Individuals domiciled outside the United Kingdom might have been justified in thinking that they would be safe from significant changes in the 2015 Summer Budget published on July 8. However, despite the recent introduction of ever-increasing charges to qualify for the remittance basis and additional tax charges on residential property owned by non-residents, Chancellor George Osborne had further measures to announce in the budget to target perceived unfairness in the treatment of foreign-domiciled individuals compared with those domiciled in the United Kingdom. These include the following measures:

  • 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 resident for 15 of the past 20 tax years;
  • Individuals 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, irrespective of the number of years they spend in the United Kingdom; and
  • Non-UK domiciled individuals will no longer be able to shelter UK residential property from inheritance tax by holding it through an offshore company or other offshore vehicle. This will apply to property held through companies owned by both individuals and trustees.

This update looks at the new measures, which are due to take effect from April 6 2017 following consultations to be published later this summer, and considers their potential implications for non-UK domiciliaries, both resident and otherwise. It also makes suggestions for possible planning in advance of the introduction of the measures where this may be relevant, bearing in mind that their form and scope may change substantially during the consultation process.

Individuals whose domicile of origin is outside United Kingdom

With effect from April 6 2017, individuals with a domicile of origin outside the United Kingdom will be deemed to be UK domiciled for all tax purposes after they have been resident in the United Kingdom for 15 of the past 20 tax years. This includes inheritance tax, for which the existing period of residence for an individual to be treated as UK domiciled is 17 of the 20 tax years ending with the relevant tax year.

Accordingly, from the start of an individual's 16th tax year of residence, he or she will be unable to claim the remittance basis of taxation for income tax and capital gains tax purposes, and will be taxed on the 'arising' basis on his or her worldwide income and gains. The individual will also be subject to inheritance tax on his or her worldwide estate.

The budget technical paper indicates that the consultation will raise the issue of whether split tax years of UK residence will count towards the 15 tax years for the purposes of the rule or whether complete tax years of UK residence will be required. If split years do count, it may be possible for an individual to become deemed domiciled after only 13 tax years and two days, rather than a full 15 tax years.

The new rules will not affect an individual's domicile status under general law.

The new rule, referred to as the '15-year rule' in the technical paper published as part of the budget, will also not affect the domicile of any children of the individual. Their domicile status under the general law and for tax purposes will be determined according to their own individual circumstances. The paper would appear to be contradictory in respect of the general law, as it also states that a child will continue to inherit his or her domicile of origin from his or her father at birth. However, a child will not become or cease to be deemed domiciled in the United Kingdom simply because a parent has. The child's own length of UK residence will be the deciding factor.

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 17 of 20 tax years will be redundant, as such individuals will by then be taxed on the arising basis.

The £30,000 charge (for seven of nine tax years' residence) and £60,000 charge (for 12 of 14 tax years' residence) will remain unchanged.

The government proposes to consult on the need to retain a de minimis exception in cases where an individual has been UK resident for at least 15 tax years where total unremitted foreign income and gains are less than £2,000 per annum.

The new rules will apply with effect from April 6 2017, irrespective of when an individual arrived in the United Kingdom. There will be no grandfathering of the existing rules for those already in the United Kingdom. For those who leave the United Kingdom before April 6 2017, but who would nevertheless be deemed domiciled under the 15-year rule on April 6 2017, the present rules will apply.

Once a non-domiciled individual leaves the United Kingdom and spends more than five tax years outside the United Kingdom, he or she will lose deemed domiciled status for tax purposes. In practice, while the individual continues to be non-UK resident, this will be relevant only for inheritance tax purposes, as such individuals are not liable to UK tax on their foreign income and worldwide gains anyway, unless they return to the United Kingdom within five tax years of leaving.

After having spent more than five tax years abroad so as to lose their deemed domicile, non-domiciled individuals will be able to spend another 15-tax-year period as UK residents before again becoming deemed domiciled. During this period they will be able to claim the remittance basis of taxation for income tax and capital gains tax, and will only be subject to inheritance tax on their UK assets (subject to a proposed change in the inheritance tax rules relating to residential property, discussed below).

Application of new rules to non-resident trusts

The paper indicates that non-UK domiciled individuals who have set up an offshore trust before becoming deemed domiciled under the 15-year rule will not be taxed on trust income and gains that are retained in the trust while they are deemed to be domiciled, and excluded property trusts will retain the same inheritance tax treatment as at present (again, subject to the proposed new rule for the taxation of UK residential property, discussed below).

However, from April 6 2017 long-term residents who are deemed to be UK domiciled will be taxed on benefits, capital or income received from any trusts on a worldwide basis.

