2nd March 2017



New legislation will be introduced in Finance Act 2017 to deal with reforms of non-domicile taxation in UK, covering following main areas, in summary form.


The ‘Deeming Provisions’

An individual will be ‘deemed UK domiciled’ for the purposes of Income Tax, Capital Gains Tax and Inheritance Tax if one of the following conditions are met:

  • born in UK with UK domicile of origin and is UK resident in tax year or returns to UK having obtained a domicile of choice elsewhere (‘BAD’ deemed-dom); or
  • resident in UK for at least 15 out of the previous 20 tax years (‘GOOD’ deemed-dom).

Once ’deemed domiciled’:

  • lose access to Remittance Basis, and
  • therefore, fully taxed in UK on Arising Basis on all worldwide income and gains.

However, for IHT purposes only an individual leaving UK loses ‘deemed UK domiciled’ status if out of UK for at least 3 full tax years.


Transitional Arrangements

  • Cleansing of ‘mixed funds’
    • A ‘mixed fund’ is a bank account comprising clean capital, income and capital gains.  Remittances taxed in a specific order, income and gains first before clean capital.


  • Cleansing of ‘mixed funds’ allowed in tax years 2017/18 or 2018/19 provided the individual:
    • not a BAD deemed-dom,
    • taxed on Remittance Basis in any tax year preceding 2017/18,
    • transfers funds between overseas ‘mixed fund’ bank accounts, thereby separating different elements of such accounts, where
      • different components of account can be readily identified, and
      • makes nomination when making transfer(s).


  • Hence, remittance of clean capital to UK in priority to taxable income or gains.


  • Rebasing of foreign assets
    • Use of MV at 5 April 2017 as base cost for CGT purposes on disposal of assets held directly and situated outside UK between 16 March 2016 and 5 April 2017 for any individual becoming deemed UK domiciled after 6 April 2017, not a BAD deemed-dom.


  • Only gains/increases in value post 5 April 2017 taxed.


Inheritance Tax on UK residential property

  • As from 6 April 2017, all UK residential Property subject to IHT regardless of the structure under which held,
    • For example, if held via offshore trust subject to 10-Year Anniversary Charge based on property value.
    • Debts relating to UK residential property also subject to IHT,
      • For example, loans made available used to finance acquisition, or maintenance or enhancement of value, of UK residential property interest.
    • Non-UK residential property and other assets in offshore trust (‘Excluded Property Trusts’) set up when Settlor not deemed domiciled, continue to be outside charge to IHT, UNLESS Settlor is BAD deemed-dom also UK resident for at least 1 of 2 previous tax years.

Provisions for trusts

  • Capital gains
    • ‘Protected’ offshore trusts will not pay CGT on arising basis unless they are ‘tainted’, in which case Settlor chargeable if he retains interest.


  • A trust becomes ‘tainted’, typically, if:
    • additions of property made to trust after date Settlor becomes deemed domiciled:
      • either directly or by trustees of any other settlement of which Settlor is Beneficiary or Settlor, or
      • Settlor becomes actually domiciled, not merely deemed domiciled.


  • Trusts created by BAD deemed-doms CANNOT be ‘Protected’ trusts.


  • Capital payments made after 6 April 2017 received by the Settlor or close family member from an offshore trust:
    • ‘matched’ against a pool of gains in trust & taxed on Settlor on arising basis (or remittance basis if that applies to them).
    • Pool of gains in trust reduced by same amount, except capital payments to non-UK resident beneficiaries, which are not ‘matched’ against pool of trust gains.
    • Current remittance basis still available to UK resident non-domiciled individuals who have not become deemed domiciled.


  • Close family member is defined, for both income tax & CGT purposes, as spouse, cohabitee and minor children, but not minor grandchildren.
  • Where family member resident and either deemed or actually domiciled, or resident and non-domiciled but has remitted payment to UK CGT charge on Beneficiary in priority to Settlor.
  • If no such charge arises on Beneficiary, e.g. because non-resident or non-domiciled remittance basis user with no remittances in year, UK resident Settlor taxed on gain.
  • Subsequent remittance of this amount to UK then possible without further tax charge since gain already attributed to Settlor.


  • Foreign income in offshore trusts


  • Foreign income in offshore trusts set up by GOOD deemed-dom Settlors not taxed on arising basis.
  • Instead, taxed by reference to benefits received by Settlor or close family and only if not already taxable in hands of recipient.
  •  Trust provisions remain in place even after benefit received so tax paid on amounts paid out of trust whilst amounts remaining in trust not chargeable.  Settlor taxed on benefits received on arising (worldwide) basis if deemed domiciled, or remittance basis if non-domiciled and remittance basis user.
  • The position for UK income unaltered: income taxable on Settlor of Settlor-interested trust via transfer of assets abroad or settlements legislation or on Beneficiary according to their status if Settlor not taxed as either dead, non-resident or excluded.


  • Tainting ‘Protected’ settlements


  • Where protection lost under trust provisions for non-domiciled Settlors as result of ‘tainting’, any foreign income within Settlor-interested trusts taxable on arising basis on Settlor while UK resident.


Reforms of the Business Investment Relief (BIR) scheme

Proposed changes to Business Investment Relief (BIR) scheme to expand scope and to encourage further investment from overseas investors.

  • Qualifying company includes:
    • trading or stakeholder company,
    • new ‘hybrid’ company.
    • Time limit for investing in company pre-trading increased to 5 years.
    • Definition of qualifying shares extended to include existing shares as well as newly-issued shares in qualifying companies.
    • Grace period for potentially tax chargeable events increased to 2 years.
      • Hence, income or gains can now remain in non-operational company for up to two years after date investor becomes aware of non-qualifying status without tax charge arising.
      • xtraction of benefits rule amended to restrict relief only if investor receives benefits directly or indirectly, which are specifically attributable to investment.

Company that is partner in partnership not regarded as carrying on trade of that partnership; company must carry on trade in its own right to qualify for BIR purposes.


NB          This note has been prepared on the basis of the draft legislation issued to date.

28 February 2017

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