Announcements were made in the 2015 Summer Budget regarding proposed changes to the UK tax rules regarding individuals who are domiciled outside the UK. These included the introduction of new provisions which would deem certain foreign domiciliaries, who are or have previously been UK resident, to be domiciled in the UK for all tax purposes. On 30 September 2015 the Government published a consultation paper regarding these proposals.

The paper is called – rather illiterately – “Reforms to the Taxation of Non-Domiciles”. It is fairly short, and where the proposed deemed domicile rules are concerned, does not contain much information that was not in the technical briefing document which was released in the summer.

However, the new paper is of interest insofar as it addresses the tax treatment of offshore trusts. As discussed below, the Government is proposing quite major changes here, which appear not to have been considered very thoroughly and will need, at the very least, refinement before they can be implemented. This is somewhat concerning, given the Government’s ambition to bring the new rules into effect on 6 April 2017. It is possible that we will not have clarity about the post-April 2017 treatment of offshore trusts until well into next tax year, and if so, this will provide a rather short “planning window” for individuals affected by the changes.

Where the proposed deemed domicile rules are concerned, the Government’s intention is to include the rules in the Finance Act 2016, but on the basis that they will not come into effect until 6 April 2017. The Government has given no indication that it intends to include new legislation regarding offshore trusts in the Finance Act 2016. The assumption therefore must be that this new legislation will form part of the Finance Act 2017.


As announced in the Summer Budget, from the tax year 2017/18, foreign domiciliaries who have been resident in the UK in at least 15 of the preceding 20 tax years will be deemed UK domiciled for all UK tax purposes. In a typical case, a non-UK domiciled individual will become deemed domiciled under this proposed new rule at the beginning of the 16th tax year of UK residence.

This is a major change. Under the current legislation, the concept of deemed domicile only applies for inheritance tax (IHT) purposes; it has no relevance for the taxation of income and gains. But from 2017/18, if a UK resident individual is deemed domiciled under the proposed new rule, he will be precluded from using the remittance basis, so he will be taxable on foreign income and gains as they accrue. This change will mean that from 2017/18, there will be no foreign domiciliaries paying the £90,000 remittance basis charge, as all individuals required to pay that charge to use the remittance basis will be deemed domiciled.

Aside from the fact that it will apply to income tax and CGT, as well as IHT, the proposed new rule will work somewhat differently from the current IHT deemed domicile rule for long-term UK residents. The current rule typically causes the acquisition of a deemed domicile in the UK at the beginning of the 17th tax year of UK residence, not the 16th; so the change will accelerate the onset of deemed domiciled status by one year.

Rather more significantly, the proposed new rule will greatly extend the period of non-UK residence that will be needed to “break” a deemed UK domicile. Under the current IHT deemed domicile rule for long-term UK residents, four tax years of non-UK residence are required for deemed domiciled status to be shaken off. However, under the proposed new rule, no fewer than six tax years of non-UK residence will be needed to “break” a deemed UK domicile, once 15 tax years of UK residence have been clocked up.


Also as announced in the Summer Budget, there will be a separate rule that will cause a UK resident individual to be deemed domiciled in the UK, if the individual has a domicile of origin in the UK (meaning, broadly, that the individual’s father was domiciled in the UK when the individual was born). Again, the deemed domicile will apply for the purposes of income tax, CGT and IHT, and again the change will have effect from 2017/18.

This proposed new rule is intended to prevent an individual from enjoying the tax benefits of non-UK domiciled status whilst UK resident, if the individual originally had a domicile in the UK, and was born in the UK, but at some point in his adult life he acquired a domicile of choice outside the UK, and still has the foreign domicile notwithstanding his return to live in the UK. Relatively few individuals fall into this category, and therefore the impact of this rule will be small. The rule seems politically motivated and cannot be expected to generate significant revenue.

The proposal is for deemed domicile under this rule to persist only for as long as the individual remains UK resident. A cessation of UK residence will typically cause the deemed domicile to fall away. The only exception to this will be where the individual has been UK resident for 15 or more out of the 20 preceding tax years. In that unusual case the individual will be caught by the deemed domicile rule for long-term UK residents, as discussed at para 2 above, which will delay the loss of deemed domiciled status until there have been 6 tax years of non-UK residence.

If a taxpayer is caught by the proposed new rule for individuals with a UK domicile of origin, not only will he be precluded from using the remittance basis for as long as he is UK resident, but in addition his non-UK assets will be within the scope of IHT. So too will non-UK assets held by any trust which the individual may have established whilst domiciled outside the UK and before the acquisition of the deemed UK domicile. If he is capable of benefiting from the trust, its assets will in effect be included in his taxable estate for IHT purposes, in the event of his death whilst deemed domiciled in the UK.

The IHT aspect of this could operate harshly, and has the potential to create a degree of complexity where trust assets are concerned. The Government is consulting on this, and seems open to the possibility of introducing an exemption for individuals whose UK residence is only for a short period.


