Deemed domicile: ICAEW comments on the draft FB 2017 legislation

The draft Finance Bill 2017 published on 5 December 2016 included some of the legislation to bring into effect the changes to the taxation of non-UK domiciliaries (non-doms). ICAEW Tax Faculty submitted our comments on this in ICAEW REP 13/17.


We have considerable concerns about the legislation, as set out below, and would also like to see the introduction of the change postponed from April 2017 to April 2017.


The balance of the draft legislation was published on 26 January 2017, as explained in our news item Deemed domicile – additional draft legislation


The changes

The changes deem long-term UK-resident non-doms to be UK-domiciled for all taxes, not just inheritance tax (IHT) where the deemed domicile concept has been with us for a long time. An individual will be deemed domiciled after being resident for 15 out of 20 years in the UK; previously for IHT it was 17 out of 20.


As a result of a change in status from being non-dom to UK-dom, individuals with offshore trusts could be adversely affected, so protections have been introduced for capital gains tax; the income tax protections are in the delayed draft legislation.


The new legislation will also bring UK residential property into the IHT net even where it is owned by an offshore structure.


The legislation

The draft legislation published in December included the following draft clauses:


  • clause 18: Business investment relief
  • clause 40 and schedule 12: Deemed domicile: income tax and capital gains tax
  • clause 41: Deemed domicile: inheritance tax
  • clause 42 and schedule 13: Overseas property with value attributable to UK residential property


As noted, our comments on this first tranche of draft legislation are published as ICAEW REP 13/17.


Our concerns

We have several concerns with the draft legislation and have raised questions for HMRC to answer to try and clarify what the clause mean. The questions are included as appendix 1 in the representation and we will publish the response from HMRC when received.


In our view a start date for this change of April 2017 is too soon, given that a part of the draft legislation on this very complex area was only published 69 days before it will be in force. The start date should be deferred until April 2018.


The trust protections are designed to encourage non-doms to remain in the UK. The late publication of the income tax provisions and the lack of clarity around what constitutes “tainting” means that non-doms will not have settled trusts pre-April. And for those that have settled trusts, they will inadvertently taint them, thus removing the protections due to lack of clarity. In either scenario, many non-doms will feel like they have no option but to exit the UK.


No thought has been given to the fact that not all trusts are based in non- or low-tax countries; there are no provisions regarding double taxation to protect the position of a taxpayer, such as a US citizen, who may experience double taxation – both UK and US taxes – giving an effective rate of tax in excess of 70%. This combined rate of tax is prohibitive. The failure to address such issues will cause some non-doms to leave the UK. The Republic of Ireland is one location that has been cited as an alternative. The situation is damaging the UK’s reputation for fairness and efficiency.


Non-doms will be allowed to cleanse their offshore assets, that is they will be able to “sort” mixed funds of income, capital gains and clean capital, leaving them free to bring the clean capital into the UK without incurring a tax charge. There is a two-year window in which to cleanse the funds but only cash can be cleansed, meaning that in some scenarios a transaction will need to occur pre-April 2017, while the remittance basis is still available. However, in many cases there will not be enough time remaining now to undertake such transactions, meaning that the objective behind cleansing will not be fully realised.


There are rebasing provisions allowing a non-dom who becomes deemed domicile from 6 April 2017 to rebase the base cost of offshore assets so that gains accrued while they were non-dom do not become taxable. However, the rebasing is not available for company assets, which will result in a lot of trapped offshore capital which cannot come to the UK. This is contrary to the policy behind cleansing and the business investment relief (BIR) changes. Additionally, not extending rebasing to company assets will not raise any additional tax, so the absence of this relief will effectively reduce the UK’s tax take.


The decision to levy IHT on all UK residential property even where it is owned by an offshore structure has caused a great deal of disquiet. This is partly because where the properties are held by offshore companies they are already liable to the annual tax on enveloped dwellings (ATED) so the addition of an IHT charge is like a double taxation, and the lack of de-enveloping reliefs leaves the owners trapped.


Current consultation

HMRC are inviting representations on the latest, second tranche, of draft legislation, with a deadline to submit comments of 23 February.


If you would like to contribute to our representation please send your comments to