Further details have now been released on the April 2017 reforms to the taxation of non-UK domiciles

Consultation Response, Policy Paper and Draft Legislation now released (5 December 2016). For our earlier commentary and background in relation to these announcements please see here.

As previously discussed there are a number of significant changes to the non-UK domicile (non-dom) tax regime effective from 6 April 2017. These changes will:

  • prevent those who were born in the UK with a UK domicile of origin from claiming non-dom status;
  • end the permanent non-dom status (via the 15/20 rule); and
  • UK residential property held via excluded property structures will now be subject to UK inheritance tax (IHT).

Additional Detail

  1. The returning UK domiciliary rule – effective 6 April 2017
  • It was announced that those with a domicile of origin in the UK who had acquired a domicile of choice in another country would be treated as domiciled in part of the UK for any periods in which they are UK tax resident. This will have implications for non-UK structures settled while non-UK domiciled.
  1. The new deemed-domicile rules (deeming provisions) – effective 6 April 2017
  • It was confirmed that the ‘15/20 rule’ will be introduced as planned. Under the new rules non-doms who have been tax resident in the UK for 15 out of the last 20 tax years will become subject to UK income tax and Capital Gains Tax (CGT) on their worldwide income and gains (and the remittance basis will be unavailable). They will also be exposed to UK IHT on their worldwide assets.
  • It was also confirmed that non-doms leaving the UK (and remaining non-UK tax resident) would lose their deemed-domicile status for IHT purposes at the beginning of the 4th year of absence from the UK.
  • It is likely that non-doms who return to the UK after 6 consecutive tax years of non-UK residence will face greater scrutiny from HMRC. HMRC may seek to argue that the taxpayer has actually decided that the UK is their permanent home and that they are no longer truly non-domiciled.
  • In relation to the transitional rules relating to the separation of mixed funds:
    • The transitional mixed fund segregation rules for foreign-held assets will only apply to amounts held in “bank accounts” (not to other assets, e.g. foreign-situs artwork/real estate).
    • The transitional mixed fund segregation rules will now be available for 2 years from April 2017 (rather than 1 year as previously announced) – this is positive news for clients and their advisers.
  • In relation to the transitional rules relating to the re-basing of foreign held assets:
    • It was confirmed that the re-basing opportunity would only be available to taxpayers who have paid the remittance basis charge at some point since 2008 and are becoming deemed-domiciled under the ‘15/20’ rule in April 2017. It will not be available to those becoming deemed-domiciled in later years.
    • Re-basing will be available for non-UK situs assets held between 16 March 2016 (previously this was 8 July 2015) and 5 April 2017.
    • The transitional rules would also not be extended to offshore trusts/companies.
    • The transitional rules will not be available in relation to ‘foreign income gains’ – this could have a significant impact on clients who have ‘non-reporting fund’ investments. Clients may wish to review (or even re-structure) their existing portfolios and should speak to their wealth adviser regarding their current investment strategy.
  1. Provisions for trusts – effective 6 April 2017
  • It was previously announced that excluded property trusts established by non-doms prior to becoming deemed-domiciled would become ‘protected trusts’ and there would be complete protection from UK income tax and CGT if benefits are not received from the structure (i.e. foreign income and gains are retained within the structure).
  • The rules for ‘protected trusts’ have changed somewhat since the last announcement with the capital gains treatment now echoing the income tax treatment. Under the previously announced rules the CGT protection would be lost permanently if a capital distribution was made to a UK resident – this is now no longer going to be the case. This is very positive news for clients as excluded property trust structures will not only retain their IHT protection, but they may (in certain circumstances) also be used as a ‘gross roll-up’ vehicle. Excluded property trust structures could therefore be effective going forward for a number of non-dom clients. They will no longer need to pay the remittance basis charge in order to benefit from income protection (as long as these are established prior to becoming deemed-domicile).
  • Non-UK capital gains will therefore be taxed on the foreign domiciled (or deemed-domiciled) settlor only by reference to benefits received by the settlor or their ‘close family members’.
  • New anti-avoidance rules will be introduced to prevent the ‘washing out’ of capital gains by making distributions to non-UK residents (who are broadly outside the scope of UK CGT). This is a commonly used planning technique utilised by trusts with beneficiaries resident in a number of different jurisdictions. It has been announced that distributions to non-residents will not be matched against the ‘pool’ of trust gains and all deemed-domiciled individuals will be taxed on an arising basis on capital payments received from a non-UK trust.  Clients may wish to speak to their advisers to explore the impact of this on their current arrangements pre April 2017.
  • Largely mirroring the gains rules as above, foreign income will be taxed on the foreign domiciled (or deemed-domiciled) settlor only by reference to benefits received by the settlor or their ‘close family members’.
