The proposals were first mooted in Budget 2015, with a consultation in September last year on the ‘deeming provisions’, which are designed to ensure that  individuals who live in the UK for a long time will have to pay UK tax on their worldwide income and gains in the same way as an individual who is domiciled in the UK.

They will also mean that any individual who is born in the UK and who has a UK domicile of origin will no longer be able to claim non-dom status for tax purposes while they are living in the UK, even if they had subsequently left the UK and acquired a domicile of choice in another country.

In the latest consultation, the Treasury states: ‘Post EU referendum, the aspiration for a tax system that balances fairness and international competitiveness remains the same, and the government believes it is still appropriate to proceed with these reforms.’

The consultation provides an update on the original plans and sets out the detail of proposals to charge IHT on UK residential property.

The Treasury says it plans to bring residential properties in the UK within the charge to IHT where they are held within an overseas structure. This charge will apply both to individuals who are domiciled outside the UK and to trusts with settlors or beneficiaries who are non-domiciled.

These changes will come into effect from 6 April 2017 and will be legislated as part of the 2017 Finance Act.

To implement the extended IHT charge, the government proposes to remove UK residential properties owned indirectly through offshore structures from the current definitions of excluded property currently provided by sections 6 and 48 of the Inheritance Act (IHTA) 1984.

The effect will be that such UK residential properties will no longer be excluded from the charge to IHT. This will apply whether the overseas structure is owned by an individual or a trust.

Once the legislation comes into effect, shares in offshore close companies and similar entities will no longer be excluded property if, and to the extent that, the value of any interest in the entity is derived, directly or indirectly, from residential property in the UK.

There will be no change to the treatment of companies other than close companies and similar entities.

Similarly, where a non domiciled individual is a member of an overseas partnership which holds a residential property in the UK, such properties will no longer be treated as excluded property for the purposes of IHT.

No change will be made to the taxation of UK property which is held by corporate or other structures which are owned by UK domiciled individuals or by trusts made by UK domiciled individuals.

The change will be effective for all chargeable events which take place after 5 April 2017. The Treasury says the legislation will need to define the types of property which will become liable to IHT, but in order to reduce any potential additional complexity, it intends as far as possible to use definitions which currently exist within tax legislation.

The model favoured by the Treasury is the definition of a dwelling which was introduced in Finance Act 2015 for the purposes of capital gains tax (CGT) on disposals by non-residents of residential property in the UK.

However, the Treasury notes there are a number of important distinctions between non-resident CGT and the intended IHT charge. One is that non-resident CGT is not payable by any individual who is resident in the UK. Another is that it is not charged on a dwelling where it is used as a main home. The consultation makes clear it is not the intention to exclude such properties from the scope of the extended IHT charge, and the draft legislation has been amended to reflect this.

On the issues of change of use of a property, the government proposes to introduce a rule based on that which currently applies for the purposes of Business Property Relief (BPR). This stipulates that relief will only be available where the property in question has been owned by the transferor for at least two years immediately before the transfer takes place.

The draft legislation includes a targeted anti-avoidance rule in the new legislation, the effect of which will be to disregard any arrangements where their whole or main purpose is to avoid or mitigate a charge to IHT on UK residential property.

The proposals include a number of other rules which the Treasury says are to aid compliance.  It says that where UK property is owned through an overseas company, HMRC might have difficulties in identifying whether a chargeable event has taken place and hence whether a liability to IHT has arisen.

To address this, the government intends to extend responsibility for reporting to HMRC when chargeable events have taken place and for paying any tax which arises.

The government believes HMRC should have an expanded power to impose the IHT charge on indirectly-held UK residential property so that the property cannot be sold until any outstanding IHT charge is paid.

In addition, a new liability will be imposed on any person who has legal ownership of the property, including any directors of the company which holds that property. This will ensure that IHT is paid, though only when HMRC are aware that a charge has arisen and have taken steps to collect the liability. The relevant legislation will be published later in 2016.

