Finance Bill 2017 – the legislation on domicile and on overseas property

The changes to the taxation of non-UK-domiciliaries have travelled a long road which is becoming ever more winding. We now have updated provisions published on 20 March in Finance Bill 2017, and a government statement about certain provisions which will be postponed to a future Finance Bill.


The initial announcement on the changes was made in the 2015 Summer Budget and was followed by two consultations, in September 2015 and August 2016. Our responses to the consultations are in TAXREP 59/15 and ICAEW REP 159/16.


The government’s response to the last consultation was published on 5 December 2016 alongside some draft clauses (originally numbered 40 to 43 inclusive), the balance of which were subsequently published on 27 January. Our responses to the draft clauses can be found in TAXREP 13/17 and TAXREP 26/17 respectively. A separate TAXREP 25/17 was submitted in respect of the proposed cleansing provisions.


The government’s intent in this area is to tax long-term UK-resident foreign domiciliaries (non-doms) in the same way as UK-domiciled individuals, while recognising in part the international aspect of non-doms’ affairs through the introduction of trust protections.


The changes come into effect from April 2017 (but see below re the trust protections).


The Finance Bill 2017 legislation is in clauses 41 to 44 of and is summarised below. The Tax Faculty would like to thank volunteers on the Private Client Committee for preparing the text.


Clause 41 and Schedule 13

Deemed domicile: income tax and capital gains tax

Clause 41 extends the concept of deemed domicile which has existed for inheritance tax (IHT) purposes to both income tax (IT) and capital gains tax (CGT).


Schedule 13 contains supplementary provisions relating to this extension and is comprised of four parts as follows:


  • Part 1: makes inter alia changes to foreign losses in Taxation of Chargeable Gains Act 1992 (TCGA 1992), the employment provisions in Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and the remittance basis in Income Tax Act 2007 (ITA 2007).
  • Part 2: introduces protected trusts for IT and CGT purposes, defines the concept of “tainting” a protected trust, and sets out the operation of the settlements legislation and the transfer of assets abroad legislation in respect of said protected trusts.
  • Part 3: introduces the “rebasing” relief for CGT purposes for those becoming deemed domiciled on 6 April 2017; and,
  • Part 4: introduces the “cleansing” relief to allow non-doms a two-year window from 6 April 2017 in which to cleanse mixed funds into their constituent parts.


Trust protections – government statement

Noticeable by their absence from Part 2 are a host of complex provisions originally included in the draft Finance Bill published on 5 December 2016 and 27 January 2017. These complexities are discussed in the ICAEW representations above.


A technical update was released by the government on 21 March 2017 explaining the absence of the above provisions. It states that:


“The draft legislation on the trust protections was consulted on between 5 December 2016 and 22 February 2017. Stakeholders were advised that where the legislation was incomplete or incorrect, the necessary amendments would be made no later than the date for the publication of the Finance Bill. However, it has not been possible to make all of these changes in time and consequently, the government has taken the view to defer publication of the provisions affected. This note sets out the provisions that have been published on 21 March 2017 and those that will be included in a future Finance Bill.”


HMRC has also stated that, although not made explicit in the technical note, any future legislation will take effect from the start of the relevant tax year for the Finance Bill in question. They have also made clear that it is not the intention to backdate it to April 2017 as that would be retrospective in effect, and contrary to the standard practice of avoiding retrospective legislation wherever possible. However, it should be emphasised that final decisions on future legislation will rest with Treasury Ministers. 


It has not been confirmed whether the omitted provisions will appear in Finance Bill 2018 or a later Bill.


Clause 42

Deemed domicile: inheritance tax

Clause 42 changes the period of UK residence allowed before deemed domicile applies for IHT from 17 out of 20 years to 15 out of 20 years – so that all taxes are in line. When an individual who has been deemed domiciled leaves the UK and stays abroad, they will lose the deemed domicile status for the purposes of IHT at the start of the fourth tax year of non-residence.


Clause 42 also makes other supplemental changes to Inheritance Tax Act 1984 (IHTA 1984).


Clause 43 and Schedule 14

Settlements and transfer of assets abroad: value of benefits

Clause 43 simply introduces Schedule 14.


Schedule 14 introduces draft legislation to formalise how capital payments and benefits are calculated for the purposes of s87, TCGA 1992 and the Transfer of Assets Abroad legislation respectively. The draft legislation is concerned with the following benefits:


  • loans;
  • making moveable property available; and,
  • land (property).


The approaches taken in the draft legislation to the calculating the benefits are not radical but what is clear is that it will not be possible in future to reduce a benefit by simply accruing a rent or interest – they will need to be paid in the tax year in question for the benefit to be reduced accordingly.


Clause 44 and Schedule 15

Overseas property with value attributable to UK residential property

Clause 44 simply introduces Schedule 15.


Schedule 15 inserts into IHTA 1984 provisions such that the following are not excluded property:


  • An interest in a close company or partnership owning UK residential property where the interest is greater than 5% of the total interest in the close company or partnership.
  • A loan, or any security, guarantee or collateral for a loan, which has been used to acquire (directly or indirectly) or maintain or enhance UK residential property.


Schedule 15 also introduces certain provisions so that the proceeds of a disposal of a company or partnership of the sort mentioned above or a repayment of a loan of the sort mentioned above will not become excluded property for a further two years post disposal/repayment.


Finally, Schedule 15 introduces a targeted anti-avoidance rule (TAAR) designed to target arrangements seeking to circumvent the provisions of this schedule.