The government released a further consultation document on Friday 18th August 2016 in which they confirm that they will press ahead with the proposed changes to the taxation of non-domiciled individuals announced at Summer Budget 2015. The document also provides further details on the proposals set out in the September 2015 consultation document.

The key areas are:

  • The proposals to bring within the scope of inheritance tax (IHT) UK residential property owned by overseas structures
  • The reforms to the taxation of non-domiciled individuals who are long-term UK residents, i.e. those who have been resident in the UK for 15 out for the past 20 years
  • The taxation of offshore trusts settled before an individual becomes deemed UK domiciled

IHT on Residential Property

The government has confirmed that, from 6 April 2017, all UK residential property will fall within the scope of UK inheritance tax. This means that shares in overseas companies holding UK residential property will no longer be considered as excluded property for IHT purposes, and will therefore be chargeable to UK IHT on the death of the owner, regardless of their domicile status. This treatment will also extend to overseas partnerships owning UK residential property.

A specific anti-avoidance rule will be introduced to prevent arrangements where the main purpose is to avoid or mitigate the IHT charge.

The definition of residential property is likely to follow the existing definition of a dwelling under the Non-Resident Capital Gains Tax rules, and includes:

  • any building which is used or suitable to be used as a dwelling,
  • any building which is in the process of being constructed or adapted for use as a dwelling

Care homes, nursing homes and purpose built student accommodation are excluded.

The consultation document confirms that the definition will be amended for IHT purposes to include an individual's main home.

Mixed use properties will be caught where the property has been a dwelling at any time within the previous two years.

Only debts that relate exclusively to the property will be deductible, and we would recommend that specific advice is taken given the extensive anti-avoidance provisions in this area.

HMRC will have a power to impose the IHT charge on the property so that it cannot be sold until the liability is paid.

Many non-UK domiciled have traditionally held UK residential property through an offshore structure in order to avoid exposure to IHT. Even following the introduction of the ATED (Annual Tax on Enveloped Dwellings) charge that now applies to properties worth over £500,000 held by an overseas company or other structure, many non-doms chose to retain their structures, accepting the ATED charge on the basis that the property would not be subject to UK IHT on their death.

Since the announcement to bring within the scope of UK IHT all UK residential properties, however held, individuals have been considering de-enveloping (taking the property out of the structure and placing it into personal ownership). However, for many individuals the potential tax costs associated with de-enveloping (see our briefing entitled 'De-enveloping') were a barrier to restructuring.

Earlier this year, there were suggestions that the government was considering a de-enveloping relief to encourage personal ownership of properties held in overseas company structures. However, the consultation document confirms that the government will not be offering any form of de-enveloping relief. Individuals who were delaying restructuring in the hope that some form of relief would be available should now reconsider their position and take professional advice as soon as possible to determine the most appropriate way forward in their circumstances.

Deemed Domicile Rules

The consultation document also confirms that the government will press ahead with the tax reforms for deemed domiciled individuals. Under the proposals, individuals who have been resident in the UK for 15 out of the past 20 tax years will be regarded as 'deemed domiciled' for all UK tax purposes from their 16th year of residence, even though they may remain non-UK domiciled under general law.

Part years of residence will count towards the 15 years as will any years of UK residence as a minor child.

Individuals who become deemed domiciled at 6 April 2017 will be able to rebase directly held foreign assets to their market value on 5 April 2017 so that only the gain from April 2017 will be chargeable to capital gains tax on a future disposal. Rebasing will apply on an asset by asset basis but will be limited to assets which were foreign situs at the date of Summer Budget 2015 (8 July 2015), and restricted to individuals who have paid the Remittance Basis Charge in any year before April 2017.

Whilst the pre-April 2017 portion of the gain will not be taxable, individuals should be aware that a tax charge may arise if the asset was purchased with foreign income and gains, and the proceeds of sale are remitted to the UK. It remains unclear how this will operate in practice where, for example, only a portion of the sale proceeds is remitted to the UK.

Importantly, those who become deemed domiciled in any year after April 2017 will not be eligible for automatic rebasing of their overseas assets. Tax planning is therefore essential for anyone who will fall within the new deemed domicile rules from April 2018 onwards.

Non-domiciled individuals who become deemed domiciled at 6 April 2017 will have one year from that date to 'cleanse' any mixed funds accounts in order to separate out their clean capital, income and gains, but only where the component parts of the mixed fund can clearly be identified.

For inheritance tax purposes, deemed domicile status will fall away once an individual has been non-UK resident for more than four consecutive years, to maintain the existing treatment for IHT purposes.

However, a deemed domicile individual will still need to remain non-UK resident for at least six years in order to reset the domicile clock for income and capital gains tax purposes when they become UK resident again.

Offshore Trusts

The government had proposed to tax UK resident deemed domiciled beneficiaries on benefits received from an offshore trust, without regard to the income and gains arising within the trust. This proposal has been shelved as the government recognized the rule would have a punitive effect on certain 'dry trusts' which generate no income or gains.

Excluded property trusts settled before the individual becomes deemed domiciled will be protected so that the income and gains can roll up tax free, provided that no benefits are received from the trust by the settlor, spouse or a minor child, and provided there are no additions of property to the trust after the settlor has become deemed domiciled. This could present an important opportunity for individuals who are about to become deemed domiciled to shelter from tax income or gains that are not required to fund the individual's lifestyle. Such assets can also be protected from inheritance tax and passed down to future generations tax free.

The protection will be lost, however, if any property is added to the trust or if a benefit is received by the settlor, his spouse, or a minor child.

Individuals born in the UK with a UK Domicile of Origin

The proposals for individuals born in the UK with a UK domicile of origin will also go ahead. These individuals will be regarded as deemed domiciled for income and capital gains tax purposes for any year in which they are UK resident.

For inheritance tax purposes, an individual will be treated as deemed domiciled where he was UK resident for at least one of the previous two tax years. This gives a small grace period to those who return to the UK only briefly.

Any trust that was settled by the individual whilst he was non-UK domiciled will be treated as a relevant property trust, and subject to UK inheritance tax charges for any year during which he is resident in the UK. This may mean that the trust's inheritance tax status will follow the residence status of the settlor, and could change from one year to the next if the individual moves in and out of the UK.


Individuals who will become deemed domiciled from April 2017 should seek urgent advice on how the proposed changes will affect them so that appropriate tax planning can be implemented on a timely basis.

It may be advantageous to set up an offshore trust before the rules come into effect, and this will be of particular relevance for individuals with assets or cash that are not required to fund day to day living expenses and can be set aside for future generations. If structured correctly, any income or gains arising on such assets can be generated tax free and the assets can pass down to beneficiaries free of UK inheritance tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.