Changes to the taxation of non-domiciled individuals

Government consultation document finally published

In the July 2015 Budget the government announced 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 two major areas of change in the current proposals:

  • long-term residents will be treated as UK-domiciled for income tax and capital gains tax (CGT) purposes as well as for inheritance tax (IHT);

  • individuals born in the UK with a UK domicile of origin, who have acquired a domicile of choice elsewhere, will be treated as UK-domiciled for any periods for which they are resident in the UK.
Brief information on the intended changes was given at the time of the Budget, with the promise of a consultation document in due course. A document did appear fleetingly on the government website on 21 September before disappearing. That document was disappointingly short on detail and it was hoped that the final version would be an improvement.

The consultation document has now been re-issued and appears to be identical to the withdrawn version, other than the consultation period being extended by two weeks to 11 November 2015.

Whilst the consultation document contains a small amount of draft legislation the intention is that full draft legislation will be published in November or December  for inclusion in the 2016 Finance Bill.

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.

You can read the consultation here. It poses nine questions on areas where it is clear some thought has been given. The questions are mainly focused on practical implications. It is clear that the government is not consulting on its overarching decision to tax longer term residents on the same basis as UK domiciliaries. What is also noticeable is that the more complex areas of the legislation are a long way from being clearly thought through. Of course, Moore Stephens will be responding in full.


Under current rules non-domiciled individuals can elect to be taxed on their overseas income and capital gains by reference to the amounts remitted to the UK (the ‘remittance basis’), rather than by reference to the total amounts arising. A remittance basis charge varying from £30,000 to £90,000 may be payable by longer-term residents as the price of using the remittance basis.

Non-domiciled individuals are liable to IHT in the UK only on their UK assets. However, when such an individual has been UK-resident for more than 16 of the last 20 tax years their worldwide estate comes within the scope of IHT.

The proposed changes

The basic rule – Worldwide taxation for long-term residents – 15 out of 20 years
  • From 6 April 2017, any individual who has been resident in the UK for tax purposes for at least 15 of the past 20 years will be deemed to be domiciled in the UK, meaning that from their sixteenth year of residence:
    • their worldwide income and capital gains will be taxed;
    • their worldwide estate will be in the scope of IHT (one year earlier than under the current 16 out of 20 rule that applies to IHT only);
Supplementary issues: income tax and CGT

  • The recently introduced £90,000 remittance basis charge, which applies to individuals who have been UK resident for 17 out of the last 20 tax years, will no longer be relevant.

  • Earnings (including income from employment-related securities) which relate to a period when an individual was neither domiciled nor deemed domiciled, and which are paid after the individual becomes deemed domiciled, will still be eligible to be taxed under the remittance basis. Travel and other employment expenses will be as for a UK domiciled employee.

  • Whilst the legislation is to follow, the government’s intention is that under the new regime individuals who are deemed domiciled, and hence taxed on a worldwide basis, should have access to foreign capital losses in the same way as a taxpayer who is actually domiciled in the UK. At present, whether a non-dom gets relief for such losses depends on them making an irrevocable, complex election which is not beneficial in every case.

  • The government understands that a significant benefit of the remittance basis is simplicity of reporting. It has indicated that it will consider how best to legislate so as to minimise the compliance burden, particularly with regards to historic data.

  • Years in which the individual is under the age of 18 will count towards the 15-year test. Under general law a child derives his domicile of origin from a parent (usually the father), but deemed domicile status will not be inherited in this way.

  • The current rules exempt non-domiciled individuals from UK tax on foreign income and gains where those amounts total less than £2,000. The government has not yet decided whether to maintain this exemption where an individual becomes deemed-domiciled under the 15-year rule.

Trusts: income tax and CGT

The document states that the government is ‘continuing to consider’ the treatment of trusts that have been set up by non-domiciled individuals before they become deemed domiciled. However, the document indicates that the government does not intend to tax settlors in these circumstances in the same way, as settlors who are actually UK-domiciled where the income and capital gains of the trust are normally treated as theirs.

Instead, it proposes that an individual who becomes deemed domiciled under the 15-year rule should be taxable only on benefits actually received from an overseas trust (whether the benefit is received in the UK or overseas). UK source income will, however, be taxed on the settlor as it arises (as it would be now on a UK-resident, irrespective of domicile). This raises some complex and difficult issues which have not been addressed to date.

However, the proposal not to tax a settlor on non-UK trust income as it arises would largely be a positive change to the current rules and would at least mean that there could be some level of control as to such an individual’s worldwide income.

The government is considering whether to apply this new regime (taxing benefits rather than underlying income) to all non-domiciled persons resident in the UK, rather than only those who become deemed domiciled. If it decided to do so, an individual who was not yet deemed domiciled would be taxable only on benefits remitted to the UK (assuming a remittance-basis election was made).