Planning points for long-term residents whose domicile of origin is outside United Kingdom

While at first glance the new 15-year rule for non-domiciled individuals without a UK domicile of origin appears to be a severe curtailing of the tax advantages of that status, under the current proposals it is not as detrimental as it seems. There has been a deemed domicile rule for long-term UK residents for many years in relation to inheritance tax (albeit based on 17 tax years of residence until now, rather than 15 tax years), and it is unsurprising that one has now been introduced for income tax and capital gains tax.

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 – other than UK residential property – within such a structure. These include the continued ability to shelter non-UK assets from inheritance tax, as well as the ability to defer and potentially avoid tax on income and gains arising in a trust, provided that the non-domiciliary does not benefit from the trust during a period of deemed domicile.

As the technical paper is drafted, the position may be even more generous in future than at present, as currently settlors may be taxed on income or gains from any trust in which they have an interest, irrespective of whether they actually receive any benefit from the trust.

Nevertheless, 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. The technical paper refers to spending "more than five tax years abroad" to achieve this. The new rules are not yet clear, but if they work in a similar way to the existing rule for inheritance tax deemed domicile, a period of non-residence of at least six tax years will be needed for an individual to lose deemed domicile.

As highlighted above, depending on how the government decides to treat split years of residence, it may 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.

Non-UK individuals with UK domicile of origin

The government indicated in the budget that it wishes to make it harder for individuals whose domicile of origin is in the United Kingdom, but who subsequently acquire a different domicile of choice, to claim non-UK domicile status for tax purposes if they subsequently return to the United Kingdom.

Accordingly, an individual with a UK domicile of origin will be deemed to be UK domiciled for tax purposes on any occasion on which they are resident in the United Kingdom, even if under the general law they have acquired a different domicile. Thus, they will not be entitled to claim the remittance basis of taxation during any period of UK residence.

On departure from the United Kingdom again, such an individual will be able to lose his or her status as deemed UK domiciled in the tax year following departure. However, this will be the case only if the individual:

  • has not spent more than 15 tax years in the United Kingdom; and
  • has not acquired an actual domicile in the United Kingdom under general law during his or her period of return.

If the first of these two conditions applies, the individual will be subject to the new rule requiring five tax years' non-UK residence in order to lose deemed domicile status.

If the second condition applies, the individual will be subject to the existing three-year rule for inheritance tax purposes, whereby the individual does not cease to be deemed domiciled in the United Kingdom until at least three years have passed since he or she was UK domiciled under the general law.

If both conditions apply, the individual will be subject to both the five-year rule and the three-year rule and can lose UK domicile status for tax purposes only on the occurrence of the later of those events.

Application of new rules to non-resident trusts

Individuals who are non-UK domiciled under general law will be able to set up excluded property trusts on the same basis and with the same tax benefits as any other non-domiciliary while they are non-UK resident. If they subsequently return to the United Kingdom, however, they will not benefit from any favourable tax treatment in respect of such trusts while they are UK resident, whether inheritance tax treatment or otherwise.

Accordingly, it appears that such individuals who return to the United Kingdom will be taxed on capital gains and income arising in an offshore settlement under applicable anti-avoidance rules, in some cases even if they receive no benefit from it; and they will no longer be able to take advantage of the remittance basis while such income or gains remain outside the United Kingdom.

General application

Once again, it appears that there will be no grandfathering in relation to these rules. They will affect all former UK domiciliaries from April 6 2017, even those who returned to the United Kingdom before that date. The five-year rule will affect any former UK domiciliary who leaves the United Kingdom after April 5 2017. It seems that the rules will also apply to trusts set up at any time while the individuals were non-UK domiciled if they are UK resident on or after April 6 2017.

Planning points

Individuals with a UK domicile of origin who return to the United Kingdom for a period of time will be in a less favourable tax position from April 2017 than those whose domicile of origin is elsewhere. Therefore, in many ways their treatment will be comparable to that of those who are UK domiciled under the general law (at least during their period of residence and for up to five tax years afterwards).

Unlike those with a foreign domicile of origin, the remittance basis of taxation will no longer be available to them, regardless of their period of residence in the United Kingdom.

However, it will remain possible for such individuals to establish excluded property trusts while they are non-UK resident (as long as they have been non-UK resident for a sufficient period to lose their deemed domicile under the five-year rule, three-year rule or both). This will continue to be sensible inheritance tax planning in many cases, as it will allow assets in excess of the nil rate band (currently £325,000) to be put into trust for future generations without an immediate inheritance tax charge at the lifetime rate of 20%. In addition, it appears that if the individual is not deemed domiciled at the date of any chargeable event for inheritance tax purposes (eg, on a 10-year anniversary), non-UK assets in the trust (including UK assets, apart from UK residential property, held within an underlying offshore company or similar vehicle) will be protected from an inheritance tax charge as excluded property.

