The change, in the form of an amendment to HM Revenue & Customs’ IHT manual that was announced on 23 Jan, was made, HMRC said, because it had been advised that the way these so-called “speciality debts” were being handled until now, which had been based on common law traditions, was “unlikely to be correct”.
It added: “We now believe that these debts are situated where the debtor resides.”
In other words, explain tax experts, a specialty debt is now to be regarded as being situated in the jurisdiction in which the debtor resides, rather than in the jurisdiction of the deed itself, as was the case previously.
The change is particularly likely to affect the financial structuring of non-domicile UK residents, according to Neil Chadwick, technical marketing manager at Royal London 360°, the Isle of Man-based life company. This, he explains, is because it has been "common practice for many years to write assets, such as UK onshore bonds ‘under seal’, with them being held offshore and outside the scope of UK inheritance tax".
“This is potentially a huge problem for UK resident non-doms, and for any trusts created by them, and could lead to significant inheritance tax charges of up to 40% of the taxable value of the debt, when a relevant event, such as a gift into trust or the death of the policyholder (creditor), occurs,” Chadwick adds.
In an analysis of the change, the journal of the Society of Trust & Estate Practitioners (STEP) cites the Macfarlanes law firm in noting that now, "only non-UK situated assets owned by a non-dom, or non-UK-situated assets held by the trustees of a trust made by a non-dom settlor, are ‘excluded property’ for IHT purposes".
It continues: "The altered debt location not only affects IHT but also lifetime gifts, because of the ten-year anniversary charges for relevant property trusts".
The STEP Journal notes that, according to the Institute of Chartered Accountants in England and Wales (ICAEW), HMRC apparently took its decision to change the way it treats specialty debit without consultation, and that its possibly "far reaching effects" are likely to include "a knock-on effect for the users of the remittance basis [of paying UK income tax], and also has major capital gains tax implications".
"The effect will be even more serious if HMRC tries to impose the new rule retrospectively on past transactions,"the STEP Journal continues, still citing the ICAEW.
"If a non-UK-resident, non-domiciled individual at some time in the past transferred a specialty debt to an offshore settlement, and the debt was owned by a UK resident, HMRC might now treat the transaction as a chargeable transfer with a consequential lifetime charge."
To see HMRC’s explanation of how it intends to treat specialty debt going forward, click here.
