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Tax considerations for returning non-doms



One of the UK’s major exports is its people. Many people leave the UK to work, retire or settle abroad. This can result in a change of domicile from the UK to that of their adoptive home. What are the tax consequences for those who remain abroad and what are the tax consequences for those who return?


Generally, non-UK domiciled individuals have certain tax advantages over those domiciled in the UK, provided they are not deemed to be domiciled in the UK as a result of being UK resident for 15 out of the previous 20 tax years. If they are UK resident, they can avail themselves of the “remittance basis” to defer or avoid liability to tax on their non-UK income and gains except to the extent that they are remitted (ie brought) to the UK. Only their assets situated in the UK (with some exceptions) are exposed to inheritance tax (IHT), their non-UK assets being outside the scope of IHT ("excluded property").

The UK comprises three different countries for the purposes of domicile: England and Wales, Scotland and Northern Ireland. For simplicity, however, this briefing will just refer to the law of domicile for English legal purposes and UK domicile for tax purposes. Under English law, everyone has a domicile, the jurisdiction of one’s “home” for certain legal purposes, such as succession and family law.

If an individual moves abroad, he or she may acquire a foreign domicile of choice, but whether that happens is very dependent on the facts of the case. Take siblings William, Rachel and Simon. They were born in the UK and acquired English domiciles of origin at birth from their father or (had their parents been unmarried) their mother. They will retain their domiciles of origin unless they acquire domiciles of choice as a result of moving to another country and forming the intention of living there permanently or indefinitely (as supported by facts on the ground). Assuming they (or their successors) wish to assert a change of domicile, the burden of proving it rests with them or their successors.

William joins an international bank, Pierrepoint, and gets posted to San Serif, an independent, low tax financial centre. Rachel retires to the sun-kissed island of Erewhon. Simon settles in distant Utopia, with his young family.


As a loyal servant of Pierrepoint, William relocated from San Serif wherever the bank posted him and spent several years at a time in New York, Singapore, Hong Kong and Tokyo before finally being posted back to San Serif. 30 years since leaving the UK and now burnt out, he decides to return to the UK.

While living outside the UK, he met numerous expatriates at the bar or on the golf course, and taking up their suggestion, set up a San Serifian trust for himself and family comprising the wealth he acquired through his hard work at Pierrepoint. There was no point seeking UK advice as he had had no connection with the UK for so many years.

The chances are that William did not acquire a domicile of choice in San Serif, or any other country, as it appears his moves to each of the countries were dictated by Pierrepoint. Therefore, he might never have formed the intention of residing permanently or indefinitely in any of the countries to which he was posted. No matter how long he resided outside the UK, that fact alone will not result in a change of domicile. It will be up to William to satisfy a sceptical HM Revenue & Customs (HMRC) that he had a foreign domicile (under general law) when he established the trust. If he can’t do this, he will be liable for historic inheritance tax (IHT) charges (the entry charge of 20 per cent of the value of the assets transferred to the trust, plus additional 6 per cent IHT charges for each 10-year anniversary of the trust). 

Even if he had a foreign domicile for general legal purposes, depending on timing, he could still have been deemed domiciled in the UK for IHT purposes, resulting in the same exposure to historic IHT charges. In order not to be deemed domiciled for IHT purposes, he would have had to have acquired a foreign domicile of choice at least three years before making the trust.

He has been in the UK for less than one tax year, when he dies suddenly from heart failure. In the absence of clear evidence of a change of domicile before he returned to the UK (and that the change preceded the trust by three years or more), the IHT charges will mount up: the 20 per cent entry charge, the 6 per cent 10-yearly charge(s) and 40 per cent on death (because, as a presumed UK domiciled settlor and beneficiary, he would have reserved a benefit in the trust assets). Not a happy outcome.

William had retained a house in the UK, which he had owned for decades. Once he returned to the UK, he decided it was no longer suitable, so he sold it. As it had not been his main residence, he was liable for capital gains tax (CGT) at 28 per cent on the entire gain, going back decades. Had he sold the property before becoming UK resident, he would only have been liable for CGT on the gain arising since April 2015, a significantly lower figure.


Rachel sought advice several years previously and was advised she had acquired an Erewhonese domicile and that she was not deemed domiciled in the UK for IHT purposes. Based on that advice, she made an Erewhonese trust for estate planning purposes.

