24 August 2016

Having originally proposed a consultation document on the “non-dom” changes in late Summer 2015, HM Treasury has finally published its consultation document addressing the non-dom changes in detail. All of the proposals are still scheduled to take effect in April 2017.

Although an initial consultation document on the non-dom changes was published in late September 2015, it posed more questions than answers and, in particular, did not give clarity on one of the key aspects of the changes – the tax treatment of offshore trusts. Since then, non-doms and their advisers have been operating in an environment of ‘known unknowns’, giving rise to a frustrating time of sketchy and/or tentative information, with people unable to plan with any certainty for the changes to follow.

Brexit and the changes which that brought about to the government’s personnel only added to the uncertainty, as we awaited possible changes to policy direction.

Thankfully the new consultation document provides much more detail, together with some draft legislation. The details should be read as being subject to further discussion and change, although they are certainly helpful in understanding what the government’s thoughts and objectives are in making the proposed changes.

The new consultation document deals with:

  • the introduction of “deemed-domicile” for Income Tax and Capital Gains Tax (“CGT”) purposes – including how relevant trusts will be affected
  • the changes to Inheritance Tax ("IHT") as it will apply to UK residential property held by offshore companies
  • how to make Business Investment Relief more accessible to non-dom users.

This article provides an overview of the consultation document and draft legislation, together with our initial thoughts on the impact that the provisions may have for taxpayers if they are enacted as now proposed.


  • The government has, notwithstanding Brexit and changes to personnel, continued with the proposals that had been made previously and without deviating from its policy objective in this area. The new information makes it clear that the government does not intend to backtrack on the proposals as a way of incentivising foreign investment into post-Brexit Britain.
  • All of the proposals still aim to take effect from 6 April 2017, without any plans for a delay.
  • IHT will be charged on UK residential property held through offshore companies. Valuations will take debts and the company’s net value into account.
  • The remittance basis of taxation will cease to be available to individuals who have been UK tax resident in 15 of the previous 20 UK tax years and have so become "deemed-domiciled": this will impact on individuals from the start of their sixteenth tax year in the UK.
  • The government will make changes to its proposals so that “deemed-domiciled” status for IHT purposes will cease after four consecutive tax years of non-UK residence, effectively keeping the current 'IHT shadow’ treatment. However, individuals will still need to remain non-UK resident for six complete UK tax years to re-start the clock in the event they decide to return to the UK.
  • Individuals who become “deemed-domiciled” for income tax and CGT purposes on 6 April 2017 will be able to re-base their non-UK assets' values at that date if they have previously paid the remittance basis charge at least once since 2008. They will also enjoy the ability to make tax-free remittances of any gains realised on disposals of such non-UK assets after 5 April 2017 to the extent such gains are attributable to the pre-April 2017 period.
  • There will be an ‘amnesty’ on segregating mixed funds during the 2017/18 tax year, allowing more tax-efficient remittances for remittance basis users in the future.
  • Pre-“deemed-domiciled” trusts will be afforded “excluded property” status for IHT. In addition, their settlors will benefit from protections from attribution rules for CGT and Income Tax, provided conditions are met: these trusts will therefore be useful ‘freezers’ for settlors and families who do not intend to access trust funds whilst resident in the UK.

Inheritance Tax on residential property

In the context of recent years’ changes to the taxation of UK residential property (such as the introduction of the Annual Tax on Enveloped Dwellings (“ATED”) and the non-resident CGT (“NRCGT”)), the announcement that UK residential property held through non-UK companies will be brought within the scope of IHT will affect many clients’ plans. Those previous changes often put non-UK domiciled clients in the position of having to choose between ATED and the IHT protection afforded by non-UK company structures, and many clients chose to accept the ATED charges and retain the IHT benefits. Those IHT benefits now look set to disappear, and another round of planning will almost certainly be needed.

