Reforms to the taxation of non-doms

Archived Post
Archived Post

The government has now released draft legislation for most of its plans for changing the taxation of non-UK domiciled individuals from April 2017. Further updates have been provided for the areas not covered by the draft legislation.

The changes can be broken down into the following five parts which we consider further below:

  • Deemed UK domicile for long term UK residents (draft legislation issued)
  • Born in the UK with a UK domicile of origin (draft legislation issued)
  • Protection for non-UK Trusts (draft legislation issued for capital gains tax changes / update issued on income tax)
  • Inheritance tax on UK residential property (draft legislation issued)
  • Business Investment Relief (BIR) (update issued)

Although we still only have some of the draft legislation – and do not expect to see the remainder of it until later this year – those affected need to start considering their options now by speaking to us so that we can provide advice which can be implemented before the changes take effect.

Deemed UK domicile for long term UK residents

The draft legislation gives further clarification on the government’s plans to deem someone as domiciled in the UK for tax purposes, and therefore bring them within the arising basis, once they have been tax resident in the UK for at least 15 of the previous 20 tax years. This change will be effective for capital gains tax (CGT), income tax (IT) and inheritance tax (IHT). There are some key points that represent important opportunities for tax planning – most notably rebasing of foreign assets and separating out pure capital from mixed funds.

Individuals who become deemed domiciled on, but not after, 6 April 2017 will be able to rebase directly held foreign assets to their market value as of 6 April 2017 though only for those assets held abroad (i.e. had foreign situs for legal purposes) throughout the period from 16 March 2016. This rebasing only applies if the individual claims the remittance basis for a tax year before 2017/18. However, rebasing is not available to anyone who regains their domicile on 6 April 2017 because they were born in the UK with a UK domicile of origin.

Rebasing will be on an asset by asset basis. However, it only protects the pre-6 April 2017 gain from UK tax where those assets were not purchased with relevant foreign income or gains. The individual can make an irrevocable election for rebasing not to apply.

Individuals who have used the remittance basis will be permitted to re-organise their offshore funds to separate out pure capital from unremitted income and gains, so as to un-trap their pure capital and enable them to remit it tax free to the UK. This relief will be available only for transfers between bank accounts and only for a limited time – from 6 April 2017 to 5 April 2019. Although not clear from the draft legislation, it is likely that HMRC will want to see segregation only after the ‘component parts’ have been correctly identified. Our experience tells us that this will be expected especially since it was suggested in the initial proposal. Doing so may cause some difficulty as it is unlikely that records are held going back 20-30 years. However, as this is a one off opportunity it is well worth exploring as the tax savings may be significant.

Other notable points that arise from the government’s plans are:

  • The statutory residence test will only apply for the periods following its introduction in April 2013 and so residence for earlier years will be determined under the rules applicable for those years.
  • Years spent in the UK during childhood will count towards a person’s time of residence.
  • A split year will count as a year of residence (even if only resident for one day in the tax year).
  • There will be no transitional relief for IHT purposes for those whose UK IHT deemed domicile is accelerated under the new 15 out of 20 year rule.
  • Transfers of non-UK assets by a person who dies after becoming deemed domiciled but within seven years of the gift will not be brought within the UK IHT net.
  • The current foreign CGT loss election for remittance basis users will remain but will only last until that individual becomes UK domiciled or deemed domiciled. They will then be able to make another election if they so choose.
  • Individuals that become non-resident will only have to remain so for 4 consecutive tax years to lose their UK deemed-domicile status for UK IHT purposes. Whereas there will be a 6 year requirement for income tax and CGT.
  • The spousal election will also be changed to 4 consecutive years of non-residence.
  • Born in the UK with a UK domicile of origin

The draft legislation confirms that the government has stuck to its guns and an individual born in the UK with a UK domicile of origin will regain their UK domicile status for a tax year if they become UK resident in that tax year. This applies even if they have picked up a domicile of choice elsewhere. They may lose their UK domicile again for a tax year that they are not UK resident.

The draft legislation does however provide a grace period for UK IHT. A returning individual will only regain their UK domicile if they have also been UK resident in either of the previous two tax years.