Having intended to see out her days in Erewhon, Rachel has to return to the UK at short notice in July for medical treatment, expecting to return to Erewhon once she’s recovered. Sensibly, she sold some shares before leaving so she would have some tax-free funds in the UK.

Once in the UK, she realises the treatment will take much longer than she had expected, meaning she becomes UK resident for that tax year, but at least she’d sold the shares before she came to the UK. Not quite. Her residence in the UK is backdated to 6 April, the start of the tax year. Split year treatment (dividing the tax year into the pre-residency and residency periods) does not apply to her circumstances, nor do any of the provisions of the UK / Erewhonese double tax treaty, so she finds she has a liability to capital gains tax on what she brought into the UK. However, she sold shares she had acquired many years ago, so presumably most of that gain would be exempt as they didn’t increase in value during the tax year in which she became UK resident. Again, not quite. The whole gain is taxable as there is no rebasing (or mark to market) of assets when a non-resident becomes UK resident.

Rather annoyed, Rachel comforts herself with the thought that, at least, none of her other foreign income or gains will be exposed to tax in the UK as long as she leaves them outside the UK and, in any event, her trust will protect her from tax on income and gains. Sadly for Rachel, this is not the case either because she had a domicile of origin in the UK and she was born in the UK, which, unbeknown to her, makes her a “returner” for these purposes. This means that as soon as she is resident in the UK for tax purposes, she is deemed to be domiciled in the UK for income tax and CGT purposes. As a result, she is liable on the arising basis for tax on all her foreign income and gains, as well as those in her trust. At least she can take out the proceeds of sale of some shares in the trust, which were sold without any gains. Again, that won’t work because any capital payment from the trust will bring trust income and gains into charge, including those arising or realised before the tax year in which she became UK resident.

Rachel comforts herself with the thought she’ll soon be free of this tax mess as she plans to return to Erewhon in the same tax year, but she relapses and ends up being resident in the UK in the following tax year, which happens to coincide with the 10th anniversary on which she made the trust. Under the IHT rules someone born in the UK, with a domicile of origin in the UK who is resident in the tax year in question and was resident in either of the preceding two tax years is a "formerly domiciled resident" and deemed to be domiciled in the UK for IHT purposes.  Consequently, her trust is subject to a 10-yearly charge and, should the Grim Reaper come for her while thus deemed domiciled, the entire trust fund will be subject to IHT at 40 per cent on her death. The somewhat dim ray of sunshine for Rachel is that if she manages to survive and leaves the UK, she will lose her deemed domiciled status as returner immediately (as long she does not stay for 15 years or lose her Erewhonese domicile).


Simon is planning to come to the UK to open a new branch of his business and recognises that he will need to be around for extensive periods over a few years before he can return to Utopia.  He seeks UK advice in the tax year preceding the tax year of his return to the UK.

In the tax year before returning to the UK, he is advised (among other things) to do the following:

  1. Create "clean" capital which can be brought to the UK tax-free,
  2. Cash in his personal portfolio bond or arrange for its terms to be changed,
  3. Review and restructure his trust arrangements so as to avoid having income and gains attributed to him while in the UK,
  4. Review whether any changes needed to his trusts to reduce exposure to IHT while he’s in the UK,
  5. Consider making gifts to his wife and children so as to avoid the risk of IHT in the event of his unexpected death,
  6. Review his will.

Simon can create “clean” capital by realising gains on his portfolio, which he can do by sales on the open market, by selling for a loan note to a trust or by transferring the portfolio to a company (which he owns). Each of these steps will eliminate the inherent gains in those assets so that he either has cash or the investments rebased for UK tax purposes, thereby avoiding liability to CGT (or income tax on offshore income gains: OIGs) in relation to gains that accrued before he became UK resident. Simon is particularly aware that most of the collective funds he holds are not registered with HMRC as “reporting funds” and that, as “non-reporting funds”, any gain realised on their disposal will be an OIG, resulting in an income tax liability at 45 per cent, rather than the usual 20 per cent on capital gains.

