Update on changes to taxation of non-domiciled individuals

Draft legislation issued in February 2016 but major uncertainties remain.


Following an announcement in the July 2015 Budget the Government issued a consultation document on 30 September 2015 proposing a number of changes to the taxation of individuals who are resident in the UK for tax purposes but who are domiciled elsewhere (non-doms).
There are three major changes proposed, to take effect from 6 April 2017:
  • individuals who have been resident in the UK for 15 of the last 20 years will be deemed to be UK-domiciled for income tax and capital gains tax (CGT) purposes from the beginning of year 16;
  • individuals born in the UK with a UK domicile of origin, who have acquired a domicile of choice elsewhere, will be deemed to be UK-domiciled for periods for which they are resident in the UK;
  • the inheritance tax (IHT) rules, which already provide for deemed domicile in certain circumstances, will be aligned with these new rules (subject to one difference outlined below).
Separate proposals will charge IHT on all UK residential property held by non-doms through an offshore company or trust, and these will be the subject of a further consultation document in due course.

Further details are available here, in our news item issued at the time the original consultation document was published.

Draft legislation published
On 9 December 2015, the Government issued in draft the majority of the material that will form the 2016 Finance Bill. This included draft provisions to change the IHT deemed domicile rules, but the remaining measures were not available at that time. The draft legislation for IHT contained one significant change from the position set out in the earlier consultation, relating to the rule that individuals born in the UK with a UK domicile of origin, who have acquired a domicile of choice elsewhere, will be deemed to be UK-domiciled for periods for which they are resident in the UK. That rule will now apply, for IHT purposes, only if the individual has also been resident in one of the previous two tax years.

Draft legislation on the income tax and CGT changes was issued on 2 February 2016 and, so far as it goes, this contains no surprises. It makes it clear that where an individual is potentially liable to a CGT charge under the ‘temporary non-resident’ rules, on returning to the UK, and where this only arises because the individual is treated as domiciled under the new rules, no charge will be imposed in respect of foreign chargeable gains arising during a temporary period of non-residence beginning before 8 July 2015.

The Government has stated that this measure is not expected to have any significant macroeconomic impacts. However, it clearly discourages non-domiciled individuals from remaining in the UK or coming to the UK, and the loss of their wealth from the UK is bound to have a harmful economic effect.

Draft legislation still awaited for trusts
One area that the original consultation document left particularly uncertain is the treatment of overseas trusts settled by individuals who are affected by the new rules. The Government has indicated that long-term residents who had set up an offshore trust before they became deemed-domiciled as a result of being resident in the UK for 15 of the last 20 years, will not be taxed on income and gains that are retained in the trust. However, the details are still unclear and the announcement of 2 February added nothing to what has been said previously. It indicated that the relevant legislation will now be included in the 2017 Finance Bill rather than the 2016 Bill. If normal practice is followed, the 2017 Finance Bill will be available in draft in December 2016, but it is quite possible that draft legislation covering this particular area will be available well in advance of that.

What to do
This delay means that there will be much less time than expected to make any necessary arrangements as regards existing trusts before the changes come into effect on 6 April 2017. Nevertheless, we would still recommend that no immediate action be taken until there is more clarity on the proposed changes.

However, individuals and trustees can take steps to be prepared for that time. These include giving consideration to:
  • rebasing overseas assets standing at a gain before April 2017;
  • making offshore trust or company distributions before April 2017;
  • settling new trusts if the potential settlor is not yet deemed domiciled for IHT purposes.
The Government has invited comments on the latest draft legislation by 2 March 2016, and Moore Stephens will take this opportunity to press for the treatment of trusts to be made clear as soon as possible.