This note is intended as an introduction to inheritance tax (IHT) issues that need to be considered where a “non-dom” (an individual domiciled outside the UK) is planning on becoming resident in, or is already resident in, the UK.

It should be emphasised that this is a complex subject, and a note such as this can do no more than highlight the issues that need to be considered and discussed. Expert, tailored tax advice should be taken which reflects the individual’s particular circumstances.


  • An individual with a non-UK “domicile of origin” can preserve his non-UK domiciled status for a long period after becoming UK resident, provided that he intends to cease being resident in the UK in the future.
  • Non-UK domiciled status carries with it the benefit of being subject to IHT only in respect of UK assets.
  • However, this tax benefit does not last forever. After a long period of UK residence, the IHT position may be affected by the acquisition of “deemed domiciled” status. Under current law, this typically occurs at the beginning of the 17th tax year of residence.
  • However, the government proposes to introduce new deemed domicile rules in April 2017, which will accelerate the onset of deemed domicile. Under the new legislation, deemed domiciled status will typically be acquired at the beginning of the 16th tax year of residence.
  • The tax impact of being deemed domiciled can be reduced greatly by giving non-UK assets to a suitable trust, before such status is acquired. Such a trust can function as a long-term IHT shelter, insofar as it holds non-UK assets.
  • IHT complexities can be created by “domicile mismatches” between spouses or civil partners. Special wills may be required. Again, giving non-UK assets to a trust may be advantageous.

What is a non-UK domiciliary?

A non-UK domiciliary (sometimes called a “non-dom”) is an individual who is domiciled outside the UK for the purposes of English common law.

“Domicile” is a concept in English law which is different from the UK tax concept of residence. It is also unrelated to nationality. It is perfectly possible for an individual to be resident in one country, domiciled (for English law purposes) in a second country, and a national of a third.

Non-UK domiciled status can persist for a long time after an individual has become resident in the UK. Under English common law, an individual may have been UK resident for decades, and may even have acquired British nationality, and yet have a domicile outside the UK. This will be the case if the individual had a “domicile of origin” outside the UK and he or she has never acquired a “domicile of choice” in any part of the UK.

Every individual is born with a “domicile of origin”. If his parents were married at the time of his birth, his domicile of origin will have been the domicile of his father at that time. An individual can however acquire a “domicile of choice” in a different country, if he moves to that country and forms an intention to reside there permanently or indefinitely.

An individual with a non-UK domicile of origin will remain non-UK domiciled for as long as he can credibly say that he intends to cease residing in the UK at some point in the future. For example, it is common for individuals with foreign domiciles of origin to intend to leave the UK when their children cease to be in full-time education in the UK, on the termination of a particular job with a UK employer, on the sale of a particular UK company, on their retirement, etc. As long as the intention to leave the UK is realistic, the domicile of origin will be retained in these scenarios.

It is also possible for an individual with a domicile of origin in the UK to become a non-UK domiciliary, by residing in another country and forming the intention to reside there permanently or indefinitely. This will result in the acquisition of a domicile of choice in the other country. In principle such a domicile of choice may be retained if the individual ceases to reside in the other country, and even if he begins to reside again in the UK.

Determining an individual’s domicile is not necessarily straightforward, but where an individual was born abroad, or his parents lived abroad, or he himself has lived abroad for a long period, it is likely to be worth investigating his domicile further to see whether he may be a “non-dom”.

Why is domicile important?

In English law, the significance of domicile goes beyond tax. In particular, a foreign domicile can affect succession to “movable” assets such as bank accounts and shares. Even where such assets are in the UK, the way they pass on the individual’s death may be affected by the succession law of his country of domicile. That law may contain “forced heirship” provisions which prevent the individual from disposing of his assets on death in the way that he wishes.

However, it is probably fair to say that the most immediate impact of a foreign domicile is in relation to tax. Non-doms have a reduced exposure to UK taxation, in recognition of the fact that they are less closely connected to the UK than individuals who are domiciled within the UK. The tax advantages of being a non-dom are essentially twofold:

  • the remittance basis of taxation; and
  • the restriction of IHT to UK assets.