The consultation looks in detail at the details of the proposal to deem long-term residents as UK domiciled for tax purposes once they have been resident in the UK for 15 of the past 20 years (the 15/20 test) and comments on the responses received from the earlier consultation.

These indicate the Treasury has rejected requests to omit the years spent in the UK during childhood from the test, but intends to put in place a number of transitional protections for those who come under the new rules.

Transitional rule

A transitional rule will be introduced that will ensure that the reforms do not have retrospective effect on those individuals who were non-resident before the announcements were made. On the treatment of the employment income relating to an earlier tax year, the government says such income will be taxable only to the extent that it is remitted to the UK.

However, the Treasury says it does not agree that those people who left the UK and then subsequently returned should be protected from the effects of these reforms on their deemed-domiciled status for inheritance tax purposes, even if they returned to the UK before the date the announcements were made.

Nonetheless, where an individual transfers a property that is situated abroad while they are non-UK domiciled and then dies after having become deemed-UK domiciled, the transfer will be outside the charge to IHT.

Individuals who will become deemed-domiciled in April 2017 because of the 15/20 test will be able to rebase directly held foreign assets to their market value on 5 April 2017. Rebasing will apply on an asset by asset basis and there will be no requirement that any part of the sales proceeds relating to the part of the gain which arose before April 2017 should be left outside the UK.

The consultation also considers the position of non-doms who have lived in the UK for a long time and who hold a large pool of offshore funds containing capital as well as income and gains. From April 2017 they will have to pay tax on any future growth in the fund as it arises. However, they will still be unable to bring the pre-April 2017 capital into the UK until they have first paid tax on the pre-April 2017 foreign income/gains.

To mitigate this, the Treasury has decided to introduce a temporary window in which such individuals will be able to rearrange their mixed funds overseas to enable them to separate those funds into their constituent parts. This window will last for one tax year from April 2017 and it will provide certainty on how amounts remitted to the UK will be taxed. Cleansing will not be available where an individual is unable to determine the component parts of their mixed fund.

In addition, the government has reviewed its original plans for non doms who have set up an offshore trust before they become deemed-domiciled, which included proposals to base the new rules on the taxable value of benefits received by the deemed-domiciled individual without reference to the income and gains arising in the offshore structure.

The Treasury says  it recognises a benefits charge could in some circumstances have a punitive effect on non-doms compared to UK domiciles and so has dropped the idea.

Instead, it intends to extend he CGT anti-avoidance legislation at section 86 TCGA 1992 taxes to apply to all those who are deemed-domiciled. This will ensure that those who are deemed-domiciled pay tax on gains arising in a non-resident trust in the same way as an individual who is domiciled in the UK.

The consultation stresses that the Treasury is seeking ‘innovative ideas’ on ways in which BIR could be changed and expanded to make it easier for remittance basis taxpayers to bring their money from overseas to invest in UK businesses, stating that the current regime may be unnecessarily complicated.

Grace period

Commenting on the consultation, described as containing ‘some helpful proposals’, Lucy Johnson, special counsel at law firm Withers said: ‘There has been speculation that the EU referendum vote might push back, or even see the end of, the proposed non-dom reforms, but this update indicates that change is still on the government's agenda and that the timetable has not changed.

‘The draft legislation will need to be looked at carefully, but the proposals allow non doms a grace period from April 2017 to April 2018 to separate out mixed funds and thus allow them to bring clean capital into the UK untaxed.

'They also confirm that non doms will be allowed to rebase their assets as at April 2017 for CGT. The proposals for the taxation of income and gains in trusts have been improved too.

‘There are some more questionable suggestions, including what appears to be the singling out of non-doms who were born in the UK.  This group seems to be separated from other kinds of non-doms and given short shrift in terms of their treatment by HMRC.  Lastly, although there is now greater clarity on the proposed rules for de-enveloping UK property owned by non-doms, it is regrettable to see that there are no reliefs offered to incentivise this process.’

The consultation closes on 20 October.

HMRC Reforms to the taxation of non-domiciles: further consultation is here