Without IHT protection, most non-UK company structures for holding UK residential property look likely to have outlived their usefulness, at least insofar as the properties are held for personal use, as the resulting ATED charges will buy little benefit. With widespread re-structuring (or “de-enveloping”) now anticipated, it had been hoped that some form of “de-enveloping relief” would be included in transitional provisions, not least as a sort of ‘good will’ gesture by the government after moving the goalposts in this area for the fourth time since April 2013. The consultation document makes it clear that the government does not intend to offer any such relief for the possible ATED-related Capital Gains Tax, NRCGT or Stamp Duty Land Tax (“SDLT”) charges that many de-enveloping cases are likely to encounter. It seems that the choice for clients will therefore be between (a) paying ATED charges indefinitely with no corresponding IHT protection, or (b) triggering CGT and/or SDLT in de-enveloping now.

From the wording of the new consultation document, it appears that the government’s intention remains that the changes to IHT will become effective on 6 April 2017, rather than being delayed until 2018 as many hoped.

Other important points within the document are as follows:

  • The new consultation document suggests that the extension of IHT will apply to residential properties falling within the definition of “dwelling” for the purposes of NRCGT. This definition was introduced in the Finance Act 2015, and applies to buildings (and grounds and their developments) that are used as – or “suitable” to be used as – dwellings. However, where properties are relieved from NRCGT by virtue of being principal private residences, they will not also be relieved from the extension of IHT.
  • Where buildings have been used for residential and non-residential purposes, IHT will apply if the property has been used for a residential purpose at any point in the two years before the IHT event. If purposes have been mixed simultaneously, there will be an apportionment for IHT values.
  • Debts that relate exclusively to the property in question will reduce its value for IHT purposes, but those that do not relate to the property will not. If the company holds debts relating to the property alongside other assets, a proportionate amount of the debt will reduce the property’s value. It appears that debts secured on the company's shares will not reduce their value for IHT purposes. Loans between connected parties will be disregarded.
  • The new consultation document makes it clear that IHT will be charged on the value of the company (rather than the property) to the extent that the company’s value is attributed to the underlying property. This seems to mean that discounts may be applied to the full value of the company to take into consideration things like shared ownership, the company’s potential exposure to litigation unrelated to the property, or bad debts.
  • The new consultation document announces that a “targeted anti-avoidance” rule will be introduced to “disregard arrangements where their whole or main purpose is to avoid or mitigate a charge to IHT on UK residential property”. This is in line with HMRC’s trend to introduce such rules (in addition to the General Anti-Abuse Rule) to catch ‘artificial’ tax planning schemes, and is likely to make it necessary to ensure that any changes to a structure are objectively justifiable from a non-tax perspective if IHT benefits are to be achieved.
  • The government has suggested that HMRC should have the power to block the sale of property held ‘indirectly’ until any outstanding IHT charges are settled. Without further information, it is difficult to see how this measure would assist HMRC in determining when an IHT event has occurred in relation to a property, although it may be effective in preventing future disposals of property until the ultimate ownership of the company throughout its history has been accounted for, including changes of ownership coming about upon IHT events.
  • In addition, the government is proposing that a new liability to pay any outstanding IHT charges will be imposed on any person who has legal ownership of the property, including any directors of the company which holds the property, to ensure the IHT is paid. The relevant legislation setting out how this new liability will apply will be published later in 2016.

“Deemed domicile” for long-term UK residents

The imposition of a “compulsory arising basis” for non-doms who have been resident in the UK for 15 of the previous 20 UK tax years remains a part of the government’s plans, and the wording of the new consultation document suggests that the government still intends this to become effective on 6 April 2017 rather than being delayed until 2018.

