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Reforms to the Taxation of Non-UK Domiciliaries with effect from 6 April 2017


On 5 December, the government published its response to the latest Consultation. It has confirmed that some of anticipated changes are to be introduced as previously proposed; provided some clarity on the changes to the taxation of offshore trusts; and announced other entirely new changes.  These changes will take effect from 6 April 2017, so that those affected by the changes should start planning now.  The purpose of this note is to summarise the main changes.

UK Deemed Domicile

The proposed new rules concerning deemed domiciliaries are largely unchanged.


Non-UK doms will become deemed domiciled for all tax purposes once they have been UK tax resident for at least 15 out of the past 20 tax years (“15 year rule”), and “split years” will count towards the 15 years.

UK doms (who have a UK domicile of origin) and who return to the UK having acquired a non-UK domicile of choice will be treated as being deemed domiciled. For Inheritance Tax purposes only, they will become deemed domiciled after they have been resident for at least one of the two tax years prior to the year in question.


A deemed domiciled individual who leaves the UK, and remains non-UK tax resident, will cease to be deemed domiciled for IHT purposes at the start of the fourth tax year of non-residence (this is a year earlier than previously suggested).

For returning deemed domiciled individuals, it will be necessary to be non-resident for 6 complete tax years in order to break deemed domicile status.

Transitional arrangements

An individual who ceases to be UK tax resident before 6 April 2017, so as to avoid becoming deemed domiciled on that date, will not be caught by the new rules.

An individual who has spent 15 of the last 20 years in the UK but is currently non-resident, will not become deemed domiciled under the new rules whilst they remain non-UK tax resident.

Remittance Basis Taxation

When a non-UK dom becomes deemed domiciled under the 15 year rule:-

  • the remittance basis of taxation will no longer be available, so the non-UK dom will be taxed on his worldwide income and gains on an arising basis;
  • the annual remittance basis charge will no longer be payable; and
  • the non-UK dom will be liable to Inheritance Tax on his directly held worldwide assets.

Capital Gains Tax Rebasing

Non-UK doms who become deemed domiciled in April 2017 because they have been UK tax resident for 15 of the past 20 years, and who have paid the remittance basis charge in any year before April 2017, will be able to rebase directly held foreign assets to their market value on 5 April 2017. As a result, any gain which accrued before April 2017 will not be chargeable to Capital Gains Tax.

The rebasing will apply automatically to disposals of assets held on 5 April 2017 which have not been UK sited at any time since 16 March 2016, or their date of acquisition if later. It will be possible to disapply the rebasing on an asset by asset basis (which would be beneficial if the asset is standing at a loss).  It seems that it may be possible to rebase assets which are not presently held personally.

If a rebased asset (which had been acquired with clean capital) were to be sold, then the gain which had accrued prior to April 2017 could be brought to the UK tax-free.

The rebasing will not apply to:

  • non-UK doms who become deemed domiciled after April 2017
  • those who become deemed domiciled because they were born with a UK domicile of origin
  • trustees
  • assets where the gain on disposal of the asset would be subject to Income Tax (eg offshore funds without reporting status).

Cleansing of Accounts Containing Mixed Funds

Non-UK doms will have a transitional period of two tax years expiring on 5 April 2019 in which to separate out the constituent parts (eg income, gains, capital) of their mixed accounts. Providing they can determine all the component parts of the mixed account, they will then be able to remit from each of the newly segregated accounts as they wish, and pay the appropriate amount of tax (if any).

This “cleansing” facility will apply only to amounts deposited in bank and similar accounts, and it will not apply to assets acquired out of mixed funds. However, an individual will be able to sell an overseas asset and separate the sale proceeds in the same way as with any other mixed account.

This cleansing facility will be available to any non-dom who was not born in the UK with a UK domicile of origin, and whether or not the non-dom will become deemed domiciled in April 2017.

Non-UK Trusts

A non-UK trust which a settlor establishes before he becomes deemed domiciled is to be protected. Non-UK source income and all gains of the trust will not be taxed so long as they are retained in the trust (and are not matched) and the protection continues. The protection will be lost if:

  • property or income is added to the trust (whether by the settlor or a trust of which he is a settlor or beneficiary) after the date upon which the settlor becomes deemed domiciled; or
  • the settlor acquires a UK domicile of choice under general law.

