How will non-dom rules affect your clients?

Laura Wilkinson, senior solicitor at Brodies, says navigating the UK Government’s guidance on non-doms taxation can be a challenge for financial advisers.

Offshore tax issues have never been a more contentious topic in the UK. The Government’s efforts to “close the net” on wealth held overseas have been met with broad support from some quarters and vociferous criticism from others. The need to reduce the national debt is clear, but critics argue a hostile tax environment is simply going to drive the wealthy overseas, taking any hope of a trickledown effect with them.

In 2008, the historically benevolent tax treatment for UK residents domiciled overseas was swept away, while HMRC’s increasingly aggressive approach (backed up by recent case law) towards UK domiciled individuals who claim to be non-resident has led many bewildered businesses and individuals to seek advice on moving their interests overseas. The mainstream media’s attacks on “fat cat non-doms” and “tax exiles”, contributes to a general atmosphere of confusion and disquiet. So what does all of this mean for taxpayers, and potential taxpayers?

Non-domiciled UK residents

“Non-doms” are individuals resident in the UK for tax purposes but with strong links to another country, through birth or the birth of their parents. They must have an intention to leave the UK at some point in the future and live in that other country. Establishing a taxpayer’s domicile may require a detailed assessment of their personal circumstances. In 2008 there were around 120,000 registered non-doms in the UK. A recent report by The Financial Times suggests there has been a 25% drop in applications from non-domiciled individuals seeking to be resident in the UK but, of course, it is unclear how much of this reduction is due to a more stringent tax code and how much is down to global recessionary trends.

Until April 2008, non-UK domiciled adults did not have to pay UK tax on their overseas income and capital gains unless they brought them into the UK (the “remittance basis” of taxation). However, since 6 April 2008, each non-dom who has been resident in the UK for seven out of the previous 10 years must pay an annual fee of £30,000, through the self assessment tax system, in order to continue being taxed on the remittance basis. Otherwise, their worldwide income and gains will be subject to UK tax. These rules affect UK residents who are either non-domiciled or not “ordinarily resident” in the UK. There are also significant ramifications for many UK resident trustees and beneficiaries of offshore trusts.

The UK has double taxation treaties in place with most countries, which means most taxpayers should be able to avoid being taxed twice on their overseas earnings if they choose not to pay the £30,000 fee. However, specialist advice must be sought.

Non-UK residents

Tax residency is a separate concept from domicile, although the two are often confused in the press. The rules around residency are spectacularly abstruse and there are many who think a statutory definition of residence in UK tax law would be a very good thing. Broadly speaking, a non-resident is someone who has left the UK and spends less than 183 days in the UK in any one year, while an individual is not ordinarily resident if they spend no more than an average of 90 days each year in the UK over a four year period. This, of course, is a gross oversimplification and professional advice is essential – becoming resident in another country is much easier than ceasing to be resident in the UK.

If you are lucky enough to be both non-UK resident and non-ordinarily resident, you are exempt from UK tax on all income earned outside the UK and from UK tax on capital gains arising both in the UK and overseas. The removal of the capital gains tax liability is a particular boon for high net worth individuals who decide to liquidate their UK assets in preparation for retirement in more agreeable climes overseas, while the new 50p income tax band has left many taxpayers eager to shift to another jurisdiction.

Unfortunately, arriving at a position where you are comfortable with your non-resident status is difficult to say the least. The legislation and guidance available is convoluted and unclear and it sometimes seems HMRC is determined to interpret the facts of a situation to fit its own conclusions.

Last month the Court of Appeal poured fuel on the flames with its decision in the case of Gaines-Cooper. In that case, Robert Gaines-Cooper, an entrepreneur who has lived in the Seychelles for the last 30 years, was ruled to be resident in the UK for tax purposes, despite believing he had properly followed the guidelines set out in HMRC’s guidance booklet IR20 (Residents’ and Non-Residents’ Liability to Tax in the UK). HMRC took the position that his “pattern of lifestyle” showed he was UK resident.

His wife lived in England, his son went to school in England and he retained an estate in Oxfordshire where he kept a collection of classic cars, guns and artworks. In other words, it is not sufficient to count the days you spend in the UK each year – HMRC will assess all your circumstances and the determination process may be very complicated. As a result of this decision, Mr Gaines-Cooper was found never to have ceased to be UK resident and HMRC will now seek £30 million in back tax from him. This is a salutary warning for the many entrepreneurs who live in places like Monaco and Switzerland but make regular trips for business and personal reasons to the UK.

Next steps

HMRC’s approach to non-doms, and even more so to non-residents, can be erratic, and navigating the maze of so-called guidance on residency issues remains a challenge of Daedalean proportions. The debate rolls on as to whether the Government’s newfound aggression in this area will actually raise money for the national coffers or simply drive wealthy people away. What is certain is the uncertainty inherent in the current regime is something that really could damage both the private and public sectors in the UK.

At present, it is unlikely simplification will happen any time soon. However, by remaining aware of the risks and consulting an expert adviser at the first opportunity, you will be in the best possible position to defend your, or your clients’, income and assets.