Non-domiciled and deemed domiciled settlors

By Tolley

The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Non-domiciled and deemed domiciled settlors
  • Significance of domicile for non-resident trusts
  • Overview of charging provisions and their application to non-doms
  • Settlements code
  • Transfer of assets abroad code
  • Capital gains tax charges under section 86
  • Tainting
  • Further information

Significance of domicile for non-resident trusts

The extent of a trust’s liability to UK income tax and capital gains tax is dependent upon its residence status. Within the trust, the liability of a non-resident trust is restricted to UK source income. See the UK tax position of non-resident trusts guidance note.

Since non-resident trusts may escape liability to UK taxation on their foreign income and gains, there are extensive anti-avoidance rules which charge UK residents who have created or benefited from them. These provisions and their application to UK resident and UK domiciled individuals are described in more detail in other guidance notes in this sub-topic. Their scope is so wide that the incidence of tax on UK domiciled settlors and beneficiaries of non-resident trusts is at least as burdensome, if not more so, than that of UK resident trusts.

However, for non-UK domiciled settlors, there has been some mitigation from UK tax liabilities. Historically, individuals of foreign domicile who became resident in the UK have been able to avoid UK taxation by retaining their wealth within an offshore trust. By claiming the remittance basis of charge, a non-domicile could limit his UK tax liabilities to the income and gains he brings in to the UK. Meanwhile, if he chose a low tax jurisdiction for his trust, the non-remitted income and gains could accumulate virtually tax-free within the protection of the trust.

Changes were introduced in 2008 to scale down some of the advantages of long-term non-domiciled status. The remittance basis charge was introduced to impose a cost on accessing the benefits of the remittance basis. See the Remittance basis ― overview guidance note in the Personal Tax module (subscription sensitive). As a consequence, the remittance basis concession became advantageous only for those with significant wealth held offshore.

Notwithstanding the imposition of a charge for the use of the remittance

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