Finance Bill 2017 – Implications for Foreign Investment and Investors in the UK

December 6, 2016

Following on from the UK Chancellor’s speech last month, draft legislation was published on 5 December 2016 setting out how the Government intends to stimulate investment in the UK.

The Finance Bill (the Bill) is subject for comment until 1 February 2017, and is likely to see Royal Assent in the summer of 2017, but will take effect from 6 April 2017.

It is clear, however, that the Government is intent on making key changes to legislation affecting non-domiciles (non-doms). These changes will affect all non-doms, but especially those with offshore structures.

The Bill targets offshore structures, particularly close companies, trusts and partnerships holding UK real estate. There are also a number of new anti-avoidance measures being introduced in relation to these changes.

The Bill introduces a window in which non-doms will be able to rearrange and tidy their structures.

We have highlighted below some of the key issues arising from the Bill.

UK Residential Real Estate

UK residential properties held through offshore structures (companies, partnerships or trusts) have, until now, been shielded from UK inheritance tax (IHT). 

The Bill removes this protection for all events from 6 April 2017, whether it be the death of the offshore shareholder or on exit of assets from offshore trusts.

This means the value of property directly or indirectly attributable to a “UK residential property interest” will be subject to IHT.

This definition of a UK residential property interest will include dwellings under construction, off-plan, as well as existing properties.

The Bill contains detailed anti-avoidance provisions which will need to be reviewed closely, including, but not limited to, restriction on deductibility of related parties’ debts and limitation of reliefs available on restructuring.

The Bill also confirms that there are currently no proposed reliefs from tax charges, such as Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT), where existing property structures are restructured.

Changes to Non-Dom Rules

As was outlined by the Government, sweeping changes for the non-dom regime will be introduced from 6 April 2017. These changes include the following:

  • An individual will become UK deemed domiciled for IHT, income tax and CGT after being resident for 15 out of the previous 20 tax years, rather than 17 out of the previous 20 tax years;
  • An individual born in the UK with a UK domicile of origin who has acquired a domicile of choice elsewhere will be treated as domiciled for IHT, income tax and CGT purposes, if the individual takes on residence in the UK and has been resident in the UK for at least one of the previous two tax years; and
  • Returning individuals will need to remain non-UK resident for a period of at least six tax years in order to break their UK deemed-domicile status.

The significant change is that foreign domiciled individuals who have lived in the UK for 15 tax years will now be subject to the arising basis of taxation on worldwide income and gains in the same way as UK domiciliaries.


The Bill provides that non-UK resident trusts established by non-dom Settlors will be subject to special tax rules once the Settlor becomes UK deemed-domiciled. The rules provide for relief to Settlors on gains arising within the trusts; however, the relief is limited and subject to restrictions on distributions of funds as well as limitation with regard to the additions of further funds.

For beneficiaries, the current rules will not change significantly. The key change for UK deemed-domiciled beneficiaries will therefore be that, going forward, tax will be charged on the arising basis on any trust income and gains distributed or attributed to them.

Existing structures will need to be audited and consideration given before making distributions, so the distributions are taxed appropriately on the relevant recipients and do not create an issue for the Settlor.

Tidying of Mixed Offshore Funds

The remittance basis rules governing mixed offshore funds dictate that taxable income and CGT of a tax year are treated as remitted before non-taxable “clean” capital. Current rules also prevent the separation of these components into different offshore accounts. 

The Bill allows a non-domiciled individual who has been taxed on the remittance basis to transfer amounts between overseas mixed-funds bank accounts, without being subject to the offshore transfer rules. This will allow the different components within the accounts to be separated, thereby allowing clean capital to be remitted to the UK in priority to the income and gains.

The individual must transfer the funds in the 2017-2018 tax year or the 2018-2019 tax year and must make a nomination when doing so. This will be available to any individual who has been taxed on the remittance basis in any tax year before the 2017-2018 tax year. However, these rules do not apply to individuals who were born in the UK with a UK domicile of origin.

There is therefore an opportunity for all non-UK domiciled individuals, not just those immediately affected by the deemed domicile rules from 6 April 2017, to reorganise their offshore accounts to separate funds into different components.


The draft legislation provides that the market value of an asset at 5 April 2017 could be used as the acquisition value for CGT purposes when computing the gain or loss on its disposal. These rules will not apply to assets situated in the UK between 16 March 2016 and 5 April 2017.

The above rules will apply to any individual who becomes UK deemed-domiciled from April 2017, other than one who is born in the UK with a UK domicile of origin.

Provided that the necessary criteria are met, this means that on a future sale of such a qualifying asset, only gains accruing from 6 April 2017 onward may be then taxable (on the arising basis).

Rebasing will not apply on a mandatory basis (taxpayers will be able to choose whether they wish for it to apply) and will need to be considered on an asset-by-asset basis.

All non-doms will need to ensure that they understand how these proposed changes may affect them.  

Business Investment Relief (BIR)

The proposed changes in the draft legislation seek to make the rules around BIR simpler and clearer, as well as encourage further investment in UK businesses.

The new rules will extend the start-up period for a company which is carrying on a commercial trade, or is preparing to do so, from two to five years and will also extend the definition of a qualifying investment to make it available on the acquisition of existing shares as well as on the acquisition of new shares in qualifying target companies.

Lastly, changes to the grace period for a potentially chargeable event will enable any income or gains to remain in a company for a period of up to two years after the date upon which the investor becomes aware that the target company has become non-operational.

Tax Deductibility of Corporate Interest Expense

The Bill introduces rules that limit the tax deductions that companies can claim for their interest expenses, with effect from 1 April 2017.

The new rules will restrict each group’s net deductions for interest to 30 percent of earnings before interest, tax, depreciation and amortisation (EBITDA) taxable in the UK, or if higher, to an amount based on the net-interest-to-EBITDA ratio for the worldwide group.

Only some of the draft legislation has been released, with the remaining provisions due to be published by the end of January 2017 in an updated version of the draft legislation.

Non-resident Companies Chargeable to Income Tax

A consultation will run shortly after the Budget 2017 to consider the case and options for bringing non-UK resident companies, which are currently chargeable to Income Tax on their UK taxable income, within the scope of Corporation Tax.

These companies would then be subject to the rules which apply generally for the purposes of Corporation Tax, including the limitation to corporate interest expense deductibility and loss relief rules.


While the Government has indicated that it will be looking to encourage foreign investment in light of Brexit, the Bill provides for a legal framework which has more stringent rules relating to investments in residential real estate in the UK, whether by UK or non-UK resident individuals.

The rules relating to offshore trusts mean a much less flexible regime, which will bring an extra level of administration and exasperation for non-doms with offshore structures.

This has been balanced by increased flexibility through BIR for UK resident individuals, which may have limited value considering the issues relating to the offshore trusts.

We recommend that all structures relating to UK residents or holding UK assets to be audited and considered prior to 6 April 2017.