Two Finance Bills were released by the government in September only days apart: Finance (No. 2) Bill 2017, and a draft Finance Bill 2018. The first includes all the changes to the taxation of non-domiciliaries that were removed from the pre-election Finance Bill 2017, and which will take effect from 6 April 2017.

Changes affecting individuals born in the UK with a UK domicile of origin who return to the UK having acquired a domicile of choice in another jurisdiction (formerly domiciled residents) will also take effect from 6 April 2017, but these rules are outside the scope of this briefing.

Finance Bill 2018 re-introduces and provides more detail on some of the anti-avoidance provisions that were delayed due to the complexity of the legislation involved. These measures will take effect from 6 April 2018. There is therefore a small window of opportunity for individuals and trustees to review structures and implement any further tax planning before 6 April 2018.



Individuals who have been resident in the UK in 15 out of the past 20 tax years will be regarded as deemed domiciled for all UK tax purposes from their 16th year of residence, even though they may remain non-UK domiciled under general law. Part years of residence count towards the 15 years as well as any years of UK residence as a minor child.

From the date on which an individual becomes deemed domiciled under the new rules, they will no longer be able to access the remittance basis of taxation and will instead pay tax on their worldwide income and gains as they arise. Certain protections are available for income and gains arising in an offshore trust where assets are settled prior to the settlor becoming deemed domiciled.

Transitional Reliefs


Individuals who become deemed domiciled at 6 April 2017 can rebase directly held foreign assets to their market value on 5 April 2017 so that only the gain from 6 April 2017 is chargeable to capital gains tax (CGT) on a future disposal. Rebasing can apply on an asset by asset basis but does not extend to assets held in trust. Rebasing will apply automatically to a disposal unless the taxpayer makes an election for it not to apply.

To qualify for rebasing, all of the following conditions must be met:

  • the asset must have been owned personally by the individual on 5 April 2017, and
  • it must not have been a UK asset at any time since 16 March 2016 (or the date of acquisition, if later), and
  • the individual must have paid the remittance basis charge for at least one tax year before 2017/18.

Whilst the pre-April 2017 portion of the gain is not taxable, a tax charge may arise if the asset was purchased with foreign income and gains, and the proceeds of sale are remitted to the UK.

Importantly, those who become deemed domiciled in a later tax year will not be eligible for automatic rebasing of their overseas assets. Tax planning is therefore essential for anyone who will fall within the new deemed domicile rules from April 2018 onwards.

Cleansing of mixed funds

All non-domiciled individuals (not just those who become deemed domiciled at 6 April 2017) will have until 5 April 2019 to 'cleanse' any mixed funds accounts. A mixed fund account is one which contains a mixture of capital, income and gains which may have arisen over a number of years and possibly from different sources.

Cleansing allows an individual to separate out their clean capital, income and gains, so that remittances to the UK can be better managed, for example, to enable the taxpayer to remit clean capital to the UK in priority to income and gains.

Cleansing can only apply where the component parts of the mixed fund can be clearly identified, but it is not necessary for all component parts to be clearly indentifiable. The government has clarified that where some, but not all, of the component parts can be identified (e.g. it is known that a mixed fund worth £100,000 comprises £75,000 clean capital but it is not clear how much of the remainder is income and gains), the amounts that can be identified (e.g. the £75,000 in this example) can be transferred to a new account or accounts. This would allow tax free remittances to be made to the UK from the new clean capital account.

It should be noted that only transfers made on the same day will qualify for segregation, so it is important to quantify the component parts as one exercise, and then make the relevant transfers to new accounts on the same day. Once an amount has been transferred out of a mixed fund account, this precludes the remaining mixed funds in the account from being further segregated.

Losing deemed domicile

Once an individual becomes deemed domiciled under the 15 out of 20 year rule, he can lose his deemed domicile status by remaining non-UK resident for at least six tax years. If he returns to the UK after six years of non-UK residence, the domicile clock will reset and he will only become deemed domiciled in the UK again once he has been resident for 15 years.

If, on the other hand, he returns before six tax years have elapsed, he will be regarded as deemed domiciled for all tax purposes from the date he becomes UK resident again.

For inheritance tax (IHT) purposes, deemed domicile status will fall away once an individual has been non-UK resident for at least three tax years. The individual will lose deemed domicile status at the start of their fourth tax year of non-residence. There is no change here to the existing rules for IHT purposes.


i) Income Tax

The tax treatment outlined below applies to income arising in settlor-interested trusts (i.e. where the settlor or their spouse can benefit from the trust). The regime applies to all trusts settled by non-domiciled individuals, not just to those where the settlor is deemed domiciled in the UK under the new rules.

