End of Permanent Non-Domicile Status

Government proposals will bring permanent non-domicile status to an end from 6 April 2017.

However, the government has shied away from complete abolition, and is introducing a deemed domicile rule instead. A person will be deemed to be domiciled in the UK for all tax purposes once they have been resident in the UK for at least 15 out of the previous 20 tax years. Deemed domicile status will apply from the 16th year of UK residence. For inheritance tax (IHT), a person will therefore be deemed to be domiciled in the UK one year earlier than is currently the case.

The 15 out of 20 year rule means that some planning may be possible. For example, you could be UK resident for 15 years, then you could be non-resident for six years, and then you could be resident for another 15 years without becoming deemed domiciled for any of these years.

Domiciled in the UK

Once anyone is deemed to be domiciled in the UK, they will generally be taxed on exactly the same basis as a person who is UK domiciled. They will therefore have to pay income tax and capital gains tax on their worldwide income and gains – and the remittance basis of taxation for overseas income and gains will no longer be available to them. IHT will be payable on worldwide assets instead of just on a person’s UK assets.

However, the proposals include protection for offshore trusts provided the trust has been set up before a person becomes deemed domiciled. Income and gains retained within the trust will be protected from the tax implications of the settlor becoming deemed domiciled. Offshore trusts will also remain effective for IHT purposes. So if you have surplus assets, consider transferring them into trust before being caught under the deeming provisions. Of course once you have been deemed to be UK domiciled, the exemption will not apply where you, your spouse or your children receive any benefit from the trust.

If you are not UK domiciled but you are UK resident for 15 or more years, you might need to think about leaving the UK for a long enough period to reset the year count. If you are already overseas, you will now need to plan the date of your return to the UK with care.