Protection for non-UK trusts

Many UK resident non-domiciled individuals and families hold their non-UK (and possibly their UK) wealth within non-UK trusts. The government has considered the impact of their initial plans on such structures and has made significant changes. The first is that they have scrapped the idea of a so called ‘benefits charge’ as it was seen as complex and punitive which is a good thing. In its place the government will introduce reforms that more closely follow those we already have (broadly there will only be a tax charge when actual benefits are received from the trust). However, the most surprising development is the introduction of a ‘protective trust’ for long term residents who settled trusts before they become domiciled or deemed domiciled. The proposed rules are outlined below.

Importantly, the original announcement by the government had stated that the protections afforded to these trusts will cease if the settlor, their spouse or a minor child receives a benefit from the trust or assets are added to the trust while the settlor is deemed domiciled. However, the first part has been dropped and so the protection will only be lost where assets are added in which case the settlor will be charged to UK tax on the arising basis on income and gains arising within the trust.

For some this may trigger the end of the need to pay the annual remittance basis fee, for others, it may now be beneficial to hold their wealth through an offshore trust.


Non-UK assets held by non-UK trusts set up by non-UK domiciled settlors currently have protection from IHT for non-UK assets held. This protection will continue after 6 April 2017 even where the settlor becomes deemed domiciled (unless they are deemed domiciled because they were born in the UK with a UK domicile of origin).

Capital Gains Tax

Deemed domicile settlors will be taxed in the same way as domiciled individuals on gains arising within the trust. However, where the trust is a protected trust, the settlor will only be chargeable to UK CGT when that gain is distributed to them, for example as a benefit, or where distributions are provided to their spouse, minor children or stepchildren. Contrary to the original proposals, this protection will not cease once the settlor, spouse or minor child receives such a benefit from the trust.

Income Tax

We have not yet received draft legislation in respect to income tax. However, a week after HMRC released the draft 2017 Finance Bill we received a response to HMRC’s recent consultation on the non-dom proposals. Within it they have included their plans for the income tax provisions.

From April 2017, legislation that taxes settlors on foreign income arising within non-UK resident trusts settled while they were non-domiciled will be switched off, as long as the settlor remains non-domiciled under general law. This means that as long as the trust does not lose its protected trust status, the settlor will not be chargeable to UK tax on income arising within the trust unless it is distributed to them or their spouse, minor children or step-children. This will include instances where the trust structure includes an underlying non-UK company. Income not distributed will remain protected until a benefit is received. There will be no need to pay the remittance basis charge to benefit from this protection. The protection continues even after the settlor becomes deemed domiciled (unless that is because they were born in the UK with a UK domicile of origin), and contrary to the original proposals, this protection will not cease once the settlor, spouse or minor child receives a benefit from the trust. This is the most significant change for the taxation of non-UK resident trusts for years and offers a level of protection for non-UK domicile settlors that frankly we did not expect.

As well as the protection requiring the trust to be established prior to the settlor becoming deemed domiciled, it is also a requirement that no further assets are added to the trust while the settlor is deemed domiciled. For this purpose, additions include those from another trust the settlor is settlor or beneficiary of.

Foreign income received prior to April 2017 and retained in the trust will become protected for matching only to benefits received after April 2017. However, no tax charge will arise when this income is distributed if previously taxed under settlor taxing provisions.

Similar to CGT, anti-avoidance provisions will be introduced to counteract routing gifts through non-chargeable beneficiaries.

IHT on UK residential property

Over the last few years, the government has continually attacked the UK property sector. The latest attack turns its attention on non-UK tax resident structures holding UK residential property. Draft legislation has been issued to bring within the scope of UK IHT residential property held through such structures. In order to do this, the value of such structures that derives from UK residential property will be removed from the definition of ‘excluded property’ for UK IHT (unless that interest is less than 1%). The aim is that it will no longer be possible to avoid UK IHT on UK residential property by the use of offshore structures. These structures usually aim to convert the situs of the asset to non-UK (the asset usually being owned by a non-UK company whose shares are themselves non-UK situs assets), and therefore within the definition of excluded property.

Furthermore, the proceeds from the disposal of a UK residential property will remain outside the definition of ‘excluded property’ for two years.

For example, suppose a property is sold for £1M and the proceeds transferred to a non-UK bank account. Ordinarily the non-UK bank account would be excluded property for a non-domicile, but under this draft legislation, those funds will remain within the scope of UK IHT for a further two years.

