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Following its brief publication and subsequent retraction on 21 September, the much anticipated consultation on reforms to the taxation of UK resident non-domiciles (RNDs) was formally issued on 30 September 2015. Amid growing concern as to the amount of time remaining for consultation and implementation of the new rules, a period of 6 weeks rather than the usual 12 has been given for responses.

As set out in our report of 24 August, the key proposals are:
A new 15/20 year deemed-domicile rule, which abolishes permanent non-dom status;
The denial of non-dom taxation for returning UK doms;
Amendments to the taxation of trusts for UK doms and non-doms.
According to the text of the consultation, “The government wants to attract talented individuals to live in the UK who will help to contribute to the success of this country by investing here and creating jobs. The long-standing tax rules for individuals who are not domiciled in the UK are an important feature of our internationally competitive tax system, and the government remains committed to that aim. However, it is only right that those people who choose to live in the UK for a very long time pay a fair share of tax, and those who are born in the UK with a UK domicile of origin cannot move abroad and return as a ‘non-dom’.”

The gap between the treatment of arriving RNDs and RNDs who began their lives as UK domiciliaries is widening, particularly when it comes to trust taxation. What is clear is that the RND regime as a whole is becoming ever more complex for RNDs as a whole.

The consultation closes on 11 November.

15/20 Rule
Long-term UK resident non-domiciled individuals (Arriving RNDs) will be treated as UK domiciled for tax purposes once they have spent more than 15 of 20 tax years in the UK (15/20 Rule). The result is that from the beginning of their 16th year in the UK they will be taxed on an arising basis in respect of income and gains and their worldwide estates will be within the scope of inheritance tax. The remittance basis of tax will be unavailable. The reforms are intended to be introduced as part of Finance Act 2016 with effect from 6 April 2017.

In assessing how many years have been spent in the UK for the purposes of the test, split years and years prior to April 2017 will count, as will years during a taxpayer’s minority. Consequently, although the new deemed-domicile status will not be inherited by children, they may become deemed-domiciled before they reach 18. Also relevant is that treaty non-residence will seemingly not interfere with the test.

In order to lose deemed-domicile status under the 15/20 Rule, an individual must spend at least 6 consecutive tax years abroad. This is a departure from the text of July’s technical briefings which had suggested that 5 tax years and a split year might be sufficient. The suggestion at this stage is that the distinction between the 6-year non-residence requirement and the existing 5-year temporary non-residence rule for the purposes of the statutory residence test will be maintained.

Importantly, a client’s 15 UK tax years need not be consecutive, as could otherwise be interpreted from the consultation, so that separate periods of residence can have the cumulative effect that an individual exceeds the 15-year threshold.

Returning Doms
Individuals who have a UK domicile of origin, acquire foreign domicile of choice and subsequently return to the UK (Returning Doms) will be taxed as though they are UK domiciled for the whole of the period for which they are UK tax resident. The consultation paper now clarifies that this treatment only applies to individuals who were also born in the UK. It requests comments on whether there should be a grace period for Returning Doms given the potential burden for those who are in the UK only very temporarily.

Domiciled tax treatment under this heading can be shed simultaneously with loss of UK tax residence, unless the taxpayer has already fallen within the scope of the 15/20 Rule or his or her UK domicile under general law has revived. Acknowledging that this would mean individuals who are only domiciled under general law could lose their inheritance tax tail faster than those caught by the 15/20 Rule (three years after acquiring foreign domicile of choice as opposed to 6 tax years following loss of residence), the government proposes to align the rules somewhat. Specifically, UK domiciled individuals would become non-domiciled for inheritance tax on the later of i) acquiring foreign domicile of choice or ii) being non-resident for 6 years. This could favour individuals who leave the UK but take several years to form the intention to remain abroad.

Not only will Returning Doms be subject to tax on income and gains arising to them directly, but they will also suffer tax on income and gains arising to offshore trusts that they have established. Additionally, their existing or future excluded property trusts will enter into the relevant property regime for the period of UK tax residence, regaining excluded property trust status on loss of that tax residence. Repeated substitution of excluded property status for relevant property status and vice versa would be likely to have a substantial impact not least in terms of administration, particularly if previous transactions need to be recreated for the purpose of calculating relevant property charges, or there is a risk of a ten-year charge arising during the period of the Returning Dom’s UK residence. The ten-year charge is expected to be apportioned based on the duration of UK residence over the previous ten years.

Offshore trusts for Arriving RNDs
Under the current proposals, Arriving RNDs will not suffer the same treatment as Returning Doms as regards trusts. Their excluded property trusts will retain tax-advantaged status following acquisition of deemed-domicile under the 15/20 Rule (although their worldwide estates will otherwise be subject to inheritance tax). Foreign income and gains arising within offshore trusts will also seemingly accumulate free of UK tax until a benefit is received.

However, the consultation provides that in future no connection will be made between benefits received from offshore trusts and the income or gains from which they derive. Rather, it is the taxable value of benefits that will be relevant. While on one hand trustees may be glad not to need to recreate past transactions in order to establish how benefits are taxed, there are potentially significant disadvantages where a trust has no income or gains or has even generated losses.

The government has yet to take a position on whether the above trust treatment should apply to all RNDs. If RNDs are not all treated equally, they will need to contend with separate sets of rules depending on whether or not they have become deemed-domiciled under the 15/20 Rule.

What could this mean in practice?
Non-UK domiciled clients of all categories (short-term RNDs, RNDs paying the remittance basis charge, RNDs born in the UK with UK domicile of origin, and RNDs who could be caught by the new 15/20 Rule) will now be looking for guidance. Some of the points they may be considering are:
Confirmation of their domicile status under general law and the existing deeming rules.
How much time is spent in the UK and abroad in light of the 15/20 Rule and the impact of UK residence for Returning Doms.
The prospect of moving to the arising basis of taxation after 2017 and alternative deferral vehicles (clients who arrived in the UK in tax year 2002/03 could be deemed-domiciled from 2017).
Reducing or otherwise planning for untaxed foreign income and gains beyond acquisition of UK deemed-domicile under the 15/20 Rule.
The impact of inheritance tax from the beginning of the 16th year in the UK rather than the 17th, and the 6-year inheritance tax tail.
A review or restructuring of existing trust arrangements given the proposed taxation of trust benefits for Arriving RNDs and, for Returning Doms, the loss of excluded property status.

Life Assurance
A UK-compliant life policy issued from Lombard International Assurance S.A. can offer a series of benefits for a UK taxpayer including the accumulation of income and gains on linked investments without the burden of tax (other than tax withheld at source which can often be reclaimed under Luxembourg’s network of tax treaties).

Given that growth on the assets arises to the insurer rather than to the UK resident, there may be no need to use the remittance basis, pay the associated charges or maintain multiple segregated accounts abroad. Clean capital policies can also be given as security for loans into the UK under certain circumstances.

A life policy, being a non-income producing asset, can ensure that there are no taxable sums arising in the trust and, as a result, no income or capital gains tax charge for the non-remittance basis user.  A life policy, such as the Lombard International Assurance S.A. Wealth Preservation Trust, can often provide protection from or mitigation of inheritance tax while generating a tax–efficient ‘income’ stream.


To learn more about our solutions please contact Simon Gorbutt, Steve Sayer or your usual Lombard International Assurance representative.

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