This note focuses on the IHT advantages of being domiciled outside the UK. For a discussion of the income tax and CGT advantages of being a non-dom, please see our note “UK resident non-UK domiciliaries: the remittance basis”.

Limited scope of IHT

Being non-UK domiciled is highly advantageous where IHT is concerned.

When a UK domiciliary dies, his or her estate is subject to IHT on a worldwide basis. IHT applies at 40% to assets both within and outside the UK, except to the extent that they are protected by the exemption for assets passing to a surviving spouse, or fall within the individual’s “nil rate band”. At £325,000, the latter is not exactly generous.

By contrast, when a non-dom dies, then provided that he or she is not “deemed domiciled” in the UK for IHT, the tax applies only to UK assets; there is no IHT on assets situated outside the UK.

The same advantage applies when a non-dom (who is not “deemed domiciled”) makes a lifetime gift of non-UK assets. There is no IHT on such a gift, even if the gift is one which would potentially give rise to an immediate IHT charge for a UK domiciliary. Examples are gifts to trusts, gifts to trust-like entities such as private foundations and gifts to charitable entities outside the EU.

The deemed domicile concept

The concept of “deemed domicile” in the UK limits the length of time for which this benefit applies. Under current IHT legislation, a deemed domicile is acquired by a non-UK domiciled individual once he has been UK resident in 17 or more of the 20 UK tax years leading up to (and including) the present tax year. Thus, under current law, an individual with a foreign domicile typically becomes deemed domiciled for IHT purposes at the beginning of his 17th tax year of residence in the UK. However, as discussed below, the position will change quite shortly.

It is important to count tax years of residence correctly for these purposes. Under the rules which applied before the UK introduced its current statutory residence test, it was not uncommon for an individual moving to the UK to become taxable as a resident in a given tax year even if he only started spending time in the UK towards the end of the tax year; and indeed, an unlucky or ill-advised individual might became tax resident a matter of days before the end of the tax year in which he “arrived” in the UK. There is no doubt that, where an individual became UK resident partway through a tax year, that whole tax year must “go onto the clock” for the purposes of the deemed domicile test (even if he was taxable as a resident, in that tax year, for just a few days). Deemed domicile can therefore arrive sooner than expected, sometimes little more than 15 years after the individual’s “arrival” in the UK.

The effect of being deemed domiciled in the UK is that the scope of IHT extends from UK assets to all assets on a worldwide basis. This is relevant not only in the event of the individual’s death, but also if the individual makes lifetime
gifts, especially gifts to trusts or trust-like entities.

However, where an individual has not yet become deemed domiciled, this unwelcome extension of the scope of IHT can be countered by putting non-UK assets into what is known as an “excluded property settlement”. This is a trust, usually in discretionary form, of which the non-dom himself can be a beneficiary. The trust must be created and funded before the non-dom becomes deemed domiciled. If so, it can function as an indefinite shelter from IHT, not just in the non-dom’s lifetime but potentially for many generations after his or her death. This is explained in more detail below.

“Breaking” deemed domicile

Where an individual has already become deemed domiciled for IHT purposes, his deemed domicile can in principle be “broken” by a period of non-UK residence. In a typical case, four entire tax years of non-UK residence are required under current law.

If an individual plans to “break” his deemed domicile, close attention must be paid to the provisions of the UK’s statutory residence test, to ensure that he will qualify as a non-UK resident throughout the required period. Deemed domicile will not be “broken” if the individual resumes UK residence too soon.

Treaty protection

Generally, an individual who has become deemed domiciled in the UK for IHT purposes has the same status, where IHT is concerned, as someone who is domiciled in part of the UK. However, in certain scenarios the position is modified by a double taxation treaty.

There are a few treaties that the UK has entered into with other countries, which can affect the scope of IHT in relation to individuals who are domiciled outside the UK but are deemed domiciled for IHT purposes. The effect of one of these treaties applying is that, on the individual’s death, IHT may not apply to non-UK assets, notwithstanding the individual’s deemed domicile. Generally, these treaties only have effect in relation to transfers on death, and they do not (for example) affect the IHT position if the individual makes a lifetime gift of non-UK assets to a trust.