There are separate rules for Capital Gains Tax and Income Tax.

Capital Gains Tax

If protection is lost, then the gains of the trust will be attributed to the deemed domiciled settlor and taxed in his hands.

Broadly speaking, trust capital gains of protected trusts will continue to be taxed in accordance with existing rules, subject to some refinement. For example, it will no longer be possible to “wash out” trust gains by making capital distributions to non-UK resident beneficiaries.

Capital payments to close family members (settlor’s spouse, minor children and stepchildren) of a UK resident settlor (irrespective of his domicile status) will be assessed to tax on the settlor if the recipient of the capital payment is non-UK resident or claiming the remittance basis of taxation and does not remit the capital payment in the same tax year. A non-dom settlor might claim the remittance basis.  Capital payments made prior to 6 April 2017 which are matched to post 5 April 2017 gains will be caught.

Rules concerning “onward gifts” are to be introduced. They will treat a capital payment received by a beneficiary which is not taxed in the beneficiary’s hands and which is then paid to another within a period of three years, as a capital payment to the recipient, which is taxable in the recipient’s hands. This will prevent capital payments which are received tax-free by non-UK residents or non-UK domiciliaries who are taxed on the remittance basis from being forwarded to the UK tax-free.  The rule will apply where the onward gift is made within three years of the capital payment.  Onward gifts made after 5 April 2017 will be taxable even if the capital payment was made before that date. Onward gifts would include beneficial loans.

Income Tax

Non-UK source income within a protected trust will be taxed on the settlor, subject to the remittance basis of taxation, only by reference to benefits received by the settlor or a close family member and only when the benefits are not otherwise subject to tax in the hands of the recipient. A non-dom settlor might claim the remittance basis.

UK source income of the trust and any underlying companies will continue to be taxed on the arising basis.

Otherwise, and if the protection is lost, then the income and gains of the trust will be attributed to the settlor and taxed in his hands on the arising basis.

Inheritance Tax

Excluded property offshore trusts will continue to enjoy exemption from Inheritance Tax (except in relation to UK residential property – see below), whether or not the income and gains of the trust are attributed to the settlor and taxed in his hands.

UK Residential Property Held Within Offshore Trust Structures

Inheritance Tax will be imposed on the value of all UK residential property, whether the residential property is owned through one or more closely held companies or a partnership, with the result that offshore structures will cease to provide any exemption from Inheritance Tax. Therefore, where an estate or trust holds shares in an overseas close company, which in turn owns UK residential property, the estate or trust will be within the charge to Inheritance Tax to the extent that the value of those shares relates to the UK residential property.  Relevant debts which relate exclusively to the property, such as amounts outstanding on a mortgage which was taken out to purchase the property, will be taken into account and reduce the taxable value of the property. However, loans between connected parties are to be disregarded.

Inheritance Tax is also to be imposed on the value of loans made to acquire, maintain or improve UK residential property and on assets used as collateral for such loans.

Furthermore, even if a property is sold or a loan is repaid, the proceeds of sale and the repayment proceeds would remain potentially liable to Inheritance Tax for two further years.

A targeted anti-avoidance rule is to be introduced, the effect of which will be to block any arrangements which are intended to avoid the new rules. New reporting requirements are also to be introduced.

All UK residential property structures and loan arrangements concerning UK residential properties need to be urgently reviewed to avoid double taxation and to ensure that appropriate actions are taken to optimise the ongoing tax exposures.

We are finding that most offshore structures which would continue to be exposed to the Annual Tax on Enveloped Dwellings should be dismantled. We are working on a number of structures where acceptable tax outcomes will be achieved on the basis that the necessary actions are taken before 6 April 2017.  The process of dismantling an offshore structure involves a number of steps which must be taken successively, so those affected should seek advice without delay.

Business Investment Relief

Changes are to be introduced to make this relief more attractive.

Where to from here?

Whilst these changes will significantly restrict the tax benefits which non-doms have enjoyed, there are opportunities to mitigate their impact.

We would strongly recommend that all those affected by the changes seek an urgent review of their current position and the options available to them.

If you would like to discuss any of the matters raised in this note, please contact us at, or your usual Saffron adviser.