Generally, the deemed domicile proposals in the consultation paper seem fairly well thought-out. However, the Government seems to be at a rather earlier stage in its thought processes where the treatment of non-UK resident trusts is concerned. This is a topic of importance, given the encouragement which the existing tax legislation gives to the creation of trusts by foreign domiciliaries, and the number of such trusts that are in existence.

It was clear from the technical briefing document released in the summer that the Government was proposing rather significant changes to the tax rules regarding offshore trusts, at least insofar as those rules apply to individuals who have become deemed domiciled in the UK. As with the developments discussed above, these changes are intended to take effect from 2017/18.

In the technical briefing document, it was stated that an individual with a deemed UK domicile who had established an offshore trust would not be taxed on the income and gains of the trust on an arising basis (as might be expected, if the concept was that such an individual should be treated in exactly the same way as a UK domiciliary). Instead, fiscal impositions for the settlor in respect of the trust would be limited to tax on any UK source income of the trust, and tax on any benefits received from the trust.

It is worth adding that, consistently with the current law, non-UK assets of a trust established by a foreign domiciliary will generally remain outside the scope of IHT, notwithstanding the settlor’s acquisition of a deemed domicile in the UK. The exception will be where the settlor has a domicile of origin in the UK, and was born in the UK, and so is caught by the rule discussed at para 3 above.

Assuming that this approach is indeed taken in the legislation, it will allow offshore trusts to be used as roll-up vehicles for the benefit of foreign domiciled families, with tax being charged on benefits received (insofar as the beneficiaries are UK resident, and subject to the remittance basis in the case of beneficiaries who are not yet deemed domiciled), but without the imposition of “dry” tax charges on deemed domiciled settlors. This approach seems fair, and strikes a reasonable balance between the policy of taxing deemed UK domiciled individuals as if they were actually domiciled in the UK, and the recognition that such individuals are mobile and will only remain UK resident if the tax costs are not too punitive.

The consultation document has shed a little extra light on the direction which the Government is heading in, where the tax treatment of offshore trusts is concerned. The document suggests that a deemed domiciled individual receiving a benefit from an offshore trust should be taxed on the value of the benefit received, whether he receives the benefit in the UK or not (which is to be expected), and without any reference to the income and gains of the trust. It is the proposed absence of any linkage between the tax charge and the income and gains of the trust which is new here.

In our view, it would be a mistake to disconnect the tax treatment of benefits from the economic performance of the assets in the trust. If the legislation does take this approach, it will have the advantage of simplicity, but at the cost of great potential unfairness. There would be a heavy tax cost to benefits received from trust structures that have not realised any income or gains, or indeed where the assets held by the trust may be standing at a loss.

To take one example, one can imagine an individual funding an offshore trust shortly before the acquisition of a deemed domicile in the UK, to protect non-UK assets from IHT, and then receiving a substantial distribution from the trust, or indeed revoking the trust, shortly after he has become deemed domiciled, and before any income or gains have accrued. It would be entirely reasonable to assume that this would have no income tax or CGT consequences, but if the Government implements the proposal to tax trust benefits at a flat rate, without regard to the trust’s income and gains, that would be a very expensive mistake. Our view is that while greater simplicity in the tax system is a laudable goal, such simplicity cannot be achieved through crude legislation which sets “bear traps” for unsuspecting taxpayers.

We are making representations to the Government on this point. We would be prepared to accept that taxing trust benefits at a flat rate is potentially an acceptable approach, and indeed could be attractive to both taxpayers and HMRC, but only if beneficiaries are given the ability to elect to be taxed in a more sophisticated manner which takes account of the trust’s income and gains.


Foreign domiciled individuals who will become deemed domiciled in the UK on 6 April 2017, and who currently use the remittance basis, should be starting to consider their options, and should open a dialogue with their advisers, so that they are ready to move ahead once there is sufficient clarity about the tax regime that will apply from 2017/18 onwards.

Given the scope to use offshore trusts as roll-up vehicles, it seems likely that many remittance basis users will continue to be able to live in the UK quite tax-efficiently once they have become deemed domiciled, provided that they take appropriate planning steps in advance of the change of tax status. The increased tax cost of being taxed on non-UK income and gains, and on any benefits received from offshore trusts, will be set against the fact that they will no longer have to pay the £90,000 remittance basis charge.

In some cases, there may be merit in dividing wealth between trusts and offshore insurance bonds, which may permit the tax-free extraction of capital. This strategy may be particularly attractive if the Government persists with its proposal to tax benefits from offshore trusts at a flat rate, without any linkage to the income and gains of the trust.

Many factors will need to be taken into account when planning – not only the precise nature of the post-5 April 2017 regime, when that is known, but also (in particular) the extent to which the individual’s assets represent foreign income and gains, as such income/gains are very likely to be taxable if remitted to the UK, even after the individual has become deemed domiciled. As ever where UK resident foreign domiciliaries are concerned, the most expert advice is needed.