Non-Dom Update: Reforms in Practice

08 / 05 / 2017

In this article for Trusts and Estates Law & Tax Journal (May 2017), Wedlake Bell partner Emma Loveday, discusses the reforms to the taxation of non-domiciliaries (non-doms). This article was published before the announcement of a general election on 8 June 2017, and since then, the Government has decided to drop these reforms from the Finance Bill 2017 (that was otherwise awaiting Royal Assent), due to lack of Parliamentary time before the dissolution of Parliament on 3 May 2017. It is widely anticipated that the reforms will be reintroduced following the election, unless there is a surprise election outcome, and the article therefore gives an overview of how the reforms will apply in practice assuming (as is expected) that the legislation is reintroduced after the election without any major amendments. It does however remain to be seen whether the reforms, if reintroduced, will take effect from 6 April 2017 as originally drafted. The whole situation is very unsatisfactory for non-doms who remain unable to plan their affairs and anticipate their UK tax liabilities with any certainty. For further information on the reforms and the present situation, please contact Emma Loveday or your usual Wedlake Bell adviser.

In the March 2017 edition of Trusts and Estates Law & Tax Journal , I wrote an article entitled ‘Where are we now?’ providing an update on the various government consultations affecting private client practitioners. The consultations included those relating to the reforms to the taxation of non-domiciliaries (non-doms) which came into force on 6 April 2017. In this addendum to the article, I explain in further detail how these non-dom reforms will affect a standard off shore trust structure by looking at two different scenarios before and after 6 April 2017. Since writing the original article, the government has published amendments to the non-dom reforms in Finance Bill 2017, and this addendum incorporates those changes.

First scenario

The first scenario is as follows:

  • off shore trust originally settled by a non-UK domiciled, UK resident settlor;
  • the settlor will become UK deemed domiciled for tax purposes on 6 April 2017 as a result of the reforms;
  • the trust holds the following assets:
  • an offshore investment portfolio;
  • an offshore bank account; and
  • the benefit of a loan made to a UK resident beneficiary on an interest-free basis;
  • the beneficiaries are all UK resident and include the settlor and his spouse; and
  • the trust is discretionary.

Inheritance tax

There will be no change to the inheritance tax (IHT) liability of the trust after 6 April 2017 despite the sett lor becoming UK deemed domiciled, provided the trust was set up when they were non-UK domiciled. The IHT ‘excluded property’ status of the trust can continue to the extent that the trust assets are non-UK situs (which is the case for all but the loan). The main change is that if the settlor adds further assets to the trust after 6 April 2017, these will be subject to IHT whether those assets are UK or non-UK situs, and within the IHT relevant property regime. This would not have been the case before 6 April 2017 while the settlor was non-UK domiciled.

Capital gains tax

The capital gains tax (CGT) status of the trust will change after 6 April 2017 when the settlor becomes UK deemed domiciled. Prior to 6 April 2017, there is no CGT liability on any trust gains. After 6 April 2017, in order to prevent CGT on trust gains, the trustees will need to ensure that the trust can benefit from the new ‘protected trust’ regime. This regime is available where a trust is set up by a non-UK domiciled settlor (who later becomes UK deemed domiciled) and protects the trust from having its gains attributed to that settlor on an arising basis. The protection only endures for so long as the trust is not ‘tainted’ by an addition of property from the settlor or another trust from which the settlor can benefit. Despite trust gains being protected from CGT as they arise, they will later be taxed if a beneficiary receives a distribution from the trust. This was also the case prior to 6 April 2017. The interest-free loan to the UK resident beneficiary is treated as such a distribution and will continue to be matched to relevant foreign income in the structure, and then to stockpiled gains (under s87 Taxation of Chargeable Gains Act 1992), and taxed accordingly.