UK source income

UK source income arising to the trustees (or an underlying company) will continue to be taxed on a UK resident settlor on an arising basis. If the settlor cannot be taxed (e.g. the settlor is dead or non-resident), the UK source income is matched to any benefit received by a UK resident beneficiary.

Foreign income

Prior to 6 April 2017, foreign income arising in a settlor-interested offshore trust was treated as belonging to the UK resident non-domiciled settlor, and subject to tax in the UK if remitted to the UK by the trustees or any underlying company.

From 6 April 2017, foreign income arising in an offshore trust is no longer treated as belonging to the settlor provided the assets in the trust were settled before the settlor became deemed domiciled under the 15 out of 20 year rule. This tax treatment continues to apply even after the settlor becomes deemed domiciled, provided the trust has not been tainted (see below).

This means that trustees (or underlying companies) can bring foreign income or gains into the UK or use those funds in the UK without triggering a taxable remittance for the settlor.

The income accumulates within the trust until it can be matched to a capital distribution made to the settlor or other UK resident beneficiary. The trust can therefore act as a shelter for foreign income and gains which 'roll up' tax free within the trust, assuming no tainting occurs. A tax charge will not arise unless and until a distribution is made or a benefit is received from the trust by the settlor or another beneficiary.

Pre 6 April 2017 foreign income and benefits

Undistributed foreign income that arose pre 6 April 2017 is added to the income pool within the trust and is taxed only when matched to a capital distribution made to a UK resident beneficiary.

Unmatched benefits received by a settlor before 6 April 2017 are not capable of being matched to future foreign income arising to the trustees or underlying company, but the benefits can be matched against future capital gains arising to the trustees.

Distributions to close family members

Income tax anti-avoidance rules (effective from 6 April 2017) tax the settlor on any distributions or benefits that are matched to the pool of untaxed income in the trust and are received by a close family member (spouse, civil partner or minor child) where the benefit cannot be taxed on the close family member because the close family member is not UK resident or is taxable on the remittance basis but does not remit the distributed funds to the UK within the same tax year.

Where the settlor is taxable instead of the close family member, the tax treatment of the benefit will depend on the settlor's status. Settlors who are deemed domiciled will be taxed on the benefit regardless of where it is received. Settlors who are remittance basis user will only be liable to tax on the benefit if it is remitted to the UK. This means that if a UK resident close family member remits the benefit to the UK in the tax year following receipt, the settlor will be liable for the tax.

Where the settlor pays the tax on a benefit received by a close family member, the settlor has a right of recovery of the tax from the family member who received the benefit and is entitled to require HMRC to provide a certificate specifying the amount of tax paid.

Care should be taken by trustees when making a distribution to a close family member who is not themselves taxable on the distribution, as this may have tax implications for a UK resident settlor.

Similar provisions will be introduced for capital gains tax purposes, effective from 6 April 2018, and are detailed at the end of this briefing.

ii) Capital Gains Tax

As at present, capital gains arising to trustees (or apportioned up to trustees from an underlying company under s13 TCGA 1992), will remain stockpiled within the trust unless and until the gains can be matched to a capital distribution made to a beneficiary, including the settlor. The distribution basis of taxation will continue to apply even after the settlor has become UK deemed domiciled as a result of the 15 out of 20 year test. There is no longer any attribution of gains to the settlor unless the trust has been 'tainted' as described below.

The tax treatment of the capital distribution will depend on the residence and domicile status of the beneficiary who receives the distribution. If the beneficiary is deemed domiciled under the 15 year rule, the capital payment will be taxable regardless of whether the benefit is received in the UK or not. If the beneficiary is not deemed domiciled in the UK, the capital payment can be taxed on the remittance basis.


A trust will become 'tainted' and the income tax and capital gains tax protections lost if either of the following events occur:

  • An addition is made (directly or indirectly) to the trust by the settlor (or by the trustees of another trust of which he is a settlor or beneficiary) after the settlor has become deemed domiciled. The
  • addition of value to property already comprised within the trust will be treated as a direct addition of property.
  • The settlor acquires a UK domicile of choice under general law.

Where protection is lost, the settlor will become liable to tax on all income or gains generated in the trust as they arise, regardless of whether the settlor receives a distribution or not.

Given the potentially significant tax impact for the settlor of making an addition to a trust that might cause it to lose its protected status, it is important that trustees take advice before accepting additions from a deemed domiciled settlor.

An addition by an individual other than the settlor will not taint a trust. However, care will need to be taken as the individual will be considered to be a separate settlor in relation to those funds and this may create additional complications for the trustees, in terms of record keeping and determining future tax liabilities, as the separate additions will create 'separate' settlements for tax purposes.

