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n be matched with a capital payment to a non-UK resident beneficiary. Under existing rules, having been washed out in one tax year, such trust gains would be unavailable for matching with a potentially taxable payment made to a UK resident beneficiary in a subsequent tax year.

Income tax

A similar set of rules is to be introduced for income tax, whereby a settlor will be taxed according to his or her tax status on foreign trust income only to the extent that he or she, or a close family member, receives a benefit from the trust and provided that the close family member is not liable to tax.

UK source income is broadly to be taxed on the basis of the existing rules.

Details of the proposed rules will be published in the Finance Bill 2017, most likely in March 2017.

Transitional rules

Transitional rules will govern the way in which pre-April 2017 foreign income will be matched after that date and how pre-April 2017 benefits or capital payments will be taxed in different situations. These are yet to be published.

Tainting protected settlements

The capital gains tax and income tax protections discussed above for non-resident trusts established by a settlor before he or she becomes deemed domiciled will be lost completely if property or income is added by the settlor to the trust during a period in which the settlor is deemed domiciled.

An addition made during such a period by the trustees of any other settlement of which the settlor is a settlor or beneficiary will also taint the recipient trust.

Once a trust is tainted and the protections lost, trust gains and foreign income will, in future, be taxed on an arising basis on the deemed domiciled settlor while he or she is a UK resident.

Recycling benefits from protected settlements

The government is concerned that beneficiaries who are not close family members and are either non-resident or remittance basis users could agree to hold money received from a trust for a period of time and then give or lend it back to a beneficiary in the United Kingdom who would otherwise be taxed on it. The UK resident beneficiary could then receive the payment from the trust without paying tax on the distribution.

As a result, the government is introducing a rule to ensure that where payments are made from a trust to such a beneficiary who makes a gift (which includes any benefit) to a beneficiary in the United Kingdom within the following three years, the payment will be taxed on the UK resident beneficiary.

In the event that the onward payment is made as part of arrangements for the payment made by the trustees to be received ultimately by the final beneficiary, rather than the original recipient, the rule will apply without the three-year time limit.


Following representations for some clarification as to how the benefit to a beneficiary of a capital payment made up of different assets should be valued, the government will introduce a set of rules which will apply across the capital gains tax and income tax benefits charges.

Planning points

Offshore trusts are likely to have an increasingly important place in the planning of non-domiciled individuals intending to come to the United Kingdom for a period, as it appears that there will be a number of tax advantages to holding property within such a structure, apart from UK residential property. These include the continuing ability to shelter non-UK assets and certain UK assets from inheritance tax, as well as the ability to defer and potentially avoid tax on foreign income and gains (other than from disposals of indirectly held UK residential property) arising in a trust, provided that the non-domiciliary and relevant members of his or her family do not benefit from the trust during a period of deemed domicile.

Nevertheless, the new regime may result in an increased tax burden and more onerous record keeping in some situations. Accordingly, it will be vital for trustees and settlors to take advice before making or (in the case of the settlor) receiving distributions, in case there may be tax implications for the settlor and, more generally, to understand all the potential consequences of the new regime.

Non-domiciled individuals who are approaching 15 tax years of residence in the United Kingdom may wish to consider leaving the United Kingdom for a period in order to restart the clock on deemed domicile, particularly bearing in mind that the government has refused to consider any grandfathering provisions. A period of non-residence of at least six consecutive tax years will be required for an individual to achieve this.

The government's concession with regard to cleansing mixed funds is potentially beneficial. Any non-domiciled individuals (apart from formerly domiciled residents) who have such funds should consider taking advantage of the two-year window to segregate the constituents of their overseas accounts for the future. This segregation will be important even once an individual is UK deemed domiciled.

Where possible, and after careful consideration of their specific circumstances, settlors and trustees of non-resident trusts with significant levels of trust gains may wish to consider making distributions to non-resident beneficiaries before April 6 2017, in order to wash out such gains while it is still possible to do so.


The proposed new rules will clearly have significant impact on non-UK domiciled individuals, particularly formerly domiciled residents. Some of the new provisions will affect individuals positively. However, there are a number of new provisions – not least the proposed anti-avoidance rules and those relating to loans in respect of UK residential property – that may be unhelpful and will require early and careful consideration.

It is disappointing that the government has decided to make a number of significant changes and additions to previously proposed measures so close to the introduction of the new legislation. Further, large sections of the new legislation are still awaited and the details of many of the new proposals are not fully clear.

It is also disappointing that the government has refused to reconsider its position on transitional relief to assist individuals who wish to restructure their holdings of UK residential property in advance of the introduction of the new inheritance tax charge. The tax costs of restructuring will be a significant deterrent for some of those who might otherwise have wished to do so.

Nevertheless, for those who do wish to consider some form of restructuring, advice should be taken as soon as possible. This would also be sensible for those who may be caught by the new deemed domicile provisions, whether as formerly domiciled residents or otherwise, especially if they may be considering a period of non-residence or taking advantage of transitional provisions where they are available.









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May  219





United Kingdom

Dividen the requirement that directors take intoive liabilities of the company when formingpinions on its solvency. It is also the first 

Reforms to taxation of non-UK d and other entities, together with provisions introducing new deemed domicile rule

years, which are open for public comment until January 31 2017...r


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