange to remit that non-taxable capital without a tax charge.

Inheritance tax on residential property interests

From 6 April 2017 inheritance tax is to apply to UK residential property interests held indirectly by non-UK domiciled individuals, for example through a non-UK company, and any debt used to finance the property will be subject to inheritance tax in the hands of the lender.

This means for example that any shares in non-UK close companies or interests in overseas partnerships the value of which is derived from UK residential property will come within the scope of inheritance tax. This will apply whether the individual is UK resident or non-resident.

Any debt used to finance the purchase, maintenance or repair of UK residential property will be treated as an asset within the scope of inheritance tax in the hands of the lender. If the lender is a non-UK close company or a partnership then look-through provisions will apply. Any security or collateral for the debt will also be within the scope of inheritance tax as part of the estate of the person providing the security.


European Inheritance Tax Burdens Compared

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A recent examination of inheritance tax systems in European countries suggests that there is no consistency in the way that the taxes are applied to family business transfers. The way the tax operates is greatly influenced by the tax relief that can be claimed. The European Family Business Tax Monitor has compared the tax position of transfers of family businesses in a number of /European countries. Taking the example of a family enterprise with EUR 10 million valuation, looking at the tax charged on the business succession. The study found that the tax potentially imposed on succession by inheritance or retirement is between EUR 0 and EUR 4 million. There are great variations between countries, one of the highest inheritance taxes on business being in Denmark, while some countries would not impose any tax on the transfer.


Switzerland – Committee rejects IHT and VAT changes

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A Swiss government committed has rejected an inheritance tax proposal from the Socialist Party and has also rejected a suggestion to introduce a consumption tax on energy in place of the VAT. The inheritance tax suggested by the Socialists would have applied at a rate of 20% to inheritances above CHF 2 million. To implement this change taxing rights would have needed to be transferred to the federal government from the cantons.

The government committee warned that a new tax on business transfers would create uncertainty and damage the attractiveness of the country as a place to set up business. The energy tax proposal was rejected amongst other reasons because the VAT is an important source of government revenue and to weaken the VAT would cause problems for the government finances.

Ireland and the UK levy the highest rates of inheritance or estate tax

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A recent report published by a firm of accountants has found that Ireland and the UK levy the highest rates of inheritance or estate tax of any major world economies.

The report computes that Ireland takes on average 26 percent from the estate of a deceased individual with assets worth USD3m. The UK on the other hand would on average take an even higher percentage, amounting to around 25.8 percent. These figures are a long way in excess of the global average of these taxes which is 7.67 percent, with China, India and Russia imposing no tax at all on estates. The average inheritance tax in the EU is only 14 percent.

An example of how the tax operates is that the UK charges inheritance tax at a rate of 40% but this applies to estates worth more than GBP 325,000. Many estates are therefore taken out of tax altogether by this nil rate band while others pay inheritance tax at 40% on only a small part of the estate. According to the recent report, therefore, a typical percentage charged is around 25.8 percent.


Slovenia – Constitutional Court Suspends Real Estate Tax

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Slovenia’s Constitutional Court has suspended property tax assessments. The tax imposes a charge based on property value of between 0.15 percent for occupied residences through to 0.5 percent for empty homes and 0.75 for commercial properties. Public buildings, energy facilities, farms, farmland and forests are also liable.

However, opponents of the tax complain that the tax legislation is unfair for a number of reasons, including that the amount payable is calculated on the basis of incomplete records held by the Mapping and Surveying Authority.

The majority decision of the Court was for a partial suspension of the property tax legislation, and the Government has said that it is continuing with its assessment preparations. The court will consider suspending the tax bill as a whole if the Government has not made a decision by April 1 2014.

Indian coal mining industry faces tax hit

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Indian draft Mines and Minerals (Development and Regulation) Act added  new provisions requiring non-coal mining companies to contribute 100% of their royalty to the proposed District Mineral Foundation, and coal mining companies to contribute 26% of their profit to the Foundation. According to the Federation of Indian Chambers of Commerce and Industry (FICCI) this requirement has put the mining sector under tremendous pressure.

As mentioned by FICCI the proposed profit sharing of 26% for coal and 100% royalty for other minerals, the tax outgoings will go beyond 60%, while the percentage is between 40-45% at present. The Federation believes that new provisions will make the domestic mining and mineral based industry globally uncompetitive. At the same time will hamper the growth and employment potential of the mining industry and discouraging investments in this field.