Particular care will also need to be taken in circumstances where an addition is made by an individual other than the settlor and that addition derives from funds provided to the individual by the settlor. HMRC may treat the addition as having been made by the original settlor (not the individual who actually settled the funds) and this could cause the trust to be tainted.

Additions that will not 'taint' a protected trust

The draft legislation clarifies that the following types of additions will not taint the trust.

a) Property or income which is provided (other than a loan) on arm's length terms (i.e. official rate of interest (2.5% for 2017/18);

b) Property or income provided (other than a loan) as long as a gratuitous benefit is not intended;

c) A loan made to the trustees on arm's length terms. In this case, interest at the official rate or more is payable and actually paid each year.

d) Any interest paid to the trustees under a loan made by them on arm's length terms. In this case, interest of no more than the official rate must be payable, and there is no requirement for the interest to be paid annually.

e) Repayment to the trustees of a loan made by them;

f) Property or income provided to the trustees in pursuance of a liability incurred by any person before 6 April 2017;

g) Any property or income provided to meet excess trust expenses for the year, relating to administration or taxation, provided the addition is limited to the excess expenses over income for the year.

Even where a loan is made to the trustees on arm's length terms, tainting will occur where there is a 'relevant event'. A 'relevant event' occurs whenever:

  • Interest is capitalised, or
  • There is a failure to pay interest when due; or
  • There is a variation of the terms of the loan such that they cease to be arm's length.

Existing Loans

For loans that were in place before the settlor becomes deemed domiciled, which have not been made on arm's length terms and are repayable on demand, the amount outstanding will be regarded as an addition to the trust by the settlor. However, for individuals who became deemed domiciled on 6 April 2017, tainting will not occur if the loan is repaid, together with all interest payable, before 6 April 2018 or the loan becomes a commercial loan on arm's length terms and interest is paid to the lender/settlor as if the commercial terms had been in place since 6 April 2017 and continues to be payable on those terms.

Trustees will need to exercise extreme caution when making or accepting loans to ensure that the terms of the loan agreement do not inadvertently cause a trust to become tainted. Trustees should also review existing loan agreements to ensure that they comply with arm's length terms and interest payments are made on a timely basis.

Valuation of benefits rules

Specific valuation rules will be introduced in relation to the taxation of benefits provided by trustees, as follows:

  • Loans: The benefit is equal to the value of the interest at the Official Rate of Interest, less any interest actually paid during the tax year.
  • Moveable property: The benefit is the value of the property multiplied by the Official Rate of Interest for the period it is available, less any payments made during the year for the use of the property, or for repairs, maintenance, insurance, and storage.
  • Land: The benefit is equal to the market rent, assuming a lease in which the landlord retains responsibility for repairs, insurance and maintenance, less any amounts paid for the use of the land, repairs, insurance or maintenance during that year.


From 6 April 2017, all UK residential property falls within the scope of UK inheritance tax. The definition of residential property follows the existing definition of a dwelling under the Non-Resident Capital Gains Tax rules.

The IHT charge applies to interests (shares of loans) in closely held companies or other structures (including partnerships) that hold UK residential property. To the extent that the interest derives its value from UK residential property, it will be regarded as a UK situs asset within the scope of IHT.

A taxpayer's interest in the company or partnership can be disregarded where that interest, when aggregated with that of a connected person, is less than 5%. A connected person includes a spouse, ascendants, descendants, siblings, a trust settled by any of the above or a company owned by such a trust.

Where the close company or partnership holds other assets apart from UK residential property, liabilities of the company/partnership will be attributed across each asset on a rateable basis, i.e. in proportion to its value.

Where the entity is in turn held through an offshore trust, the trustees will be subject to 10-yearly and exit charges in respect of the value attributed to UK residential property. If the settlor is also a beneficiary, there is likely to be a reservation of benefit, resulting in the close company shares (or partnership interest) being included in the settlor's chargeable estate on death.

Loans taken out to acquire, improve or maintain UK residential property are deductible for IHT purposes, but will be within the charge to IHT in the hands of the lender. The IHT charge will also extend to assets held as security, collateral or guarantee for such loans.

In circumstances where trustees make a loan to a settlor to acquire UK residential property, the trustees could be subject to ten yearly charges on the value of the loan, and, if the settlor is also a beneficiary of the trust, the debt held by the trust could also form part of the settlor's estate under the reservation of benefit rules. Trustees will need to ensure that they have adequate procedures in place to ascertain whether loans made to a UK resident beneficiary are to be used for investment in UK residential property.

A specific anti-avoidance provision catches arrangements that have as a main purpose to avoid or mitigate the IHT charge in these circumstances.

In addition, a double tax treaty cannot be used to override these provisions unless inheritance tax is payable in the other country (there is no minimum amount that must be paid).

