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Abolishing permanency of non-dom status

**On the 25 April 2017 the UK Chancellor announced the removal of some significant clauses within Finance Bill (No2) 2017  which affects the content of this article. Any references to changes to be introduced April 2017 should be considered on-hold until further notice. This article will be updated once the final position is known**

HM Treasury have issued proposals on how legislation should best be introduced in Finance Bill 2016 to restrict certain individuals from claiming non-dom status for tax purposes. Consultation is open 30 Sept -11 Nov 2015.

At the 2015 Summer Budget the Government announced a series of changes to tax rules for people who are not domiciled in the UK, referred to as non-domiciled or non-dom.

The consultation document sets out the detail of the changes and introduces a ‘deemed-domicile rule’ so that long-term residents of the UK can no longer claim to be non-UK domiciled for tax purposes. The new rules also stop someone who was born in the UK, and are therefore UK domiciled at birth, claiming they are not domiciled while they are living in the UK.

To distinguish the two key scenarios that are being tackled the Government intends to differentiate between the two groups and these are referred to in the consultation as ‘long-term resident’ and ‘born in the UK’.

Under current rules individuals who are resident in the UK but not domiciled:

  • are able to claim tax relief on overseas workdays (in the first three years in the UK)
  • are liable to UK income and capital gains which arise in the UK, but
  • can choose to pay UK tax on their foreign income and capital gains only if/when remitted to the UK (known as the remittance basis).

Those individuals who claim to be taxed under the remittance basis rules had to pay a charge which was staggered depending on the length of time they had been resident:

Years of residence

Charge applicable from 1 April 2015

7 of previous 9 years


12 of previous 14 years


17 of previous 20 years


Long term resident

Under this ‘group’ the proposed rules are that any individual who has lived in the UK for 15 of the past 20 tax years will be ‘deemed UK domiciled’. Once deemed UK domicile, an individual will no longer be able to use the remittance basis of tax described above. Their worldwide income and gains will be liable  to income tax and capital gains tax and worldwide assets will also be subject to inheritance tax (IHT). These changes will take effect from April 2017 and will make the £90,000 charge above redundant.

The proposals also include an allowance for those individuals who are ‘internationally mobile’ where a six year non-residence period can avoid the deemed-domicile status applying. In other words, someone who is resident for 15 years in the UK, leaves the UK, and remains non-resident for six years. On return to the UK they can claim non-dom status again for a further 15 years before they would be deemed-domicile.

The number of years for testing will include ‘any year of UK residence’. This will include years while the individual is under the age of 18 as well as years which are considered ‘split years’.

The consultation also discusses further implications of being deemed UK domiciled which include: 

Income from overseas pensions

Pension income arising from outside of the UK is currently taxed with a 10% deduction. Although the proposals do not look to change this position, currently those individuals receiving pensions income from overseas could opt to be taxed under the remittance rules instead. The effect of the deemed-domicile rule is that these individuals could no longer be taxed under remittance rules.

Capital Losses election

Individuals who acquire a deemed-domicile status will be subject to tax on worldwide gains and therefore the Government believes that they should also have access to UK and foreign capital losses in the same way as a UK domiciliary.

Period of time to be deemed non-dom

The proposals highlight a concern that current rules for UK domiciles obtaining a non-dom status are more favourable than the rules proposed for deemed domiciles. Currently a UK domiciled individual from birth can elect domicile in another country and, assuming three years pass, no IHT is due. When you compare this to the proposed six year rule for deemed-domicile it seems unfair. The Government are considering bringing these two scenarios inline and have asked for feedback. 

Potentially exempt transfers

The proposals confirm that any potentially exempt transfers (PETs) made by someone who is not domiciled in the UK (assuming gift is excluded property) but who later becomes deemed-domicile and dies within seven years are not included in the death estate.

Spousal election

Where a non-dom spouse elects to be considered domicile in the UK they can access an unlimited IHT exemption for gifts between spouses. Currently a four year period must pass before the UK connection can be broken. Consideration is to be given to whether to increase the four year period to six.

Born in the UK

Under this ‘group’ the proposed rules are that any individuals born in the UK with a UK domicile should not be able to benefit from the non-dom status while resident in the UK.

This includes income, gains and IHT; however income and gains arising overseas in split years will not be taxable in the UK.  For example:

Tom was born in the UK and is UK domiciled. He leaves to travel the world and settles in South Africa, cutting all ties with the UK and elects to change his domicile. 20 years later Tom returns to the UK following the death of his mother and decides to stay for a period of time. During his time back in the UK he is considered resident under the statutory residency tests and therefore he is once again considered domiciled and worldwide income, gains and assets are subject to UK tax (income tax, CGT, and IHT).

If/when the individual leaves the UK again and assuming they retain their foreign domicile status under general law, they will not be treated as domiciled once they are no longer considered resident – unless they have been resident for 15 of the past 20 tax years. So the domiciled status is a temporary one for the short period they return to the UK.

Treatment of offshore trusts

The proposals also cover offshore trusts for both groups and the changes are summarised below:

‘Long term resident’

The Government thinks it is fair for any individual who becomes deemed-domicile under the new rules to pay tax on benefits they receive from any offshore trust. There is however no intention to apply UK tax to individuals who have settled property in offshore trusts, while neither they nor their spouse/children receives any benefit from it.

In terms of the IHT treatment of property settled within an excluded property trust, where this is established by a non-dom, the assets will remain outside of the estate even if that individual becomes deemed-domiciled later. 

‘Born in the UK’

There will be no protection for offshore trusts in this ‘group’ either in terms of income/gains or IHT where the individual is resident in the UK. Excluded property rules will be changed so that an individual born in the UK with a UK domicile can’t benefit from creating an excluded property even if they created it after acquiring an overseas domicile and when non-resident in the UK.

The new rules confirm that on return to the UK (and meeting the statutory residence test) worldwide assets will be liable to IHT including any assets held within the excluded property trust. Relevant property regime will also apply for any periods the settlor is UK resident so trustees will need to consider whether a 10 year anniversary charge arises.  

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The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth or Old Mutual International's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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