Updated and new proposals
Indirectly held UK residential property
Deemed UK domicile for long-term UK residents
Non-UK domiciled individuals born in United Kingdom with UK domicile of origin


On August 19 2016 the government published its long-awaited follow-up consultation on the proposals for reform of the taxation of non-UK domiciled individuals, which were initially announced in the July 2015 Summer Budget (for further details please see "Reforms to taxation of non-domiciled individuals: consultation published").

The consultation includes details of the proposals for bringing into the scope of inheritance tax UK residential property held by non-domiciliaries through offshore companies and other entities.

The consultation paper also contains a brief discussion of, and request for, ideas for reform of the rules on business investment relief, a scheme which enables individuals who use the remittance basis to bring their overseas income and gains to the United Kingdom without a liability to tax where they do so to make a commercial investment.

Updated and new proposals

Non-UK domiciled individuals will no longer be able to shelter UK residential property from inheritance tax by holding it through an overseas company or other overseas vehicle.

Non-UK domiciled individuals with a domicile of origin outside the United Kingdom will be deemed to be domiciled in the United Kingdom for all tax purposes income tax, capital gains tax and inheritance tax after they have been UK resident for 15 of the last 20 tax years.

Individuals born in the United Kingdom with a UK domicile of origin will be unable to take advantage of a subsequently acquired foreign domicile at any time when they are UK resident (referred to as a 'formerly domiciled resident').

Indirectly held UK residential property

With effect from April 6 2017, UK residential property held by offshore companies and other similar entities will no longer qualify as 'excluded property' under relevant inheritance tax legislation. The consultation makes it clear that property held through offshore partnerships will be caught by the rules, a point that had been the subject of some debate among advisers.

Diversely held vehicles holding UK residential property will be outside the scope of the new charge, but closely held offshore companies, partnerships and similar structures will be within the rules.

Inheritance tax will be imposed on the value of UK residential property owned by an offshore company or other vehicle on the occasion of a chargeable event. Such events include the death of an individual who owns the company shares, the redistribution of the company share capital or the 10-year anniversary of a trust, among others.

The government intends to base its definition of a 'dwelling' for the new rules on existing legislation: either the definition used for non-resident capital gains tax (NRCGT) or that used for the annual tax on enveloped dwellings (ATED). This remains under consideration.

Valuation provisions are still being considered, but it is likely that where an estate owns shares in an offshore company which in turn owns UK residential property, the estate will be within the charge to inheritance tax to the extent that the share value relates to the underlying property. Further details of how this will work in all circumstances (eg, where a property is held by a company with more than one owner) are still required.

Debts relating exclusively to the property (eg, outstanding mortgages) will be allowable when determining the value chargeable to inheritance tax. Those that are not so related and loans between 'connected parties' will be disregarded. A pro rata approach may be taken in certain situations.

Targeted anti-avoidance provisions will prevent arrangements from being put in place to avoid or mitigate the charge.

Liability and accountability will principally fall on executors, trustees and beneficiaries, with an additional liability to be imposed on directors of a company that owns UK residential property. Her Majesty's Revenue & Customs will be given new powers to prevent the sale of a property until an outstanding inheritance tax charge has been paid. Nevertheless, enforceability of the new charge is likely to be an issue and this may strengthen calls for the recently proposed register of foreign companies owning UK land to be introduced.

Disappointingly, the government has decided not to offer transitional arrangements to mitigate the tax costs of those who might wish to unwind structures.

Planning points
The introduction of inheritance tax on residential property held through overseas companies and other structures removes the final tax advantage of such a structure. It comes after the introduction of NRCGT for UK residential property, as well as ATED, higher-rate stamp duty land tax (SDLT) for properties of higher value and the additional 3% rate of SDLT for companies acquiring residential property which is not already caught by higher-rate SDLT.

Certain non-tax advantages of holding property through such structures remain and, for some, may outweigh the tax disadvantages. These include confidentiality of ownership and asset protection, and the potential avoidance of forced heirship rules, whether Sharia or civil law based.

However, another recent government proposal that foreign companies may be required to disclose their beneficial ownership before they are allowed to buy land and property in England and Wales is likely to add to the factors weighing against such structures.

For some perhaps many individuals, the costs of maintaining a holding structure will mean that de-enveloping to hold the UK residential property will become attractive. Unfortunately, it appears unlikely that any incentives will be available to mitigate the tax costs of doing so, although it may be possible to make some tax savings through careful restructuring.

For new property purchases, using a mortgage should be considered to reduce the amount chargeable to inheritance tax.

For an individual wishing to invest in UK residential property generally, rather than in any specific property, investing in a diversely held fund or non-resident company that holds such property may be an alternative tax-efficient option, as the new provisions will not apply to diversely held entities.

UK commercial real estate held within an offshore structure is another alternative that may become more attractive in future, as may other forms of UK situate non-residential property or foreign property.

