Update on non-dom tax changes

Published on 15th Dec 2016

In the recently published draft legislation for the Finance Bill 2017, the government has revealed the detail of its non-dom changes, first announced in the Summer Budget 2015.

The headline measures remain as set out in the latest consultation, in August 2016: long term residents will, from April 2017, no longer be able to maintain non-dom status for tax purposes and residential property held indirectly by non-doms, such as through an offshore company, will be brought within the UK inheritance tax (IHT) charge. There have also been changes, for example in relation to the treatment of certain loans for IHT and the taxation of benefits received from offshore trusts. The provisions enabling “protected” status for trusts established prior to an individual becoming deemed domiciled differ substantially from those proposed in the second consultation and include new anti-avoidance provisions that protect Treasury revenue rather than the trust, settlor or beneficiaries.


1. Those who have been resident in the UK for 15 out of the previous 20 tax years will be treated as deemed domiciled in the UK for capital gains tax, income tax and IHT purposes. However, for IHT purposes, deemed domicile status can be lost after a four year period of non-residence (rather than six years as had been proposed), broadly maintaining the existing treatment of IHT for departing non-doms.

2. Those with a UK domicile of origin who were born in the UK but leave and later return will not be able to claim the remittance basis beyond the tax year of their arrival.

UK residential property

1. The government will be proceeding with its implementation of reforms to IHT on residential property by extending the charge to UK property held through offshore structures. Closely held company shares and interests in a partnership owning UK residential property will be treated as UK situs for IHT purposes. There will be a de minimis exception where an interest is less than 1% of the right or interest in the close company/partnership.

The rationale for holding UK residential property through offshore companies is fast disappearing, with these changes coming on top of the introduction of the Annual Tax in Enveloped Dwelling (ATED) in 2013, higher rates of Stamp Duty Land Tax (SDLT) for purchases via a company and the introduction of non-resident capital gains tax in 2015.

2. Where the shares or partnership interest have been sold, the proceeds will remain liable to IHT for two years from the date of sale, irrespective of the location of the monies. This is to prevent deathbed sales of shares to a family member escaping IHT. A gift of the shares would be a potentially exempt transfer and so at risk of IHT if the donor dies within the following seven years.

3. Loans and mortgages used to purchase residential property will be deductible in calculating the value subject to IHT, subject to the usual restrictions that apply to directly held property.  But the unexpected flipside is that loans which are used to purchase UK properties or which are used for the repair or maintenance of such properties will be UK situs and therefore potentially taxable on the death of the lender.  Similarly, IHT will also be charged on any assets put up as security or collateral for a loan or to support a guarantee given by a third party in connection with such a loan. The loan provisions are drafted widely and include, for example, individuals with interests in foreign close companies that have made loans. Offshore trusts that have provided funding will be subject to IHT on the value of the loan.

Mixed funds

The government announced in the Summer Budget that long term remittance basis users would have the opportunity to cleanse overseas bank accounts containing a mixture of capital, income and/or capital gains in the 2017/18 tax year. The government has extended this opportunity to two tax years from April 2017.  To take advantage of this opportunity during the two year window, the taxpayer will have to identify the constituent parts of the mixed bank account (for example income, capital gains and clean capital) and then separate each part by transferring it to different bank accounts. This will enable the account holder to remit the clean capital to the UK tax-free and remit capital gains at the lower rates applicable while leaving the income offshore.


Those individuals who become deemed domiciled for the first time on 6 April 2017 as a result of the above changes will be able to rebase their non-UK assets to their market value on 5 April 2017. The rebasing will apply to those assets which were foreign situs at the date of the Summer Budget (8 July 2015), although they can be brought to the UK after 6 April 2017 without losing the relief.  It will be restricted to those who have paid the remittance basis charge for any year before April 2017.


The draft legislation now put forward will be a relief to some of those who have established trusts (or plan to) before they become deemed domiciled.  The August 2016 consultation had proposed that if a settlor or close family member received income or gains from the trust then the settlor would be taxable on all income or gains on an arising basis.  Under the proposed changes, the deemed dom settlor will be taxed only by reference to benefits he or his close family have received.  It will also no longer be possible for a trust to ‘wash out’ trust gains by making capital payments to non-resident beneficiaries but this carries a nasty sting in the tail which could easily catch out individuals who have nothing to do with the trust or any tax planning. If a non-resident trust makes a capital distribution to a non-resident beneficiary who then makes an onward gift to any UK resident within 3 years, any stockpiled gains within the trust are attributed to the UK resident.

Action points

All structures holding UK residential property should now be reviewed urgently in light of the planned changes, which are unlikely to undergo any further amendment. Any review should include the cost/benefit of unravelling the existing structure as, in some cases, there may be a substantial capital gains tax cost. Where trusts are involved, trustees should think about the timing of any ten year charges that may now arise and how these will be funded. Trusts and private companies set up to provide debt financing should also be considered. There had been hope that the government might offer a form of transitional relief for SDLT, ATED-related CGT and/or Non Resident CGT for those seeking to put residential properties into personal ownership, but this will not be the case.

There will, however, be some great opportunities for non-doms, such as the one off mixed account ‘amnesty’, which provides a chance for some taxpayers to separate income and gains to allow for simpler and cheaper future remittances.  The opportunity to rebase assets to 6 April 2017 may also allow some taxpayers to dispose of certain assets and remit more of the proceeds to the UK free from tax.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

Interested in hearing more from Osborne Clarke?