Update: Further Changes Announced to the Non-Domiciles Regime

August 31, 2016

On 19 August 2016, the UK Government published a new consultation paper together with draft legislation which will affect changes to the non-domiciles (“non-doms”) regime in the UK.

The proposals will be legislated through the Finance Bill 2017 which is likely to see Royal Assent in the summer of 2017, but will take effect from 6 April 2017. 

All non-doms are likely to be impacted by these changes.

The consultation document also specifically targets non-doms with UK residential property held through offshore structures.

However, the legislation is likely to introduce a one year window during which non-doms will be able to rearrange and tidy their mixed funds.

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

UK Residential Property

UK property held through offshore structures (companies or trusts) has been shielded from UK inheritance tax (IHT) up to now. 

The consultation document is looking to remove this protection for all IHT events (be it the death of the offshore company shareholder or on the 10 year anniversary and on exit of assets from offshore trusts) on or after 6 April 2017.

This means the value of property deriving from an interest in a UK “dwelling” will be subject to IHT.

It is intended that the definition of “dwelling” be modelled closely with the non-UK resident Capital Gains Tax (CGT) definition, and will therefore apply to dwellings under construction, off-plan, as well as to existing properties.

Under current drafting, there will be no exemption for property occupied as a main residence, or for property used in a rental business.

Debts that relate exclusively to the dwelling will be deductible against the value charged to IHT.

There will be anti-avoidance provisions including:

  • the disallowance of debts incurred with connected persons,
  • any change in use of a property within two years of an IHT chargeable event, and
  • an overriding rule to prevent the avoidance of a charge through any “arrangements.”

De-Enveloping Relief – the consultation confirms that there are no proposals to allow for reliefs from other tax charges, such as CGT and Stamp Duty Land Tax (SDLT), where existing property structures are unwound.

Individuals Returning to the UK

The major change to the non-doms regime relates to the ability to claim non-domicile status in the UK. Under the new rules, the presumption of UK domicile will change from 17 out of 20 tax years, to 15 out of 20 tax years, so non-doms will become UK deemed-domiciled after 15 tax years in the UK and the rules will apply for IHT as well as income and CGT taxes.

Returning individuals will need to remain non-UK resident for a period of at least six tax years in order to break the 15-out-of-20-tax-years, deemed-domiciled rule for IHT, income tax and CGT after April 2017.  

Non-doms with a domicile of origin in the UK will always be deemed to be domiciled in the UK whenever they are resident in the UK, with the only exception to this being that it is proposed that those who return to the UK only temporarily and who, with reference to any tax year, were not UK resident in either of the prior two tax years, should remain outside the scope of UK IHT. 

Non-doms who leave the UK will break any deemed UK domicile status for IHT purposes after four tax years of non-UK residence if they do not return to the UK. 


HMRC proposes that non-UK resident trusts established by non-dom settlors will be subject to special tax rules once the settlor becomes deemed-domiciled, such that:

  • Foreign income, and gains arising, within a trust will not be subject to UK tax on the settlor unless and until a benefit is received from the trust either by a deemed-domiciled settlor or the settlor’s family (i.e., spouse and minor children). Where such a benefit is received, the special tax rules will no longer apply and the settlor will be taxed by reference to the level of income and gains arising within the trust (rather than simply by reference to the value of benefits received, as originally planned). This “settlor tax protection” will apply only to those who become deemed-domiciled under the 15/20 rule, and will not be available to those who have revived a UK domicile of origin.
  • If a non-dom settlor adds further funds to existing trusts, or receives benefits from such trusts, after the settlor has become deemed-domiciled, certain elements of the “settlor tax protection” will be permanently lost going forward. Specifically, under current proposals, trust gains will then become taxable on settlors as they arise, rather than when these are distributed or matched to benefits received.
  • For beneficiaries, it is not intended that the current rules will change significantly. The key change for deemed-domiciled beneficiaries will therefore be that, going forward, tax will be charged on an arising basis on any trust income and gains distributed or attributed to them. Transitional reliefs introduced in 2008, relating to trust capital gains, will continue to apply even when a beneficiary becomes deemed domiciled under the 15/20 rule, but not where the individual has revived a UK domicile of origin.

Tidying of Mixed Offshore Funds – A One Year Window

The remittance basis rules governing mixed offshore funds dictate that taxable income and capital gains of a tax year are treated as remitted before non-taxable “clean” capital. 

The current rules also prevent the separation of these elements into different offshore accounts. 

The consultation document has indicated that a one year window will be given from 6 April 2017 for the separation of the income, capital gains, and clean capital elements of existing non-UK funds into separate accounts or funds.

The one year window will be available to all non-UK domiciled individuals not born with a UK domicile of origin and who have claimed the remittance basis at some stage prior to 6 April 2017.

This 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 their different components.

The window is subject to the ability of an individual to identify the different elements of an offshore account at 6 April 2017 and will apply only to mixed funds which consist of amounts deposited in bank and similar accounts.


As announced in the 2016 Budget, the HMRC has confirmed that individuals becoming deemed-domiciled in April 2017 under the 15/20 rule will be able to benefit from the rebasing of their foreign assets to their market value on 5 April 2017.

This means that on a future sale of such assets, only gains accruing from 6 April 2017 onward may be then taxable (on the arising basis).

The consultation document also confirms that there will be no need to hold sale proceeds offshore to benefit from this protection. It should be noted that:

  • Rebasing will not apply on a mandatory basis; taxpayers will be able to choose whether they wish for it to apply.
  • HMRC has confirmed it will be on an asset-by-asset basis.
  • Rebasing will apply only to unrealised gains in directly held assets. Funds originally invested in those assets will not benefit from protection and a tax charge may still therefore arise if these original funds are remitted.
  • The protection will be limited to those assets which were foreign situs at the date of the Summer Budget 2015 (8 July 2015).
  • Rebasing will apply only for individuals who have paid the remittance basis charge in any year before 5 April 2017 and who become deemed-domiciled under the 15/20 rule on 6 April 2017.  It will not be available for individuals who revive a UK domicile of origin, or for those who become deemed-domiciled in years after April 2017.

As noted above all non-doms need to ensure that they understand how the changes will impact them. It may therefore be of value to arrange a meeting to discuss a strategy and make the necessary changes before 6 April 2017.