HMRC and the UK Government are in the middle of a balancing act: weighing up media and political pressure to ensure everyone pays their “fair share of tax” with the economic benefit of a competitive tax regime. It is crucial to the UK economy that Britain remains “open for business” and maintaining a competitive tax regime plays an integral part in attracting new business. The potentially favourable tax regime available to non-UK domiciliaries has historically played its part in attracting wealthy individuals and business owners to the UK. The rules on the tax treatment of non-UK domiciliaries are currently in a state of flux and it would perhaps be understandable to be of the view that any changes are likely to be unfavourable from the taxpayer’s perspective. However, HMRC appear to acknowledge the importance of non-UK domiciliaries to the UK economy. This acknowledgement was evident in the foreword by David Gauke, Financial Secretary to the Treasury, to HMRC’s consultation document setting out the proposed changes which stated:
The government wants to attract talented individuals to live in the UK who will help to contribute to the success of this country by investing here and creating jobs. The long-standing tax rules for individuals who are not domiciled in the UK are an important feature of our internationally competitive tax system, and the government remains committed to that aim.
So what are the changes to the taxation of non-UK domiciliaries and is it all bad news?
HMRC published a consultation document setting out their proposed reforms to the taxation of non-UK domiciliaries back in September 2015. The new regime will be effective from 6 April 2017 and legislation was to be included in Finance Bill 2016. Publishing draft legislation has been pushed back to 2017; however, it would appear that HMRC continue to be committed to a new regime being in place in April of next year.
Numerous articles have been written on the technicalities of the new proposals and how they may impact on taxpayers depending on their current and historic UK residence and domicile position. Explaining the possible changes and potential implications requires an article by itself and once you have ploughed through the possible implications it is easy to miss the fact that these changes potentially present opportunities for certain taxpayers. Whilst we do not have published legislation (and therefore, the position continues to be uncertain), HMRC have confirmed certain matters and this may allow taxpayers to take action now before the new rules are introduced. Such action could present long term tax benefits.
Long term non-UK domiciled individuals
One of the main changes is that, with effect from 6 April 2017, individuals who are non-UK domiciled will be deemed to have a UK domicile for tax purposes if they have been resident in the UK for more than 15 out of the past 20 tax years. Once the individual has become deemed UK domiciled, they will no longer be able to claim the remittance basis and, consequently, will be subject to UK tax on their worldwide income and gains. Furthermore, all of the individual’s worldwide assets would be within scope of UK inheritance tax.
What are the potential benefits?
If you anticipate becoming deemed UK domiciled under the new regime from 6 April 2017, now is the time to act in order to benefit from an offshore trust structure. If you set up an offshore trust now (ie before you become deemed UK-domiciled under the new regime) you should not be taxed on foreign income and/ or chargeable gains which are retained in the trust. Furthermore, the trust should also provide an effective shelter from UK inheritance tax (even if you subsequently become UK deemed domiciled under the new regime in the future). There are, of course, certain asset types that would need to be excluded, UK residential property for example. However, an effective deferral of income and capital gains tax could potentially be achieved with the added benefit of protection from UK inheritance tax.
What action should I be taking now?
Timing is crucial. If you anticipate becoming deemed UK domiciled under the new regime, any steps to establish an offshore trust in order to potentially benefit from tax savings must be taken before the new rules are introduced. We would recommend taxpayers in these circumstances take action now to establish their offshore structure.
If you would like to discuss either the proposed new rules for non-domiciliaries or any practical aspects of establishing an offshore trust structure feel free to contact one of our team.
Kevin Loundes, Senior Tax Manager – email@example.com
Stewart Fleming, Group Managing Director – firstname.lastname@example.org
Stephen Colderwood, Business Development Manager – email@example.com