Individuals who are in this position and considering leaving the United Kingdom anyway in the near future may wish to do so before April 6 2017 in order to avoid potentially being caught by the new rules – including, for longer-term residents, the five-year rule for losing deemed domicile.

Following the introduction of these new rules, appropriate tax planning for a returning non-domiciled individual 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.

Consultation and legislation

In many areas, all of the rules discussed above for non-domiciliaries will require interaction with other existing tax rules, such as the anti-avoidance rules relating to the taxation of income and gains in offshore trusts. With regard to these and other interactions (eg, with relevant estate duty treaties), potential issues will be included in the proposed consultation to take place after the summer parliamentary recess (most likely in early September 2015).

Legislation is anticipated for the Finance Bill 2016.

New inheritance tax rules for UK residential property held within offshore corporate envelopes

With effect from April 6 2017, UK residential property will be within the scope of inheritance tax, whether held directly or indirectly by non-UK domiciled individuals, in the same way as property owned by UK domiciled individuals.

The government intends to change the existing inheritance tax rules only for UK residential property. The rules as they relate to other UK or foreign property will be unchanged.

The measure will apply to UK residential property of any value and irrespective of whether it is occupied or let. The budget paper indicates that the new rules for indirectly held residential property will be based on the rules for the annual tax on enveloped dwellings (ATED) levied in respect of property held through a non-natural person, such as a company, partnership with one or more corporate partners or common investment fund. However, the ATED threshold whereby the tax applies only to property over a certain value (£500,000 with effect from April 1 2016) and its reliefs (eg, for property let on a commercial basis) will not be applicable.

The definitions of 'UK residential property' and chargeable persons will be broadly the same as those stipulated in the new capital gains tax legislation introduced for non-residents disposing of UK residential property from April 6 2015 (for further details please see "Capital gains tax for non-residents disposing of UK residential property: final rules"), with any necessary adaptations. Thus, the charge is likely to apply to "property used or suitable for use as a dwelling".

According to the budget paper, diversely held vehicles holding UK residential property will be outside the scope of the new charge, but closely held offshore companies, partnerships or similar structures will fall 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. Chargeable events will include:

  • the death of an individual who owns the company shares;
  • a gift of the company shares into trust;
  • the 10-year anniversary of the trust;
  • distribution of the company shares out of trust;
  • the death of a donor within seven years of making a gift of the property holding company shares to an individual; and
  • the death of a donor or settlor who benefits from the gifted UK property or shares in the seven years before his or her death. The reservation of benefit rules will apply to the shares of a company owning UK property just as they currently apply to UK property held by foreign domiciliaries and generally to UK-domiciled individuals. These rules provide that a donor of property who continues to benefit from it, although he or she had purported to have given it away, is treated as still owning that property for inheritance tax purposes.

Legislation will be changed so that shares of offshore companies or other vehicles will not be excluded property, to the extent that they derive their value from UK residential property or are otherwise attributable to UK residential property.

The budget paper recognises that UK residential property may not be the only asset owned by an offshore company. It may also hold foreign assets or UK assets other than residential property that are not subject to the charge. Companies may also be held in more complex structures, such as groups. Further, the non-domiciled individual or excluded property trust may not be the only owner of the company. The government intends to consult on the details of the proposed measures with a view to making sure that only the value of UK residential property is subject to tax (less any borrowings taken out to purchase such property).

The proposals envisage that the same reliefs and charges will apply as if the property were directly owned by the relevant individual. Thus, the spouse exemption will be available to the owner of shares who leaves them to a spouse or civil partner. It will not generally be available where the shares are held in trusts other than qualifying interest in possession trusts or where the settlor is taxed on them at death under the reservation of benefit rules.

It is intended that liability, reporting and enforcement, and targeted anti-avoidance provisions will be included in the legislation. As yet, there is no detail on the likely rules in this regard.

As with the proposed new rules relating to deemed domicile, there is to be a consultation in respect of the proposals towards the end of Summer 2015 – but in this case with a view to legislation in the Finance Bill 2017. The consultation will address issues such as costs associated with de-enveloping structures so that individuals hold residential property directly. Such costs may be significant, for example, where properties have been mortgaged or have increased in value since April 2013 or April 2015 (when ATED-related capital gains tax and then the wider capital gains tax charges were respectively introduced).