Deemed UK domicile for long-term UK residents

Non-UK domiciled individuals with a domicile of origin outside the United Kingdom will be deemed to be domiciled in the United Kingdom for all tax purposes after they have been UK resident for 15 of the last 20 tax years (15/20-year rule). As a result, they will be subject to global taxation on an 'arising basis'.

Such individuals will be able to lose their deemed domicile status again and 'reset the clock' for income tax and capital gains tax purposes once they have spent six consecutive tax years resident outside the United Kingdom. For inheritance tax purposes, the required period of non-residence will be four tax years; but if the individual becomes UK resident within six tax years of leaving, he or she will be within the scope of inheritance tax again.

The new rules will not affect an individual's domicile status under general law or the domicile status of his or her children, which will be determined according to the child's individual circumstances. However, years spent in the United Kingdom while an individual is under the age of 18 will count for the purposes of deemed domicile, despite representations made during the initial consultation regarding potential unfairness.

From April 6 2017 the £90,000 annual charge to claim the remittance basis for individuals who have been resident in the United Kingdom in at least 17 of the past 20 tax years will be redundant, because such individuals will by then be taxed on the arising basis. The £30,000 charge (for UK residence in at least seven of the past nine tax years) and £60,000 charge (for UK residence in at least 12 of the past 14 tax years) will remain unchanged.

The new consultation confirms that the government intends to include in the year count any year in which an individual is UK resident, even if he or she enters or leaves the United Kingdom at some point during the year (ie, even if it is a split year for tax purposes). As such, some individuals may become deemed domiciled after only 13 tax years and a few weeks, rather than a full 15 tax years.

Transitional rules will be available in certain situations, including a one-year window from April 2017 to enable individuals with certain 'mixed funds' of foreign capital, capital gains and income to separate them into their constituent parts. This will be available to all non-domiciled individuals not born in the United Kingdom with a UK domicile of origin, regardless of their residence at April 2017.

It will also be possible for non-domiciled individuals who become deemed domiciled in April 2017 to rebase overseas assets to market value as at April 5 2017. The protection will be limited to assets that were foreign situs as at the date of the July 2015 Summer Budget (July 8 2015).

Where assets were purchased wholly or partly with foreign income or gains, the remittance basis will be available for the element of the disposal proceeds that relates to those income or gains. The protection will be limited to those who had paid the remittance basis charge in any year before April 2017.

Property in non-UK resident trusts established by such individuals before they become deemed domiciled in the United Kingdom will be outside the inheritance tax net as excluded property, to the extent that it is non-UK situate property or is UK situate property (apart from residential property) held by the trustees through a non-UK vehicle (eg, a company).

The government has moved away from its initial intention to tax non-resident trusts established by individuals before they became deemed domiciled on the basis of the taxable value of benefits received by the individual, without reference to income and gains arising in the offshore structure. Instead, the taxation of income and gains arising in non-resident trusts will be based on existing rules for taxing settlors and beneficiaries on such income and gains. These provisions will be adapted to protect foreign capital gains and income that remain within a trust established before the settlor became deemed domiciled in the United Kingdom under the new rules. However, these protections will fall away if either the settlor or other relevant beneficiaries principally his or her spouse or minor children or stepchildren receive any actual benefits from the trust.

The draft rules appear particularly harsh in the case of capital gains tax, where this protection appears to fall away permanently if a relevant beneficiary receives a benefit from the trust. In this situation, the UK deemed domiciled settlor will in future be taxed on all gains arising in the trust or attributable to the trustees in the same way as a UK domiciled settlor.

In the case of the new income tax provisions, to be based on two sets of existing legislation known respectively as the 'settlements' legislation and the 'transfer of assets abroad' (TTA) legislation, it seems that the protection will be lost and the deemed domiciled settlor taxed on any foreign income that such benefits represent under relevant rules in each set of provisions, as amended. However, the new TAA rules are not drafted yet and as such it is unclear how the protection will be applied.

Planning points
Offshore trusts are likely to have an increasingly important place in the planning of non-domiciled individuals intending to come to the United Kingdom for a period, as it appears that there will be a number of tax advantages to holding property within such a structure, apart from UK residential property. These include the continuing ability to shelter non-UK assets from inheritance tax, as well as the ability to defer and potentially avoid tax on foreign income and gains (other than from disposals of indirectly held UK residential property) arising in a trust, provided that the non-domiciliary and relevant members of his or her family do not benefit from the trust during a period of deemed domicile.

Nevertheless, the new regime may result in an increased tax burden in some situations. Accordingly, it will be vital for trustees and settlors to take advice before making or (in the case of the settlor) receiving distributions in case there may be tax implications for the settlor, and more generally to understand all potential consequences of the new regime.

Non-domiciled individuals who are approaching 15 tax years of residence in the United Kingdom may wish to consider leaving the United Kingdom for a period in order to restart the clock on deemed domicile, particularly bearing in mind that the government has refused to consider any grandfathering provisions. A period of non-residence of at least six consecutive tax years will be required for an individual to achieve this.

