The changes from 6 April 2017 to the taxation of non-UK domiciled individuals provided some valuable advantages to the settlor of a protected trust. Foreign income and gains in such trusts would enjoy protected status and would only be taxed if matched to capital payments or distributions.  Trusts tainted by additions after acquisition of UK deemed domicile would become transparent for tax purposes, impacting income and gains as they arise in the trust itself.

Despite the positive policy initiative behind these rules, professional bodies such as the CIOT, STEP and ICAEW noted a flaw in the interaction of the protected trust legislation with Regulation 19 of the Offshore Funds (Tax) Regulations (SI 2009/3001) (“Regulation 19”). Regulation 19 classifies offshore income gains (gains on the disposal of non-reporting funds) as ‘relevant foreign income’ of the individual where the remittance basis applies to the individual in a tax year and the individual is not domiciled. In general, an offshore fund, which has not been approved by HMRC as a reporting fund (gains taxed on an arising basis in the fund), is a non-reporting fund (gains taxed on distribution from the fund). A fund is therefore automatically non-reporting until an application for reporting fund status has been made. However, as a deemed domiciled individual cannot access the remittance basis, offshore income gains cannot be relevant foreign income, and therefore cannot be protected alongside other foreign source income in the trust.
HMRC had originally stated that “As a part of these reforms, the government will ensure that any individual who becomes deemed-UK domiciled will continue to be protected from UK tax on offshore trusts that they have settled while neither they nor their spouse or children receive any benefit from the trust.”

HMRC update

Despite the promised position, HMRC has now stated that:

“A decision has been made not to amend the current legislation to include income arising in offshore non-reporting funds in the foreign trust exemptions at this time. The current demands placed on parliamentary resource make it difficult for the government to justify returning to the legislation at this time to add to the generous package of protections which the government has already legislated for in the extensive reform of the non-dom rules last year. Going forward, HMRC will continue to monitor this situation and engage with stakeholders.”


As a result of Regulation 19 not being amended, deemed-domiciled individuals face an immediate tax charge on offshore income gains that arise in what would have been a protected trust. Those long-term resident and now deemed-domiciled individuals with offshore trusts will be left without trust protection for offshore income gains from non-reporting funds, and they may need to revisit their tax position if income gains have been received by an offshore trust since becoming deemed domiciled.
This could potentially impact any UK deemed domiciled individual with an offshore protected trust and undermine protected status. Indeed, a CIOT survey was conducted in 2017 to assess the scale of the problem, should Regulation 19 not be amended. It noted that from the responses collected from offshore trustees that as many as 40% of protected trusts, established by individuals before they acquired deemed domiciled status, hold investment portfolios in non-reporting funds.

What is next?

The response from HMRC is disappointing, and it leaves a question mark hanging over future rule changes, if any, and whether HMRC will allow a retroactive application of future revised rules to trusts that lose their protected status, as a result of this flaw in Regulation 19.

The Currently Non-Domiciled

For UK non-domiciled individuals who are settlors of a protected offshore trust, it’s essential that advice is taken on the existing or future status of any trust to understand tax and reporting obligations which may arise.  

Since non-reporting fund gains are assessed to income tax in protected trusts as they arise, one option which may be attractive as a simple, compliant and globally recognised solution, particularly to those considering establishing a protected trust, is the acquisition of a UK compliant Lombard International Assurance life policy (Life policy).
To the extent the policy is linked to non-reporting funds, no income gains arise to the trustees, with the result that protected status, and even the risk of tainting, are of minimal concern and investment strategies need not be altered in light of HMRC’s recent statement. The policy allows income and gains on underlying assets to accrue and grow free of tax until sums are withdrawn.

The Nearly Deemed-Domiciled

 For those individuals who are on the cusp of becoming UK deemed domiciled, but still have the benefit of the remittance basis of taxation (“RB”) and can elect for it, a Life policy could assist in reaching the objective expected to be achieved by the protected trust legislation. For example, compare the following:

  • Person ‘P’ is currently non-UK domiciled and the settlor of a protected trust. He is happy to pay the RB charge for certain assets offshore and is not taxed on gains arising in non-reporting funds (the “Fund”). P subsequently becomes UK deemed-domiciled and gains in the Fund total GBP 5 million. As P is now UK deemed-domiciled and can’t claim RB, P is taxed on gains on the disposal of non-reporting funds in a protected trust at the income tax rate of 45%. P therefore incurs a tax charge of GBP 2.25 million.

  • Person ‘P’ is currently non-UK domiciled and is the settlor of a protected trust and continues to pay the RB charge. While he is non-UK domiciled, the protected trust takes out a Life policy which invests in non-reporting funds. P subsequently becomes UK deemed-domiciled and gains in the Fund total GBP 5 million. As disposals of non-reporting funds within the Life policy aren’t taxable, tax charge incurred is GBP 0 million. These gains are reinvested within the policy and income tax will be due when the policyholder makes a partial or full surrender. 

The Already Deemed-Domiciled

 Individuals, who have become deemed domiciled with a protected trust and unfortunately are no longer able to claim the remittance basis, could still benefit where an existing trust takes out a Life policy, subject to tax payable on disposal of any existing non-reporting funds. As above, the gains arising to a Life policy from underlying non-reporting funds would grow free of UK tax until a chargeable event takes place. Additionally, similar benefits could arise where a UK deemed-domiciled individual holds a Life policy directly.
Applicable to all the categories of individuals above, a Life policy gives a person more freedom to choose the timing of taxation, when a withdrawal or surrender is made and the ability to accumulate tax free allowances each year to use them later. So although HMRC’s update delivered coming into winter may set a bleak outlook for the promised reliefs for protected trusts, individuals who created protected trusts on reliance of these rules still have options open to achieve the same goals.

Lana Mallon TEP
Senior Wealth Planner 
Lombard International Assurance