Policy paper

Income Tax, Inheritance Tax and Capital Gains Tax: deemed domicile rule

Published 5 December 2016

Who is likely to be affected

This measure will affect:

• non-domiciled individuals (non-doms) who have been resident in the UK for 15 out of the past 20 years
• individuals who were born in the UK with a UK domicile of origin who return to the UK having obtained a domicile of choice elsewhere
• settlors and beneficiaries of overseas trusts
• individuals who become deemed domicile from April 2017 who have overseas assets acquired before 6 April 2017
• individuals who have been taxed on the remittance basis in any tax year before 2017 to 2018 who hold a mixed fund in an overseas bank account

General description of the measure

The measure implements Income Tax, Inheritance Tax (IHT) and Capital Gains Tax (CGT) changes to reform the treatment of individuals who are long term resident in the UK for tax but domiciled abroad.

This measure provides that those individuals who are not domiciled in the UK will be deemed to be UK domiciled for tax purposes if they are either resident in the UK for 15 of the past 20 tax years, or if they are born in the UK with a UK domicile of origin and return to the UK having obtained a domicile of choice elsewhere.

They will be taxed on any arising worldwide income and gains in the same way as UK domiciles. At the same time the existing IHT deeming provisions will be aligned with the new 15 out of 20 rule.

Transitional protections will be given where an individual becomes deemed-UK domicile under the 15 out of 20 rule in April 2017, including the facility to rebase offshore assets for CGT purposes. The measure will also ensure that any non-dom who sets up a qualifying trust before becoming deemed domiciled would not pay Income Tax /CGT on income/gains in the trust, as long as they did not receive a benefit from the trust. However, the new legislation to cover the Income Tax changes will follow in due course. Once a benefit is taken, CGT would be payable on trust gains and income tax on family benefits received.

There will also be a facility for remittance basis taxpayers to rearrange their overseas mixed funds to allow them to remit clean capital from overseas ahead of income and gains.

Policy objective

The measure deems certain individuals, who would otherwise be non-domiciled in the UK as a matter of general law, to be domiciled here for the purposes of IHT, Income Tax and CGT.

Background to the measure

At Summer Budget 2015, the government announced that it would change the tax regime for individuals who have a foreign domicile (‘non-doms’). These changes will bring an end to permanent non-dom status for tax purposes and will apply for the purposes of Income Tax, IHT and CGT.

Further detail was provided in a consultation document published on 19 August 2016 and consultation closed on 30 October 2016. The government’s response to the consultation was published on 5 December 2016.

Detailed proposal

Operative date

The measure will have effect on or after 6 April 2017.

Current law

A non-domiciled individual who is resident in the UK has the option of being taxed on the remittance basis. The remittance basis rules are provided in Chapter A1, Part 14 of Income Tax Act 2007.

Where an individual who is taxed on the remittance basis, remits amounts to the UK from a mixed fund, special rules in section 809Q of the Income Tax Act (ITA) 2007 apply which prevent the capital being remitted before the income and gains. Further rules in section 809R (4) ITA apply where amounts are transferred between mixed funds.

Under section 38 of the Taxation of Chargeable Gains Act (TCGA) 1992, when computing the amount of gain chargeable to CGT on the disposal of an asset, the sums deductible from the amount of consideration for the disposal are normally the acquisition cost, enhancement costs and incidental costs of acquisition and disposal. The current legislation for trusts is set out in sections 86 and 87 TCGA 1992, sections 620 to 648 of Income Tax (Trading and Other Income) Act (ITTOIA) 2005 (settlements legislation) and Chapter 2, part 13 of ITA 2007 (Transfer of Assets legislation).

Proposed revisions

Legislation will be introduced in Finance Bill 2017 to deem certain individuals to be domiciled here for the purposes of Income Tax, CGT and IHT.

This will be the case where they meet 1 of 2 conditions:

• where an individual was born in the UK with a UK domicile of origin and whilst they are UK resident or return to the UK having obtained a domicile of choice elsewhere
• where an individual who has been resident in the UK for at least 15 out of the previous 20 years

The measure amends the remittance basis at Chapter A1, Part 14 of ITA 2007 so that anyone deemed UK domiciled by virtue of either condition cannot access the remittance basis.