Many years ago, Simon was sold an insurance product in Utopia which was particularly attractive as he could choose the underlying investments. He is advised that this would be a personal portfolio bond, exposed to income tax charges on an annual (and cumulative) deemed 15 per cent gain in the bond. The insurer is reluctant to change the terms of the policy, so he cashes it in and buys a single premium insurance bond where the underlying portfolio is subject to discretionary management. He is advised that any income and gains in the bond will not be reportable or taxable in the UK, but that he will be able to encash up to 5 per cent per year of the original capital without a UK tax liability and that any unused 5 per cent allowance can be carried forward. It is only if he exceeds these thresholds that he will be liable for income tax on the excess.

Simon is the settlor of three family trusts. He could wind them all up to make life simpler, but he is concerned about the succession to those assets and the risks of expropriation in Utopia, where the politics can be rather changeable (though not quite like 2022 in the UK).

He opts to do the following:

With the first trust, he asks the trustees to confine the beneficiaries to his children and remoter descendants, excluding himself and his wife, and asking the trustees to switch their investments just to non-reporting funds. As a result, no trust income or OIGs will be attributed to him while he is UK resident, even though the trust will remain “settlor-interested”, but just for the purposes of CGT, not income tax.

With the second trust, he asks the trustees to confine the beneficiaries to his grandchildren and remoter descendants. As this trust was made before 17 March 1998, it can be made a “grandchildren’s settlement” so that it ceases to be “settlor” interested, and no capital gains realised by the trustees will be attributed to him.

Simon’s removal as a beneficiary from these trusts means he will no longer be reserving a benefit in those trust funds and, in the event of his death while in the UK, the trust funds will escape the 40 per cent IHT charge. He accepts that the trusts will be exposed to the 10-yearly charge at up to 6 per cent should the 10-year anniversary of the trusts coincide with his second or subsequent year of residence in the UK.

With the third trust, he and his wife may need to access its wealth in the future so he accepts he will be exposed to trust income and gains while in the UK. He chooses this trust as the one in which to retain an interest, however, as it holds shares in numerous start-up companies which should qualify for business property relief, as well as a working farm. This serves to eliminate or at least reduce the exposure to IHT in the event of his death while UK resident. 

He realises that he could make gifts to his wife and children now, while domiciled outside the UK for all purposes, so that the gifts fall outside the IHT net in the event of his death within seven years. As his wife is Utopian born and bred she has a Utopian domicile, so he realises there will be a domicile mismatch if he made any significant gifts to her while he’s treated as domiciled in the UK. He also realises that his will should be changed so that his entire estate does not go to her on his death, as the spouse exemption is limited to only £325,000. In those circumstances, if his wife opted to be treated as UK domiciled for IHT purposes, his estate would be exempt from IHT on his death. She is undecided whether she would wish to exercise that option, however, as she would be treated as UK domiciled for all IHT purposes for at least four years, thus bringing her worldwide estate within the scope of IHT. Accordingly, Simon changes his will to leave his estate on discretionary trusts for his wife and descendants with a letter of wishes to treat his wife as the primary beneficiary. The trustees of his will will have two years from the time of his death to decide, in the light of the circumstances then prevailing, whether they can avail themselves of the spouse exemption by appointing his estate to her (or conferring a life interest on her) or leave his estate in a discretionary trust.


All individuals with a certain level of wealth coming or returning to the UK should seek advice on tax pitfalls and planning opportunities and the earlier that advice is sought the better. This will enable structures to be put in place, restructured or unwound, depending on circumstances. Particular issues arise with expats returning to the UK. In particular, their domiciles should be closely examined, given the adhesive nature of a domicile of origin in English law, buttressed (if that’s the right word) by the deemed domicile rules. If it appears that the individual had not acquired a foreign domicile, then depending on the country of residence, it may still be feasible to take steps to eliminate gains before becoming UK resident. Specific advice should also be sought on the statutory residence test, as it has numerous traps for the unwary.

If you require further information about anything covered in this briefing, please contact Nick Dunnell or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2023

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Nick Dunnell


Nick's expertise in private client and tax involves acting for individuals, families and trustees in the UK and abroad to mitigate their tax exposure, and structure their wealth against potential threats posed to it. 

Nick's expertise in private client and tax involves acting for individuals, families and trustees in the UK and abroad to mitigate their tax exposure, and structure their wealth against potential threats posed to it. 

Email Nick +44 (0)20 3375 7573

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