Two Year Tail

Where an interest in a close company or partnership holding UK residential property is disposed of (or a loan repaid), the sale proceeds (or loan repayment) will remain chargeable to IHT for a further two years. For trustees, this two year rule could lead to a ten year charge or an exit charge if, following such a disposal or loan repayment, a ten year anniversary occurs within that two year period, or the sale proceeds (or loan repayment) exit the trust within two years.

The two year tail does not apply to a disposal of the property itself.

Trustees considering selling an interest in an entity holding UK residential property should take advice to determine the most tax efficient solution.


1) Disregard of capital payments to non-resident beneficiaries for CGT matching purposes

Currently, trust gains (including gains made by an underlying company which have been apportioned up to the trustees under s13 TCGA 1992) can still be matched to capital distributions made to a non-resident beneficiary who does not pay tax on the distribution. The capital distribution is still capable of reducing the stockpiled gains pool within the trust, even though no UK tax is payable on the distribution.

This can be advantageous where a trust has both UK resident and non-resident beneficiaries, since the trustees can manage the timing of distributions to ensure that distributions made to the non-resident beneficiaries wipe out the gains pool so that future distributions to a UK resident beneficiary can be received free of tax.

From 6 April 2018, this type of planning will be blocked by measures that prevent capital payments made to a non-UK resident beneficiary from matching to stockpiled gains within a trust.

Trustees still have time to take advantage of the current position, and should consider making capital distributions to non-UK resident beneficiaries before 6 April 2018 in order to reduce or eliminate stockpiled gains with no UK tax charge for the beneficiary. Trustees should seek professional advice before any action is taken.

2) Distributions to close family members – capital gains tax charge on settlor

From 6 April 2018, capital gains tax anti-avoidance rules will ensure that a UK resident settlor is taxed on matched distributions made to a close family member where the family member is not themselves taxable on the distribution, for example because the family member is not UK resident, or is a non-UK domiciled remittance basis user and does not remit the distribution to the UK in the same tax year.

If the settlor is a remittance basis user, he will be taxed on the payment if it is remitted to the UK. This means that if the family member remits the funds to the UK in any tax year after the one in which the payment was received, the settlor will be liable to the tax, although he or she has a right to recover the tax from the close family member.

Trustees will need to take care when making distributions to close family members where the settlor is UK resident, as this could have tax implications for the settlor.

3) Anti-Recycling rules

Complex anti-recycling rules will be introduced that are designed to tax benefits or capital payments received (tax free) from a trust by a non-UK resident beneficiary or by a non-domiciled beneficiary who does not remit the benefit to the UK in the tax year of receipt, but who then makes an onward gift (directly or indirectly) of the benefit (or anything that derives from it or represents it) to a UK resident.

The UK resident will be charged to income tax or capital gains tax (to the extent the distribution is matched to income or gains within the trust) as if they had received the distribution directly from the trustees.

These rules apply without time limit, but are conditional upon there being, at the time the benefit is received by the original beneficiary, arrangements or an intention to pass on the benefit to a UK resident.

They also apply to a series of gifts where the recipient of the last gift in the series is resident in the UK.

Where the UK resident is a remittance basis user, tax only applies to the extent that the payment is remitted to the UK.

Where the UK resident is a close family member of the settlor, the settlor will instead be liable for the tax if he or she is UK resident.

Non-resident beneficiaries who are considering making gifts to a UK resident may wish to make the gift before 6 April 2018.


Individuals who are deemed domiciled from 6 April 2017 should seek advice if they haven't already done so, as there may still be opportunities to cleanse mixed funds or sell assets to take advantage of rebasing relief.

Individuals who will become deemed domiciled from 6 April 2018 should seek advice on how the proposed changes will affect them so that appropriate tax planning can be implemented on a timely basis. Such individuals may wish to consider the use of a trust to shelter income and gains from UK tax, and to provide protection from IHT. Trusts may be particularly attractive for individuals with assets or cash that are not required to fund UK living expenses, or for succession planning.

The taxation of overseas trusts is becoming increasingly complex, and it is essential that trustees and their advisers familiarise themselves with the new rules. Trustees will need to take particular care where a settlor becomes deemed domiciled in the UK to ensure that the trust does not become tainted.

Where UK residential property is held in an entity in turn owned by offshore trustees, the trustees may face additional IHT liabilities and compliance requirements from 6 April 2017. The two year IHT tail must also be taken into account when such entities are sold. Advice should be taken on whether it would make sense to de-envelope.

The delay in introducing some of the anti-avoidance provisions relating to trusts may create a window of opportunity for individuals with offshore trusts already in place to make tax efficient distributions before 6 April 2018. Professional advice should be taken depending on the specific circumstances of each case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.