It should be noted that the reforms include changes to the way in which benefits from offshore trusts are valued for tax purposes and as from 6 April 2017, the ‘benefit’ to the beneficiary of having the loan on interest-free terms will be deemed to be equal to the official rate of interest (2.5% as from 6 April 2017). The settlor’s deemed domiciled status as from 6 April 2017 will affect the distributions they may receive in future from the trust. They will no longer be able to use the remittance basis, meaning that any distributions that are matched to stockpiled gains under s87 will be immediately subject to CGT at the settlor’s marginal rate. Prior to 6 April 2017, assuming the remittance basis applied to the settlor, the distribution would only be taxed if they brought the distributed assets in to the UK.

It is worth noting that the government is planning to restrict the use of s87 so that distributions to non-UK resident beneficiaries will not reduce the trust’s pool of stockpiled gains (as is currently the case). This provision was included in earlier drafts of the Finance Bill but has now been deferred to a later Finance Bill (although which is unknown). This will adversely affect the CGT status of off shore trusts with non-UK resident beneficiaries; so, if distributions to such beneficiaries are planned, it would be best for these to take place in tax year 2017/18 before the reforms to s87 are brought in.

Income tax

Prior to 6 April 2017, the trust is subject to income tax to the extent that there is UK source income. There is none at present with this trust. However the income produced by the offshore bank account and investments (relevant foreign income) is taxed in the hands of the UK resident beneficiary in receipt of the loan to the extent that it is matched to the value of this annual ‘interest-free benefit’. After 6 April 2017, to ensure that the trust’s foreign source of income is not taxed on the settlor as it arises, the trustees will need to ensure that the trust remains within the new ‘protected trust’ regime (in a similar way as for CGT – see above). This means that the trustees will need to take care that the settlement does not become ‘tainted’ by additions of property from the settlor, but otherwise foreign source income will not be subject to UK tax as it arises.

The taxation of benefits provided to beneficiaries will change. In respect of the interest-free loan, the position will remain as pre-6 April 2017; however, if the trustees provide benefits in future to the settlor, their spouse or their minor children, and the benefit is not taxable in their hands because they make use of the remittance basis, the benefit will be taxed on the settlor instead. With the settlor being deemed domiciled after 6 April 2017, and not able to use the remittance basis, this means any benefit will be fully subject to income tax. This would not necessarily be the case prior to 6 April 2017.


So, in summary, in the case of this trust, the effect of the non-dom reforms can be managed by the trustees, but will considerably reduce the trustees’ flexibility to make distributions and accept additions to the trust fund going forward.

Second scenario

The second scenario is as follows:

  • offshore trust originally settled by a non-UK domiciled, UK resident settlor;
  • the settlor will become deemed domiciled in the UK on 6 April 2017 as a result of the reforms;
  • the trust holds shares in an offshore company; the offshore company owns a UK residential property which is used by the beneficiaries;
  • the beneficiaries are all UK resident and include the settlor and their spouse; and
  • the trust is discretionary.

The main change to the taxation of the off shore structure will be for IHT. Prior to 6 April 2017, the UK property was not subject to IHT because it is held by an off shore company and the trust’s shares in that company, being non-UK situs, are ‘excluded property’ for IHT purposes. After 6 April 2017 this will change. Shares in a close company or partnership whose value is attributable to UK residential property will no longer be excluded property and will instead be fully within the UK IHT net. This is being introduced to get rid of the tax advantages of holding UK residential property in an enveloped structure. As a result, the shares in the offshore company will be subject to the IHT relevant property regime, and ten year and exit charges. Selling the property might not bring immediate relief from these charges – if the company (along with the property) is sold, the trust’s proceeds of sale will be subject to IHT for a further two years. The income tax and CGT status of the structure should not alter after 6 April 2017 provided the trust holds the UK property only, and no further assets are added to the structure.


The IHT aspect of the non-dom reforms is a major problem for affected non-doms and off shore trustees, and is why many structures will have been unwound into absolute ownership prior to 6 April 2017. As always however, it is a fine balance between seeking tax savings and providing asset protection and estate planning options, and the two clash in this situation: a decision will have to be made by non-doms based on what is right for them and their family.

This article was first published in Trusts and Estates Law and Tax Journal, May 2017.