The treaties which are best-known for avoiding the impact of a deemed UK domicile are those with India, Pakistan, France and Italy. Of these treaties, those with India and Pakistan are most useful for planning, as they are in point where an individual has his domicile in one of those countries, regardless of where he is resident. They can therefore be taken advantage of by long-term UK residents who remain domiciled in a state/province of India/Pakistan. By contrast, the treaties with France and Italy are only in point where the individual is resident in France/Italy, and therefore do not assist where an individual is domiciled (in the English law sense) in France/Italy but is resident in the UK.

Certain other treaties can also reduce the impact of a deemed UK domicile, namely those with the Netherlands, Sweden, Switzerland and the United States. Typically such treaties limit the scope of IHT where the individual is non-UK resident but deemed domiciled in the UK, and is resident in and/or a national of the other country. The operation of the treaty with the United States is complex.

These treaties should be borne in mind whenever an individual has a connection with one of the countries mentioned above, and expert advice should be sought to ensure that valuable opportunities are not missed.

Individuals with “roots” in India or Pakistan, in particular, should ensure that their estate planning factors in the relevant treaty. Although technically it may not be necessary, it is generally thought to be desirable for individuals with Indian/Pakistani domiciles who wish to rely on the relevant treaty to put in place a will made under a foreign law, to deal with their non-UK assets. It may also be desirable to obtain an opinion from an Indian/Pakistani lawyer that the individual is regarded, as a matter of local law, as domiciled in the relevant country. If required, we can assist with engaging and instructing overseas lawyers to deal with these matters.

The domicile mismatch trap

Non-dom status is generally beneficial, but there is one situation in which it can have unwelcome IHT consequences – where there is a “domicile mismatch”. This occurs when:

  • a UK domiciled spouse dies leaving his or her estate to a non-dom spouse who is not yet deemed domiciled; or
  • a non-dom spouse who is deemed domiciled for IHT purposes dies leaving his or her estate to a non-dom spouse who is not yet deemed domiciled.

Normally, assets passing from one spouse to another are free of IHT, by virtue of the spouse exemption. However, in the scenarios mentioned above, the spouse exemption is limited to £325,000 – unless the surviving spouse makes an election to be treated for IHT purposes as domiciled in the UK. If so, the spouse exemption will be unlimited, but the worldwide assets of the surviving spouse will be within the scope of IHT on his or her own death (unless the surviving spouse then spends sufficient time outside the UK to shed his or her deemed domiciled status).

Mixed domicile couples, and non-dom couples who became UK resident at different times, should consider putting special Wills in place to cater for the possibility of a domicile mismatch on the first death. Consideration should also be given to transferring non-UK assets of the non-UK domiciled and non-deemed domiciled spouse into an excluded property settlement, to forestall the acquisition of deemed domiciled status in the event that an election is required to avoid IHT on the first death.

Establishing an excluded property settlement

As mentioned above, non-doms generally lose their favoured IHT status once they become deemed domiciled, when their non-UK assets fall within the scope of IHT.

However, if a non-dom gives non-UK assets to an excluded property settlement before he becomes deemed domiciled, these assets will remain ring-fenced from IHT even after the individual becomes deemed domiciled (or actually UK domiciled) and beyond his death, so that the assets are protected from IHT for future generations. The individual can, and normally should, be a beneficiary of the trust. It is also possible for the trust to be revocable, so that the individual has the ability to bring it to an end at any time. These features of the trust do not affect its efficacy as a shelter from IHT.

If the trust has non-UK resident trustees, it offers an additional advantage, because neither the non-UK domiciled settlor nor any other UK resident beneficiary will be liable to CGT in respect of capital gains realised by the trustees, until a benefit is received from the trust. This means that gains can roll up inside the trust, potentially without the need for the settlor to claim the remittance basis.