The legislation allows a non-domiciled individual who has been taxed on the remittance basis to transfer amounts between overseas mixed fund bank accounts without being subject to the offshore transfer rules. This will allow the different elements within the accounts to be separated, thereby allowing clean capital to be remitted to the UK in priority to income and gains.

The individual must transfer the funds in the 2017 to 2018 tax year or the 2018 to 2019 tax year and must make a nomination when they do so. This will be available to any individual who has been taxed on the remittance basis in any tax year before the 2017 to 2018 tax year. However, they don’t apply to individuals who were born in the UK with a UK domicile of origin.

The draft legislation will provide that the market value of an asset at 5 April 2017 will be able to be used as the acquisition cost for CGT purposes when computing, for CGT purposes, the gain or loss on its disposal where the asset was situated outside the UK between 16 March 2016 and 5 April 2017. This will apply to any individual who becomes deemed domicile from April 2017, other than one who is born in the UK with a UK domicile of origin.

The measure will also amend TCGA legislation so that where capital payments are made to the settlor or a close family member they are taxed on the settlor under a modified version of Section 87. Capital payments to a non-resident made on or after 6 April 2017 will not be matched against the pool of trust gains for the purposes of section 87, regardless of the domicile status of the settlor and whether or not the recipient of the payment is the settlor or another beneficiary of the trust.

For Income Tax purposes, foreign domiciled settlors and deemed domiciled settlors will be subject to Income Tax under section 731 of ITA in respect of benefits received by the settlor or close family member for example, a spouse, cohabitee and minor children but not minor grandchildren and according to the status of the settlor at the date the benefits received are matched to trust income. New legislation to cover the Income Tax changes will be published at a later date.

Foreign income arising to a trust will only be taxed under the modified settlements legislation in cases where the benefit is not taxed under section 731 for example, because of the motive or EU defence or because there is no income available for the benefit of the settlor. Income at trust level matched to benefits received by the settlor or close family member under the transfer of assets provisions will not be taxed again under the settlements legislation.

Trusts will lose their protection if property is added by the settlor after he is deemed domiciled and any payments from a trust made to non-residents or remittance basis users who hold the money for a period of time before giving or lending it back to a beneficiary in the UK will be taxed on the UK resident beneficiary if the payment is made to the UK resident beneficiary within three years of the payment made by the trustees.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
-	-20	+395	+310	+310

These figures are set out in Table 2.2 of Budget 2016 as ‘Non-domiciles: abolish permanent status’, and have been certified by the Office for Budget Responsibility. More details can be found in the policy costing note published alongside Summer Budget 2015.

The transitional protections, including the ability to rebase offshore assets for CGT purposes, are expected to cost the Exchequer approximately £20 million per annum from April 2018. The Office for Budget Responsibility has included this in its forecast.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

The costing includes adjustments to account for behaviour, which includes increased tax planning on offshore income, non-compliance and choosing to become non-UK resident.

Impact on individuals, households and families

This measure is not expected to impact on family formation, stability or breakdown.

The measure will impact on non-UK domiciled individuals who have been resident in the UK for 15 out of the last 20 years and those born in the UK will become deemed-UK domicile.

The vast majority of non-domiciled UK residents leave the UK within 15 years from the date of their arrival and will not be affected by these reforms. Around 3,000 people will become UK domiciled for tax purposes as a result of these changes from April 2017.

Equalities impacts

The main impact will be on non-UK domiciled individuals who have been resident in the UK for 15 out of the last 20 years and who currently use the remittance basis of taxation.

This will generally have an adverse effect on non-UK nationals of above average means.

Impact on business including civil society organisations

This measure is expected to have no administrative burden impact on businesses or civil society organisations. This measure will affect non-UK domiciled individuals who have been resident in the UK for 15 out of the past 20 years.

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

There will be no significant operational impact on HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns.

Further advice

If you have any questions about this change, please contact Aidan Close on Telephone: 03000 585255 or via email: aidan.close@hmrc.gsi.gov.uk.