Planning points

These new measures will come as a blow to many non-UK domiciled individuals holding UK residential property through corporate envelopes. The past two tax years have seen the introduction of ATED, ATED-related capital gains tax and non-resident capital gains tax (where this is also relevant). If such individuals have purchased residential property through a corporate structure, they may also have suffered stamp duty land tax at the higher rate where the property was valued at more than £2 million – or more recently, more than £500,000. The one tax advantage of holding residential property through a corporate structure that remained was the shelter provided from inheritance tax; but now this too is being withdrawn.

For some individuals, the non-tax advantages of holding property through a structure may still 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.

One key non-tax advantage of holding property through a structure is the avoidance of the need for UK probate on the death of an individual where the property owned is shares in an offshore company, rather than the underlying UK property. This may no longer apply from April 2017 if a grant of probate in some form is required, albeit possibly in relation to the shares in the company. What the position will be in this regard, exactly how and where a liability to inheritance tax will fall where property is not owned by an individual directly and how it will be paid and enforced will be matters for consultation.

In relation to such an inheritance tax charge, assuming that the deceased's personal representatives are primarily liable for the tax, there may be a secondary liability for the company or the recipient of the property under the deceased's estate if the personal representatives do not pay the inheritance tax themselves. Her Majesty's Revenue and Customs (HMRC) may also take a charge on the underlying property if the tax is not paid. Since the introduction of ATED, HMRC has more information on offshore companies holding UK property than would previously have been the case. However, taking such a charge may be an issue for HMRC in situations where there is a mortgage of more than 60% of the value of the property.

For some (and perhaps many) individuals, the costs of maintaining a holding structure will mean that de-enveloping to hold the UK residential property will become attractive. The consultation is awaited to see whether the government will provide an incentive to individuals to de-envelope by mitigating some of the costs of doing so. Certainly, there is an indication in the way that the budget paper is worded that the government may at least consider options for some form of mitigation.

Where an individual decides to de-envelope a property and own it directly, there remain options available to mitigate inheritance tax, one of which is insurance.

Lower-value properties held directly may fall within a couple's joint nil rate bands. This is currently £325,000 each or £650,000 jointly. However, an additional nil rate band will be available for property used as a main residence passed on death to direct descendants. This will start in tax year 2017/2018 (increasing from £100,000 initially to £175,000 in 2020/2021) and any unused nil rate band will be available to be transferred to a surviving spouse or civil partner who dies on or after April 6 2017, regardless of when the first death occurred.

There will be a tapered withdrawal of the additional nil rate band for estates with a net value of more than £2 million, at a rate of £1 for every £2 over this threshold. However, no additional inheritance tax mitigation may be necessary if there are no other significant UK assets and the net value threshold applies only to property within an individual's taxable estate under the new rules when they are introduced.

Alternatively, property may be purchased with a mortgage to reduce its value in a non-domiciled individual's estate. Legislation introduced in 2013, which restricts the deductibility of liabilities for inheritance tax purposes in certain circumstances, may limit the effectiveness of such a strategy where the relevant legislation applies.

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 invests in such property may be an alternative tax-efficient option, as it appears that the new provisions will not apply to diversely held entities.

It is also worth bearing in mind that UK commercial real estate held within an offshore structure will not be caught by the new inheritance tax rules under the proposals; nor will other forms of UK situate non-residential property or foreign property.

For non-UK domiciliaries who are also non-UK resident, forms of UK property other than residential property may still be tax efficient, as they are not within the scope of non-resident capital gains tax or, where applicable, ATED or ATED-related capital gains tax.


The new measures are far reaching and will represent a fundamental change in the taxation of non-domiciled individuals from 2017, particularly those with a UK domicile of origin, for whom the benefits of that status will be severely curtailed if they return to live in the United Kingdom.

They will also represent a final nail in the coffin for the tax advantages of holding UK residential property in corporate structures. Nevertheless, other benefits may still make such structures worthwhile, depending on individual circumstances.

In any event, given that the current understanding of the proposed measures is based solely on brief technical papers accompanying the main budget documents, there are as yet insufficient details to draw any conclusions that would enable concrete planning decisions to be made. Further, it is likely that changes may be made to the existing proposals before the legislation comes into force.

Nevertheless, it is useful to consider what options may be available to non-domiciled individuals who are likely to be affected by the new measures. Until draft legislation becomes available, non-domiciled individuals who may be thinking of either leaving or coming to the United Kingdom in the next few years, or of investing in UK residential property, should ensure that they take advice on what planning steps – if any – may be appropriate on the basis of the developing proposals.

For further information on this topic please contact Anthony Thompson or Nicole Aubin-Parvu at Wragge Lawrence Graham & Co LLP by telephone (+44 20 7379 0000) or email ( or The Wragge Lawrence Graham & Co LLP website can be accessed at

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