Concrete Analysis

New non-dom clampdown to hit British expats

Non-domiciled individuals are being encouraged to 'de-envelope' residential property from corporate structures into simpler ones

PUBLISHED : Tuesday, 21 July, 2015, 11:41pm
UPDATED : Thursday, 23 July, 2015, 9:08am

Last week, the British Chancellor, George Osborne, delivered the first Conservative budget in 19 years. He announced three major changes for non-domiciled individuals or "non-doms" that will apply from April 2017.


  • Non-doms resident in Britain for 15 of the past 20 tax years will be deemed to be domiciled in Britain for income tax, capital gains tax and inheritance tax (IHT) purposes.



  • Individuals with a British domicile of origin who have left Britain and acquired a domicile of choice, for example in Hong Kong, will always be treated as domiciled in Britain if they return to Britain. It is proposed that this rule will apply even if they return to Britain before April 6, 2017. In addition, trusts that they have created while non-resident will not be treated favourably for tax purposes.



  • The extension of IHT to residential property in Britain held indirectly by non domiciled individuals or by excluded property trusts.


A consultation paper will be issued after the summer break inviting comments on all of the above proposals. Of the three changes affecting non-doms the extension of IHT to British residential property held indirectly by non-doms was the greatest surprise.

One of the themes of the coalition government was to increase the tax paid by non-resident and non-dom owners of residential property. For instance, in 2011 the Annual Tax on Enveloped Dwellings (ATED) was announced, which introduced a charge for certain residential properties held by companies. The Conservative government now proposes to introduce a change to the inheritance tax rules so that any indirect owner of residential property in Britain is subject to IHT, regardless of how that property is owned.

For the purposes of these proposals, it does not matter whether the property is for personal use or is let out commercially. The charge will apply where British residential property is subject to the current ATED rules. The provisions will apply irrespective of whether the beneficial owners are resident or non-resident.

IHT will be imposed on the value of the residential property owned by an offshore company on the occasion of a chargeable event. Where the company is held by individuals a chargeable event will include: the death of the individual who owns the shares in the company; a gift of the shares in the company into trust and the death of the donor within seven years of having given the shares in the company to another individual.

In relation to discretionary trusts, IHT will be charged on the value of the residential property on 10 year anniversary dates and on exits, irrespective of whether the property is held through a non-British company or other non-British entity.

It is intended that the same reliefs and charges will apply as if the property was held directly by the shareholders of the company. So a deceased shareholder who owned the shares directly will have the benefit of spouse exemption. However, spouse exemption will not generally be available if the offshore company shares are held by a trust.

If the property is purely an investment and the shareholders are individuals, an offshore company may still be an attractive structure. Relief from ATED can be claimed, the rate of tax on rental income will still only be 20 per cent, any capital gain on a future sale will also be taxed at 20 per cent and if the shareholder is married a properly drafted will should ensure spouse exemption applies for IHT.

That said, it is clear that these changes are intended to encourage non-doms to "de-envelope" residential property from corporate structures and move into simpler more straightforward structures outside the scope of future ATED charges, ATED reporting or ATED-related capital gains tax. If the property is mortgaged or has increased in value since 2013 there may, however, be significant costs of "de-enveloping".

If a positive can be taken from this announcement, it is recognition that some owners of residential property may be trapped in inefficient structures due to the costs of restructuring. The government has promised to consult on these costs and it may be possible that a limited exemption or deferral may be introduced for "de-enveloping".

Katie Graves is partner at Withers Hong Kong