New Zealand lawyers have been structuring the affairs of British migrants for many years. However, we suggest that the effect of the UK Finance Act 2006 on New Zealand trusts is still not fully appreciated by many practitioners. The major effect of the Finance Act is to impose on persons who are domiciled in the UK: an immediate 20% charge to UK inheritance tax on the creation of lifetime trusts (with a few exceptions) on the value of the assets transferred into the trust over and above the nil rate band (currently £325,000); periodic charges to UK inheritance tax every 10 years; and exit charges whenever assets are transferred out of the trust. The double tax agreement between New Zealand and the UK will not prevent a charge to UK tax arising in these circumstances, and there could be penalties imposed by HM Revenue and Customs if the trust is not reported to them.
Often a UK migrant believes he or she is no longer domiciled in the UK by virtue of becoming a New Zealand citizen or residing outside the UK for an extended period of time. However, a domicile of origin in the UK is not easily divested, and the charge to UK inheritance tax is based on domicile, rather than residence. For UK tax purposes, a person is “deemed domiciled” in the UK once he or she has been resident in the UK for 17 out of the past 20 tax years. Furthermore, a person is deemed domiciled in the UK for three calendar years after having left the UK, if he or she was previously regarded as UK domiciled. Therefore, for a British migrant to New Zealand, it would be a minimum of three years before he or she could shed UK domicile status. Even then, one must not forget also the 17 out of 20 year rule. Unless there have been any years within the last 20 years when he or she was not UK resident, effectively it would be four UK tax years before the person would no longer be deemed domiciled in the UK.
If the value of the assets to be transferred into a New Zealand trust is greater than £325,000, then a trust settled by a British migrant before they have shed their UK domicile will trigger an immediate tax charge payable to the HM Revenue and Customs. Only when a British migrant has shed their UK domicile, should they proceed with a New Zealand trust and the transfer of their assets into it. It would be prudent to also consult a firm with general knowledge of UK inheritance tax principles. Even after one has ceased to be “deemed domiciled” in the UK, there remains the question as to whether one has ceased to be UK domiciled for general law purposes. Therefore, before the British migrant can safely proceed with a New Zealand trust, they must establish a New Zealand domicile. In this regard, the factors that will be taken into account will include the purchase of a home in New Zealand, obtaining a New Zealand passport, establishment of New Zealand bank accounts and the formation of social links, and memberships of clubs and societies. Return visits to the UK should not be regular or frequent – effectively he or she should relinquish ties with that jurisdiction.