Given how the government proposes to treat split years of residence, it will be necessary to review carefully how and when this may affect an individual's tax status for the purposes of the new rules, taking such years into account.

The government's concession with regard to cleansing mixed funds is potentially beneficial. Any non-domiciled individuals (apart from formerly domiciled residents) who have such funds should consider taking advantage of the one-year window to segregate their overseas accounts for the future. Segregation once an individual is UK deemed domiciled will also be important.

Individuals who will become deemed domiciled with effect from April 2017 and otherwise qualify for this transitional protection should also consider rebasing their foreign assets to April 5 2017 for capital gains tax purposes.

Non-UK domiciled individuals born in United Kingdom with UK domicile of origin

Individuals born in the United Kingdom with a UK domicile of origin who subsequently acquire a foreign domicile of choice will be treated for tax purposes as if they are UK domiciled once they become UK resident.

While they are UK resident, they will be subject to tax on their worldwide income and capital gains on the arising basis, as would a UK domiciled individual.

While they are treated as UK domiciled, they will also be subject to inheritance tax on their worldwide estate. However, there will be a grace period for individuals who return to the United Kingdom only for a short period so that they will not be treated as domiciled in the United Kingdom for inheritance tax purposes at any relevant time unless they have been so resident for at least one of the two tax years prior to the tax year in question.

Any non-resident trust established by such an individual prior to April 6 2017 while non-UK domiciled, or after that date while he or she is domiciled and resident outside the United Kingdom, will be taxed as a relevant property trust for inheritance tax purposes during any period in which he or she is UK resident or treated as UK domiciled and subject to 10-year anniversary and exit charges.

Unless the settlor is excluded from all benefit from a trust, rules relating to 'gifts with a reservation of benefit' will apply to treat the trust property as remaining in the settlor's estate for inheritance tax purposes, and taxable as such on his or her death while UK resident or treated as UK domiciled.

The inheritance tax grace period will also be available for non-resident trusts.

Ten-year anniversary charges will be apportioned based on the settlor's period of UK residence during the last 10 years and there will be no exit charge if the settlor leaves the United Kingdom and remains non-UK domiciled.

On departure from the United Kingdom, such individuals will cease to be treated as UK domiciled on becoming non-UK resident unless they have been UK resident for 15 out of the last 20 tax years or have ceased to be non-UK domiciled under the general law. In either or both of those cases, the relevant rules and periods of non-residence for losing an actual or deemed domicile will apply.

Planning points
Formerly domiciled residents will be in a significantly less favourable tax position from April 2017 than individuals whose domicile of origin is elsewhere. Their treatment will be broadly comparable with those who are UK domiciled under the general law (at least during their period of residence and, in some cases, for a number of years thereafter).

Unlike for those with a foreign domicile of origin or who were not born in the United Kingdom, or both, the remittance basis of taxation will no longer be available to them regardless of their period of residence in the United Kingdom.

It will remain possible for such individuals to establish excluded property trusts while they are non-resident in the United Kingdom (as long as they have been non-resident for a sufficient period to lose their deemed domicile for inheritance tax purposes). However, careful consideration will be needed in each case as to whether such trusts provide genuine advantages.

Individuals who are in this position and who are considering leaving the United Kingdom in the near future may wish to do so before April 6 2017 in order to avoid potentially being caught by the new rules.

Following the introduction of these new rules, appropriate tax planning for a formerly domiciled resident may take a form closer to that for a UK domiciled individual, including individual savings accounts, offshore life bonds and, for inheritance tax purposes, the use of reliefs for business property and agricultural property.


The proposed new rules will clearly have a significant impact on non-UK domiciled individuals, particularly formerly domiciled residents. However, the government has introduced some helpful transitional protections, at least for those who are not formerly domiciled residents not least the limited option for rebasing and the option to reorganise mixed funds for the future.

A four-year period of non-residence to lose deemed domicile status for inheritance tax purposes will also be helpful, rather than the six years originally proposed.

However, the proposed protections for excluded property trusts of deemed domiciled settlors appear rather more fragile than might have been hoped, certainly in the case of capital gains tax. It is to be hoped that this will prove not to be the government's intention.

It is also disappointing that the government has pulled back on offering transitional relief to assist individuals who wish to restructure their holdings of UK residential property in advance of the introduction of the new inheritance tax charge. The SDLT and capital gains tax costs of restructuring will be a significant deterrent for those who might otherwise have wished to do so.

Nevertheless, for those who do wish to consider some form of restructuring, and particularly those who wish to do so before April 2017, advice should be taken as soon as possible. This would also be sensible for those who may be caught by the new deemed domicile provisions, whether as a formerly domiciled resident or otherwise especially if they may be considering a period of non-residence or taking advantage of transitional provisions where they are available.

For further information on this topic please contact Daniel Ugur at Gowling WLG (UK) LLP ​by telephone (+44 20 7379 0000) or email ([email protected]). The Gowling WLG website can be accessed