For anyone that holds UK residential property through offshore structures this is a significant change and will once again lead many to consider unwinding their offshore structures as they may no longer be fit for purpose. However, the big nasty is that there will be no soft landing for those that wish to do this. In their initial statement in the 2015 Summer Budget, the government stated that they were aware of the dry tax cost (tax charges that arise without a cash transaction) of de-enveloping and would consider such a soft landing. Sadly this has not happened. For many this means that they will need to make a decision – continue to pay the ATED along with the fees for any structure that is in place whilst still being liable for all the taxes that everyone else is, or de-envelope and potentially two tiers of UK CGT.

Initially, it had been proposed that connected party debts would not be deductible in arriving at the value of UK residential property brought within the scope of UK IHT. This proposal has been dropped but instead debts to acquire, or assets used as collateral to acquire, UK residential property will also be taken outside the definition of ‘excluded property’ so will be within the charge to UK IHT for the lender.

The definition of residential property will be based on the definition used for the recently introduced non-resident CGT charge. Provisions will be introduced to deal with situations where a property has mixed use.

What is clear though is that a number of factors will need to be considered including:

  1. Valuation – only UK residential property will be brought within the charge to UK IHT and so non-UK companies (for example) that hold such assets as well as others will need careful consideration.
  2. The impact of the 10-yearly charge on such structures.
  3. Who is liable – to prevent avoidance the government intends to extend the definition of who is accountable and prevent assets from being sold where IHT is outstanding.
  4. Business Investment Relief (BIR)

The above could be seen as encouraging non-domiciles to remain in the UK but leaving their assets outside in a non-UK trust. So while it means the UK remains an attractive base for non-domiciles, the changes do not by themselves encourage inward investment in the UK by non-domiciles, something that anyone who works in finance knows that the UK cannot live without. So the government are looking at ways to improve BIR to make it more attractive.

Simply put, BIR is a relief only available to UK resident non-domiciled individuals that allows them to remit funds to the UK without suffering UK tax as long as those funds are invested into a qualifying business (which includes a property business).

The government is looking to broaden its appeal and asked for feedback. Following receipt of this feedback they have proposed the scope of BIR will be extended as follows:

  • Introduction of a ‘hybrid’ trading / investment company category (currently a company has to be one or the other)
  • The time limit for investing in a company before it starts to trade increased from two to five years
  • Relief extended to the acquisition of existing shares rather than only for new shares
  • The grace period allowing income or gains to remain in a company becoming ‘non-operational’ without becoming chargeable to tax to be increased from 90 days to two years.


The government’s current proposals mean that long term UK residents who qualify as not domiciled in the UK will become deemed domiciled from April 2017 once they have been tax resident in the UK for at least 15 of the last 20 tax years. This change is effective for income tax, CGT and IHT. In addition, UK residential property that currently escapes UK IHT because it is held through offshore structures will be brought within the scope of UK IHT from April 2017. Even though the government have stated that there will be no soft landing, it will be very important to review how these assets are held before April 2017, as the use of an offshore trust whilst not eliminating the charge to IHT, may dramatically reduce its effect.

However, it is not all doom and gloom.

  • Non-UK domiciled settlors of non-UK resident trusts will be able to benefit from a significant relaxation of the rules that currently tax them on the foreign income of the trust as it arises even where it is not distributed to them. Assuming the government follow through on their proposed change, from April 2017, where the trust qualifies as a protective trust and the settlor is not deemed UK domiciled because they were born in the UK with a UK domicile of origin, the settlor will only be liable to UK tax on foreign income arising within the trust when it is distributed to them or a close family member (spouse, minor children and step-children). For those that already structure their wealth through offshore trusts this is very good news. For those that don’t, it may be time to consider doing so.
  • Non-UK domiciled individuals will be permitted to re-organise their offshore funds to separate out pure capital from unremitted income and gains, so as to un-trap their pure capital and enable them to remit it tax free to the UK.
  • Non-UK domiciled individuals will be able to rebase their non-UK assets for the purposes of UK CGT as long as they held those assets on 16 March 2016 and 5 April 2017. As the rebasing election is on an asset by asset basis, and the election need only be made when the asset is sold, this puts those that are able to make the election in a very enviable position indeed.

And for those that do or would like to invest into UK business, the relaxation of the conditions for BIR may well provide significant economic as well as tax benefits.

Further information

For more information about this article, contact our tax team or contact the author below.