Some clarity on the government’s thoughts is provided in the new consultation document on the following points, some of which represent important opportunities for planning (most notably, re-basing of foreign assets for people caught by the new rules in April 2017 and an effective ‘amnesty’ on mixed funds):

  • The Statutory Residence Test (“SRT”) will only apply for the purpose of deciding if an individual has been UK resident in relevant tax years since its introduction in April 2013. For previous years, the rules in place at those times will apply (i.e. the pre-SRT mixture of legislation, case law and extra-statutory concessions).
  • Children will be subject to the same rules, effective from birth. A child could therefore become subject to the ‘compulsory arising basis’ at the age of 14.
  • ‘Split years’ will count as a year in which an individual was UK tax resident for the purpose of the ‘compulsory arising basis’ rule: it is therefore not the case that only years for which the individual is resident for the entire tax year will be counted. With this in mind, it is conceptually possible for someone to become deemed domiciled under the new '15/20' rule after having only been in the UK for not much more than 13 years. If an individual leaves the UK during tax year 15 and is non-resident in the 16th tax year their liability to UK CGT and income tax will be limited (even though they are deemed-domiciled) but their deemed domiciled status will impact on their IHT liability regardless of their residence status.
  • The ‘temporary non-residence rules’ for CGT purposes will not be applied on an arising basis where the individual would have expected under the rules at the time disposals were made to have had access to the remittance basis upon returning to the UK.
  • Individuals who have left the UK to re-set their “deemed domicile clock” under the existing IHT rules will have to change their plans to ensure that the clock is also re-set under these new proposals: there will not be a transitional relief for people whose planned absences under the existing ‘17/20’ rules will not satisfy the requirements of the new ‘15/20’ rules. However, for IHT purposes, the IHT shadow that follows individuals after they leave the UK will be limited to four consecutive UK tax years, albeit such individuals will need to remain non-UK resident for six consecutive years to avoid being caught within the IHT net again if they return to the UK.
  • Anyone who has paid the remittance basis charge for at least one tax year before 6 April 2017 will be entitled to rebase their foreign assets for CGT purposes at their 5 April 2017 market value. This will apply only to people who satisfy the ‘15/20’ rule in order to become subject to the ‘compulsory arising basis’ from 6 April 2017, so will only be of relevance to people who are already ‘long term’ residents and have been in the UK for at least 15 tax years within the last 20 (including the current 2016/17 tax year). However, it represents a useful concession to those long-term residents who may have long-held foreign assets pregnant with significant gains, which can now be re-based to 5 April 2017 values and sold after 6 April 2017 without triggering large CGT charges on the arising basis.
    • Where such foreign assets were purchased with relevant foreign income and gains, the remitted proceeds of sale will be taxed according to existing remittance rules in relation to those original foreign income and gains only.
    • The post 6 April 2017 element of the gain will be subject to CGT on the arising basis.
    • Other sale proceeds (including the whole of any gain realised that is attributable to the period prior to 6 April 2017) will not be subject to tax on the arising basis and can be remitted without a charge to UK tax, despite being foreign gains. This represents a significant advantage, as individuals who would have been taxed to CGT if they had disposed of foreign assets prior to April 2017 and remitted the ‘profits’ of sale under the remittance basis will be able to dispose of such foreign assets after 6 April 2017 and remit all of the sale profits attributable to the period prior to April 2017 for free, without a charge to CGT.
    • Individuals who will not be subject to the ‘compulsory arising basis’ immediately on 6 April 2017 will not qualify to benefit from this re-basing or ‘free remittance’.
  • Individuals (whether or not UK resident, or “deemed-domiciled” under the new rules) will be permitted to ‘clean up' during the 2017/18 tax year any bankable asset mixed funds that they hold, so that income, capital gains, offshore income gains and 'clean capital' can be untangled for future use. Non-bankable assets can similarly be ‘cleaned up’ during this time if they are sold in exchange for bankable assets during the 2017/18 tax year. The elements can only be segregated effectively if they can be tracked and evidenced for the period during which they have been mixed. After a ‘clean up', the various elements can be remitted to the UK without reference to the mixed fund ordering rules, offering a significant opportunity for clients who have been forced to block mixed funds from remittance to the UK to create new 'clean capital' pots for future remittance.

