Deemed domicile – additional draft legislation

From April 2017 there will be changes to the rules on deemed domicile, introduced by Finance Bill 2017. The deemed domicile concept which has long applied to inheritance tax (IHT) is being extended to income tax and capital gains tax. And with effect from 6 April 2017, non-domiciled individuals will be treated as domiciled in the UK if they have a UK domicile of origin or if they have been resident in the UK for 15 out of the preceding 20 years.


The deemed domicile provisions have been under discussion for over 18 months and there have been two consultations on the changes to be introduced from 6 April 2017, and yet some of the draft legislation was only published on 26 January, a mere 69 days before it will be in force.


The thrust of the newly published legislation (paras 20–39) is the introduction of income tax protections for offshore trusts created by a non-UK domiciliary (non-dom) who will become deemed UK-domiciled under the new legislation.


Once a settlor becomes deemed UK-domiciled they will become liable to income tax on the offshore trust income if they have retained an interest in the settlement or if the income is paid to their minor child. This is the same as the position for a UK trust with a UK-domiciled and resident settlor. Currently, as a resident non-dom the settlor is only liable if the income is remitted to the UK.


The protection included in the new draft legislation is to remove the “protected foreign-source income” (PFSI) from a charge to income tax. PFSI is defined as foreign income derived from assets settled by the settlor while he or she was non-domiciled, provided they were settled before 6 April 2017 – so if new assets are added to the trust the protection will be lost.


The newly published legislation includes some tweaks to the draft legislation published in December 2016, but notably it has extended the rebasing provisions to non-reporting funds, a common investment vehicle for non-doms. Non-reporting funds do not report income and gains to HMRC as they arise and no tax is paid until a sale of the fund. The gain on the sale of the non-reporting fund is taxed as income; it is an offshore income gain, but the tax could be avoided by a non-dom using the remittance basis.


If you would like to contribute to our representation on the draft legislation please send your comments to by 20 February 2017.