We would normally recommend that a professional offshore trust company is appointed as trustee, to ensure that the non-UK resident status of the trust is maintained. If the intention is to defer tax on gains through the use of an offshore trust, it is crucial that the settlor does not become actually domiciled in the UK, and also that the trust assets are carefully selected, so as to avoid investments that can give rise to income gains (i.e. gains which are treated by the UK tax legislation as income).

Although an excluded property settlement will save IHT at 40% of the value of the assets on the settlor’s death, there will be ongoing trustee fees. Prospective settlors should compare these costs against the cost of life assurance.

Where a non-dom might be interested in establishing such a trust, to ring-fence assets from IHT, it is strongly recommended that advice is taken at the earliest opportunity. Ideally, an adviser should be consulted more than a year before the anticipated date of acquisition of a deemed domicile in the UK.

There are two reasons for this. One reason is that it can take some time to choose a trustee and establish and fund a trust, and it is not sensible to leave it to the last minute.

In addition, it is very common for individuals to have poor records and recollection of when they first became UK resident. Very often, it transpires that the individual became UK resident earlier than he or she had remembered, and/or that the totting up of years of UK residence has been done incorrectly. In either case, a surprisingly common outcome is that the professional adviser is consulted about establishing an excluded property settlement after the individual has already become deemed domiciled! This is deeply disappointing for the individual and adviser alike.

Proposed deemed domicile rules

As touched on above, the government intends to introduce new deemed domicile rules which will apply for all UK tax purposes (and which will replace the existing deemed domicile rules that apply for the purposes of IHT only). These rules will be introduced with effect from the tax year 2017/18.

From April 2017, a non-dom will be deemed domiciled in a given tax year if 15 or more of the preceding 20 tax years were tax years of UK residence (“the 15 out of 20 years rule”). A non-dom will also be deemed domiciled in a given tax year if he has a domicile of origin in the UK, he was born in the UK, and he is resident in the UK in that tax year (“the UK origin rule”).

In either case the deemed domicile will apply for all tax purposes, so:

  • the remittance basis will not be available; and
  • the individual’s non-UK assets will be within the scope of IHT, on his death or if certain lifetime gifts are made by him.

The number of UK resident non-doms with a UK domicile of origin is small. The UK origin rule will therefore catch few individuals.

However, the 15 out of 20 years rule will have a significant impact. It will bring a number of non-doms who currently use the remittance basis within the arising basis tax regime, so that they are subject to tax on their income and gains on a worldwide basis.

It will also affect the IHT position for long-term UK residents with a foreign domicile. Clearly, in a typical case it will accelerate the onset of deemed domicile, by one year. From April 2017, a deemed domicile will typically arise at the beginning of the 16th tax year of residence in the UK, rather than (as now) the beginning of the 17th such year.

There will be no “grandfathering” of the current IHT rules for those non-doms who are already resident in the UK. In particular, non-doms who are currently (in 2016/17) in their 15th tax year of residence should note the need for urgent action if they wish to take advantage of the opportunity to create an excluded property settlement.

Other issues and opportunities

The legal and tax treatment of non-doms is a highly complex area and this note only covers a selection of the relevant issues. Our note “UK resident non-UK domiciliaries: the remittance basis” covers some of the planning points for individuals who are preparing to become UK resident as remittance basis users. It also touches on the structuring of acquisitions of UK real estate by non-doms who are resident in the UK.

Other important issues for non-doms to consider include:

  • the possibility of (in effect) converting foreign income or gains into clean capital through gifts to family members;
  • the possible use of “wrappers” or structures which can eliminate the need to pay remittance basis charges;
  • tax-efficient philanthropy – as there are particular opportunities for remittance basis users;
  • estate planning for foreign assets – whether local Wills are necessary, and the impact of local succession laws (for example, forced heirship rules may apply); and
  • specific issues which may arise due to an individual’s domicile or nationality, or where his assets are situated. For example US citizens, who are subject to US taxes on a worldwide basis (see our note “My client’s a US citizen”) need specific advice to achieve the best result from the interplay of the UK and US tax regimes.