Trusts set up by non-UK domiciled persons

As we had anticipated, the government has abandoned the proposed ‘benefits charge’ in favour of introducing reforms of the offshore trust taxation rules more closely aligned to the existing rules. As for the other proposals above, there is no suggestion of a delay to the proposals due to be introduced in April 2017.

Trusts settled by non-dom settlors who are not "deemed-domiciled” under the ‘15/20’ rule when they settle the assets (“protected trusts”) will be afforded certain beneficial treatments, even after the settlor has become subject to the "deemed-domiciled" provisions. It should be noted that adding assets to a settlement after “deemed-domiciled” status under the new '15/20' rule has been triggered will forfeit all ‘protected trust’ benefits for the whole of the trust, and this is something that trustees will need to monitor carefully.

  • IHT:
    • Protected trusts will - as now – continue to have “excluded property” status for IHT purposes.
  • CGT:
    • The government will extend the current attribution rules (s.86, TCGA 1992) to settlors who are “deemed-domiciled” under the 15/20 year rule.
    • However, such settlors who do not receive a benefit from a protected trust (and whose spouse and minor children also do not receive a benefit) will not have the trust’s realised gains attributed to him or her, with gains instead being held in the trust and subsequently matched under the existing rules (s.87, TCGA 1992) to any benefits received by other beneficiaries. Once a settlor or spouse/minor child receives a benefit from a protected trust, the trust's gains will be attributed on an arising basis to the settlor for all future years, irrespective of whether or not further benefits are conferred.
    • It seems that families who expect to need distributions in the future, but whilst the settlor is "deemed-domiciled", may want to consider taking funds from the protected trust before April 2017 in order to ensure that the ‘protected’ status of the trust for CGT purposes is retained so future gains are not attributed to the settlor on an arising basis.
  • Income Tax:
    • The government has set out its intention to ensure that settlors of protected trusts are not adversely affected by the introduction of the new "deemed-domiciled" rules. Achieving this end will involve complicated changes to the existing rules, and the consultation document goes some way to explaining how these are to be effected.
    • Settlors who may benefit from a non-UK resident protected trust will not have the trust’s non-UK direct income attributed to them under the current “settlements legislation” (s.624 et seq., ITTOIA 2005), provided that the income remains within the trust rather than being distributed to the settlor, his/her spouse or minor children.
    • Settlors who may benefit from a non-UK resident protected trust will also not have the trust’s non-UK income (or that of its underlying or related entities) attributed to them under the "transfer of assets abroad legislation” (s.720 et seq., ITA 2007), but will instead be subject to Income Tax on worldwide benefits received and matched to the structure’s relevant foreign income.
    • Unlike for CGT purposes, it does not seem to be the intention that protected trust status will be lost for Income Tax purposes if a taxable distribution is made: the new consultation document certainly makes this clear for the purposes of the “transfer of assets abroad legislation” changes.

UK domicile of origin ‘returners’

  • The government has confirmed that it intends people born in the UK with a UK domicile of origin not to have access to the remittance basis even if they are resident in the UK but claim to have a non-UK domicile of choice. The new consultation document confirms that the government does not intend to give any sort of concession against this for individuals who are resident in the UK only for a short time, although they have confirmed an intention to allow a one-year 'grace period' for IHT purposes.
  • In relation to trusts previously settled by such individuals, the government has indicated that it will continue with its original proposals although without giving any further detail at this stage than that included in the original consultation document.

Business Investment Relief

The government has confirmed its intention to make this more attractive to encourage greater take-up and further foreign investment in the UK. However, it has stopped short of suggesting how this can be achieved and has instead asked for ideas to be submitted for consideration.

Key contact

Suzanna Harvey Partner

  • Head of Private Wealth
  • Private Client Services
  • International Tax

Subscribe to news and insight

Non-dom tax changes from April 2017

UK non-dom tax rules are scheduled to change with effect from April 2017. Find out how the changes will affect you and what we can do to help.
Find out more