  • Close family members are defined as ‘spouse, cohabitee and minor children’, but importantly do not include minor grandchildren.
  • UK source income will be taxable on the settlor of a settlor interested trust – this position remains unchanged.
  • Protected settlements can be ‘tainted’ (and the income and gains protections lost) if additional assets are added to the trust. Extreme caution (and relevant advice) should be taken when transferring further assets to a protected trust.
  • Where payments are made from a trust to a non-resident individual/remittance basis user (who is not a ‘close family member’), who then subsequently transfers/gifts/lends the funds/asset to a UK beneficiary within 3 years, the payment will subject the UK beneficiary to UK taxation. These anti-avoidance measures are designed to prevent the ‘recycling’ of funds between family members.
  • A new method of valuing benefits from offshore trusts will also be introduced to determine the taxation of the benefit received:
    • For art – acquisition price multiplied by HMRC’s official interest rate.
    • For loans – value of the loan multiplied by HMRC’s official interest rate less any interest actually paid (rather than a simple ‘roll-up’).
  • Where a settlor has lent cash to an offshore trust and this is repaid after 5 April 2017, there may be an income tax charge on the loan repayment if ‘accumulated income’ is in point. Settlors with loans to existing trust structures should review the position in advance of 6 April 2017 to undertake any restructuring, if appropriate.
  1. Inheritance Tax (IHT) on UK residential property – effective 6 April 2017
  • The ‘extended charge’ to IHT on UK residential property will apply to UK residential property held through an overseas structure. The draft legislation states that overseas company shares will be within the scope of UK IHT (and cease to be considered ‘excluded property’) where their “value is attributable to an interest in UK land which is …residential property situated in the UK”.
  • Where double tax agreements/treaties are in place and the principle taxing rights are assigned to another jurisdiction, the UK charge to tax will only apply if the other jurisdiction does not have an effective tax charge on the property.
  • There will be no exemptions from the potentially exempt transfer (PET) and gift with reservation of benefit (GROB) rules.
  • The definition for a ‘UK dwelling’ will follow the Non Resident CGT definition, rather than the Annual Tax on Enveloped Dwellings (ATED) definition.
  • The proposed rule relating to ‘change of use’ of a property within 2 years of the IHT chargeable event has now been abandoned. There is still some uncertainty relating to mixed-use properties, though it is understood that this will be legislated for next year.
  • When considering the deductibility of debt for IHT, ‘connected party debt’ will not necessarily be disregarded. However “any loans taken out to acquire or maintain a UK dwelling [will be within the scope of] IHT in the hands of the lender”’. Therefore, though deductible for the estate holding the UK residential property, the debt should be treated as part of the ‘UK estate of the person making the loan’.
  • Where a UK residential property is sold by an overseas vehicle, the proceeds of sale will continue to be regarded in the same way as a UK residential property for 2 years following the disposal.
  • It was confirmed that the ‘targeted anti-avoidance rule’ (TAAR) to deter ‘deliberate tax avoidance’ in relation to IHT on UK residential property will be introduced, as planned.
  • It will perhaps be welcome news to corporate service providers that the Government will not proceed with its plan of imposing the IHT liabilities on the legal owners of a property, e.g. the directors of a property holding company.
  • The Government remains ‘unconvinced’ that any concession or tax relief should be available for those looking to remove property from enveloped structures, which is disappointing, but not a surprise given comments to date.
  • Clients with UK residential property held via offshore structures should seek advice and review their position (and the likely exposure from April 2017) at the earliest opportunity.
  1. Business Investment Relief (BIR)
  • Further details were also released in relation to reforming Business Investment Relief (BIR), to encourage investment by non-doms in to the UK. We will release a separate blog article on this topic in the future.

Final Comments

After a long 18 month consultation process the rules now appear to be settled and appropriate action can now be taken ahead of 6 April 2017. The detail on the offshore trust rules does give welcome certainty to non-doms, offshore trustees and their advisers. It is important that clients undertake a review of their existing offshore structures particularly where they hold UK residential property.

It will be welcome news to many non-dom clients that they will have opportunities to protect their foreign income, gains and non-UK situated assets from UK taxation (income tax, CGT and IHT) by utilising non-UK ‘excluded property’ trust structures before becoming deemed-domiciled in the UK under the new rules.


This briefing is written in general terms and cannot be relied on to cover specific situations. Professional advice should be sought before acting or refraining from acting.

For further information, please do not hesitate to contact Sean Bannister – Partner or any member of the Edwin Coe Tax team.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing. This guide concerns the law in England and Wales and is intended for general guidance purposes only. It is essential to take specific legal advice before taking any action.

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