UK Summer Budget 2015 - comment

Tuesday 01 December 2015

by Phillip Dearden, Director - Tax, Equiom Solutions


The Summer Budget of July 2015 was the first Budget of a new Conservative administration. It contained some proposals that will be significant for non-resident and non-domiciled individuals.

The main proposals that will concern this group are:

1. To treat all UK resident but non-domiciled taxpayers as UK domiciled for all tax purposes after more
than 15 years of UK residence;

2. To ‘look through’ offshore structures that own UK residential property so that the property falls within
the scope of Inheritance Tax (IHT); and

3. To treat all individuals who were born in the UK but who left and became domiciled elsewhere, as
UK domiciled immediately upon a return to the UK with a knock-on effect for trusts that they have

Each of these proposals may have a significant impact for those people affected by them. I consider the ramifications for those individuals and what they might do to mitigate these effects below.

1. Deemed domicile after 15 years

The UK already has a ‘deemed domicile’ rule which provides that after a non-domiciled individual has been UK resident in 17 out of the previous 20 years, that person will be treated as UK domiciled for IHT purposes only. Effectively this means that after about 17 years of living in the UK a non-domiciled individual’s worldwide assets will fall within the scope of IHT.

The new proposal provides that after 15 years of residence an individual who is non-UK domiciled will be treated as UK domiciled for all tax purposes. This means that the remittance basis, which allows for a more benign treatment than usual for foreign income and gains, will no longer be available to such individuals who will then be taxable in respect of their worldwide income and gains and their total worldwide assets will also be subject to IHT on their demise.

Non-domiciliaries also benefit from a relaxed treatment under the UK’s anti-avoidance provisions relating to offshore trusts. These rules attempt to attribute the income and gains of offshore trusts to UK resident settlors. However, where those settlors are non-domiciled these provisions often do not apply or apply in a less rigorous manner. This means that offshore trusts can be a tax shelter for such individuals. It seems likely that in future the income and gains of many offshore trusts will be attributed to UK resident settlors whether they are UK domiciled or not.

The new provisions commence on 6 April 2017. It appears that trusts created before that date will not be caught in full by the new rules so that tax in respect of income and gains may not be charged until a distribution takes place and these pre-existing trusts may continue to be outside the scope of IHT where they do not hold UK assets. Detailed legislation has not been seen yet but based on HMRC press releases it may be worth the individuals concerned considering the setting up of a trust prior to 6 April 2017. In order to be free of this deeming-provision, a non-domiciled person would need to leave the UK for five years.

2. UK residential property and IHT

The Chancellor also announced a further proposed attack on UK residential property which is held by
offshore companies or partnerships.

Until now, non-UK domiciled individuals have been able to hold UK residential property through an offshore vehicle, and in doing so, shelter that property from a potential UK IHT charge of 40%. This is because non-UK situs assets held by non-UK domiciled individuals are not within the scope of IHT and in this case the individual would typically hold shares in an offshore company. Similarly, non-resident trusts have also been able to avoid IHT charges in the form of 10-year anniversary charges and exit charges by holding UK residential property through the medium of an offshore company.

The UK Government has explained that it intends to amend the IHT rules so that trusts or individuals owning UK residential property through an offshore company, partnership or other opaque vehicle, will pay IHT on the value of that property as if the property was held directly, i.e., they will ‘look-through’ the company.

It is intended that the proposed changes will become effective on or after 6 April 2017, being included in the Finance Bill 2017. As the detail of the legislation is not yet known it is too early to form any detailed plans. If the provisions operate as expected then it is likely that the proposed changes will result in a considerable amount of ‘de-enveloping’ (i.e., trustees and individuals taking residential properties out of their corporate wrapper). There are, however, potential Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT) charges associated with such a ‘de-enveloping’. The UK Government has suggested that it will consider the costs associated with de-enveloping as part of the consultation process which will begin with a consultation document being published at the beginning of 2016 inviting views and representations from interested
parties and stakeholders on the subject.

Individuals and trustees who are concerned with these proposals should take advice as and when the shape of the new provisions becomes apparent.

3. Returning non-domiciliaries

The third proposal will only affect individuals who were born in the UK and who moved away from the UK and hoped to achieve a domicile in a new country. It is now proposed that individuals born in the UK with UK-domiciled parents, who have left the UK, will be automatically treated as UK domiciled upon their return to the UK. This will affect, for example, individuals who have moved to Jersey or the Isle of Man on a permanent basis and who hoped to have achieved a domicile in their new home. If such individuals return to the UK and become UK resident, even temporarily, they will be treated as UK domiciled as soon as they become UK resident.

Furthermore, it is provided that such individuals will not benefit from any favourable tax treatment in respect of trusts that they have set up prior to returning. This provision has the potential to cause a lot of discomfort as many individuals will have set up trusts believing themselves to be non-domiciled but now, if they return to the UK, they may prejudice the tax position of trusts created many years ago. A consultation document is expected on these provisions shortly and individuals in this position should be very cautious about a return to the UK until they understand how this change might affect them or trusts that they have created.


The headline change will be the ‘deemed domiciled after 15 years’ provision. The tax position of nondomiciliaries has been very sensitive for a long time. On the one hand the tax regime for non-domiciliaries is part of the attraction for the many non-UK people who come and live in London and contribute to its economy. On the other hand, many media commentators and politicians are unhappy with a tax regime that treats a small sub-set of the population so much better than the majority of the population. This change will mean the Government can say it has gone some way towards dealing with this matter. Many nondomiciliaries will be happy living under a benevolent tax regime for 15 years; after that they can either be taxed in the same way as the majority, or they can leave the UK. The possibility that trusts created before April 2017 may be treated in a gentler manner than usual may make the changes easier to bear.

The provision to levy IHT in respect of UK residential property is consistent with several recent changes that have made ownership of UK residential property more expensive from a tax point of view for non-residents. In nearly all cases non-residents will now be subject to a CGT charge when they sell a UK residential property and in many cases they are, or will soon be, subject to an annual tax (Annual Tax on Enveloped Dwellings, or ATED). The UK Government seems to have seen the overheating London residential property market as a source of taxation. Many shareholders will now want to consider unravelling these structures and they should await more detail regarding the proposals to see what reliefs may be available on such an unravelling.

The provision regarding returning non-domiciliaries was something of a surprise as, in most cases, the facts would allow HMRC to treat UK persons who return to the UK after an absence, even a long one, as UK domiciled on return. Nevertheless, the proposal is there and the sting in the tail is the proposal to bring trusts created by such persons within the scope of IHT. Individuals who may be caught by this provision should take advice before they return to the UK.

Overall these changes represent a further reduction in respect of the tax advantages available to a nondomiciliary in the UK. Despite this, there are still significant advantages for such people in creating nonresident settlements. In particular, for 15 years they may act as tax shelter for capital gains tax and possibly income tax, and even after the 15-year period has elapsed a trust may serve as an IHT shelter.