Deemed domicile update – some trust problems, with comments from HMRC

The draft legislation changing the rules for non-UK domiciliaries (non-doms) from 6 April 2017 is still a work in progress in some respects.

This news item sets out some specific problems relating to trusts, together with comments we have received from HMRC.

The 6 April 2017 changes
In brief, the changes deem long-term UK-resident non-doms to be UK-domiciled for all taxes, not just inheritance tax (IHT). 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.

ICAEW commented on the first tranche of the draft legislation in ICAEW REP 13/17 – see our news item Deemed domicile: ICAEW comments on the draft FB 2017 legislation 

We will comment on the second tranche of legislation later this month – for details of what these clauses are about, see our news item Deemed domicile – additional draft legislation

Additions to a trust
One of the areas of concern is that a loan on non-commercial terms that has not been replaced by a commercial loan by the time the settlor becomes deemed domiciled on 6 April 2017 would taint the trust but given the lateness of the legislation there is insufficient time to negotiate a commercial loan in time.

A further point of concern was where a settlor has the power to revoke a trust to protect the beneficiaries.

HMRC comments
These points were raised with HMRC and we have been sent the following statement and asked to share it:


“1. A repayable on demand loan which was made directly or indirectly to a relevant trust prior to 6 April 2017 on non-commercial terms e.g. at a low or nil rate of interest and which remains outstanding on that date will generally be regarded as a provision of property for the purposes of the settlement. Consequently, where after 5 April 2017 a loan has not been repaid or adjusted to commercial terms, the condition at new sub paragraph 5A(1)( e) would be met. The provision at 5A(1)( e) will apply equally where the loan was initially for a fixed period but falls to be repaid after 6 April 2017 such that it becomes a repayable on demand loan. There will however be a transitional provision so that the condition is not regarded as met where, before 6 April 2018, the loan is either repaid in full together with any outstanding interest or made subject to fully commercial terms, including a commercial rate of interest payable at least annually for the year ending 5 April 2018 and subsequent years and in addition interest at a commercial rate or a sum in lieu thereof has been paid in respect of the year ended 5 April 2017.

“2. Certain trusts require the settlor to have the power to revoke the trust to safeguard the position of beneficiaries. HMRC will not regard the failure to exercise such a power the same as an addition of property or value to the trust and therefore it will not cause the trust to lose its protection.”


While the legislative reference refers to the capital gains tax draft provisions, HMRC has confirmed that the points apply equally for income tax.

We have asked HMRC about the reference at the end of point one to the 2016/17 tax year. We expect a response next week and there is likely to be a slight amendment as a result.

Changes to s87, TCGA 1992 commencement provisions
Another area of concern is the interpretation of the commencement provision in paragraph 19(4)(b), Sch 12 of the draft Finance Bill 2017 legislation.

Some respected commentators have taken the draft clauses to mean that the disregard of payments to non-residents will be applied retrospectively. That is, that from 6 April 2017 all matched gains to non-residents come back into the s87, Taxation of Chargeable Gains Act 1992 pool.

HMRC comments
This issue has been raised with HMRC and we have been told that it is the intention that payments to non-residents made before April and matched before 6 April 2017 will be dealt with under the current rules and will be able to wash out pre-6 April 2017 gains. 

It is only unmatched payments to non-residents that are ignored post-6 April 2017, ie a large unmatched capital payment made now to a non-resident (unless temporarily non-resident) cannot be used to match and wash out future gains arising after 6 April 2017.

It is possible that the draft legislation will be amended so that the paragraph 19(4)(b) commencement provision is clearer in the Finance Bill when published.

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