The treatment of offshore trusts is a key concern for many non-doms and the lack of detail in this area is particularly frustrating. It is noticeable that the consultation poses no specific questions in this area.

Trusts: IHT

Offshore trusts that have been set up by an individual domiciled outside the UK will broadly remain outside the scope of IHT, even after that individual acquires deemed UK domicile under the 15-year rule. This is essentially the current position but it is encouraging that it is being maintained.

IHT: individuals

Gifts made in the seven years before death can come into a charge to IHT. However, .if an individual gifts an overseas asset and subsequently acquires deemed UK domicile under the 15 year rule before dying within seven years of the transfer, the transfer will not be included in the estate on death. This is the same as the current position for those who are deemed domiciled under the present 16 out of 20 year rule.

As for income tax and CGT, if an individual deemed to be domiciled in the UK under the 15-year rule ceases to be UK-resident they will continue to be deemed domiciled for six years following the cessation of UK residence. For income tax and CGT this is only relevant if they resume residence in the UK. However, for IHT it means that they will remain within the scope of the charge for their worldwide estate during this period. This six year rule impacts in other ways:
  • Under current rules an ‘actual’ UK-domiciled individual who acquires a domicile outside the UK (because they move to another country and intend to live there permanently) is deemed to remain UK-domiciled for IHT purposes for three years from that time. The government proposes to align this rule with the treatment of an individual who is deemed to be domiciled under the 15-year rule and who becomes non-resident, with the result that an ‘actual’ UK-domiciled individual who becomes domiciled elsewhere will remain domiciled in the UK until they have been non-resident for six years.
  • Currently transfers between spouses are exempt from IHT, subject to a lifetime limit of £325,000 where the transferee spouse is domiciled outside the UK. The transferee may elect to be treated as UK-domiciled, which has the advantage that the £325,000 limit does not apply, and the countervailing disadvantage that the transferee’s worldwide estate will thereafter be liable to IHT. However, if the transferee becomes non-resident, the election ceases to have effect from the end of the fourth full tax year of non-residence. The government proposes to change this rule so that the election ceases to have effect only at the end of the sixth year.
Individuals born in the UK with a UK domicile of origin

The basic rule
  • If an individual is born in the UK with a UK domicile of origin, they may subsequently acquire a domicile of choice outside the UK. Under the proposed rules, if such an individual returns to the UK they will be deemed to be UK-domiciled while they are resident for tax purposes in the UK (i.e. excluding the non-UK part of any tax year to which the ‘split year’ rules apply). Therefore:

    • their worldwide income and capital gains will be taxed;

    • their worldwide estate will be in the scope of IHT. 
Trusts: Income Tax and CGT

It follows that while such an individual is resident, income or gains in an overseas trust that they have set up will be liable to tax in the same way as they would be in the case of an individual actually domiciled in the UK.

Inheritance tax: trusts

Under current rules, overseas assets held by a trust with a non-domiciled settlor are outside the scope of IHT and subsequent changes in the domicile status of the settlor do not affect the trust .As indicated above, this will not change where the settlor is subsequently deemed to be domiciled in the UK as a result of the 15-year rule.

It will, however, change where the settlor becomes deemed-domiciled under the rule relating to individuals born in the UK with a UK domicile of origin. In such a case the trust assets concerned will be within the scope of IHT for as long as that deemed-domicile status continues. This could lead to some severe consequences for the limited number of individuals in this category. The government is, however, open to the possibility of ‘a short grace period’, but only for IHT. Generally a trust is subject to IHT on each tenth anniversary of its creation at maximum rate of 6% of its then value. If an individual varies their residence status regularly, this may produce some arbitrary results for the trust, depending on whether the assets are, or are not, within the scope of IHT at the time of a ten-year anniversary charge. Where a ten-year charge does arise, it will be reduced in proportion to the part of the ten year period for which the individual has been UK-resident.

Whilst this is a fundamental change to the taxation of long term resident non-doms and individuals with UK domiciles of origin it needs to be noted that:
  • the changes do not come into effect until 6 April 2017;
  • the legislation is planned to be finalised in Finance Act 2016 meaning that the rules will be known some eight or nine months before they become effective;
  • this gives some time for planning;
  • there is no indication of anti-forestalling rules, i.e. it does not seem that the government is looking to ‘catch’ within the new rules any transactions undertaken before 6 April 2017.
What action should affected taxpayers take?

As indicated above there should be time to take action before the new rules come into force. But individuals can take steps to be prepared for that time. These include:
  • Reviewing their years of residence to determine whether they will be deemed domiciled from 2017
  • Reviewing the likely tax liability should they become deemed domiciled from April 2017
  • Considering rebasing overseas assets sitting at a gain before April 2017
  • Considering offshore trust or company distributions before April 2017
  • Considering settling trusts if they are not yet deemed domiciled for IHT purposes

However we would recommend no immediate action is taken until we have more clarity on the proposed changes.


Gill Smith
Private client tax team