The proposed changes that came into force on 6 April 2017 are the most significant taxation reforms for non-doms since 2008. For those who have been living in a cave, it means many more long term residents and offshore structures will be brought within the UK tax net under a new ‘resident for 15 of the previous 20 years’ rule. To understand how these changes impact UK non-doms, Citywealth spoke to a selection of UHNW advisers from within the private wealth industry: Sara Maccallum, senior partner at Boodle Hatfield, Mark Wingate, partner in private client tax services at Smith & Williamson, Dipan Shah, partner at PwC, Alex Ruffel, partner at Irwin Mitchell Private Wealth, Gillian Kennedy-Smith, principal associate at Mills & Reeve, and Michelle Tring, senior client manager at Estera, Jersey.
New rebased asset rule brings money into UK tax free
The proposed tax changes, although they are bringing some hard-to-swallow rules, are not all doom and gloom. Mark Wingate, partner at Smith & Williamson, says that one of the upsides for long-term non-doms was the ability to rebase assets overseas. “This is to ‘compensate’ long-term non-doms for the loss of the remittance basis option,” says Wingate. “However, someone deemed domiciled under the 15/20 rule after 6 April 2017 will not be able to rebase overseas assets.”
Alex Ruffel agrees that the rebase concept for non-doms’ non-UK assets was a major help. “We have one client who has been negotiating the sale of his non-UK business for some time,” she says. “Rebasing will mean that he can bring the gain he will make on the sale, tax-free into the UK, which he could not do before the change in the rules.”
Dipan Shah, tax partner, and Natalie Martin, senior manager, at PwC, say there is more welcome news for non-doms recently arrived to the UK in that they can now protect their assets in trust structures without penal tax consequences. “This will encourage families to reinvest their wealth, not consume it, because funds are only taxed when distributed to the family,” confirm Shah and Martin.
However….property structures see tax bills
Gillian Kennedy-Smith, principal associate at Mills & Reeve, says some of her clients retained assets structures without tax benefits for other reasons such as privacy and asset protection. But, the tax changes mean extra bills. “For example,” says Kennedy-Smith, “we just advised a client who is winding up a series of property holding trusts, the structure holds property worth £8m which resulted in a CGT liability of £0.5m and legal fees of £15-20,000.”
Mixed funds need segregation to maintain ‘clean capital’ as tax free
Sara Maccallum explains that non-dom individuals who are taxed on a remittance basis often hold funds abroad from different years, which could contain a mix of income, gains or ‘clean capital’ which is income realised before an individual becomes UK tax liable. These ‘mixed funds’ are deemed to be remitted to the UK, but clean capital can often become stranded abroad. “Mixed fund cleansing will provide a temporary window, for two tax years from April 2017 to April 2019,” says Maccallum, “during which individuals will be able to rearrange their overseas mixed funds to separate out capital into different accounts. This will enable UHNW's to choose the most tax efficient method of remitting those funds and in particular to access and remit clean capital tax free.”
‘Fishing expeditions’ from HMRC increase but not aggressive
With the first Common Reporting Standard report expected this year, and increasing scrutiny of tax advisers and their clients, there will be more opportunities for HMRC to target any arrangements that plan to work around the new rules, according to Michelle Tring at Estera. “Legislation will be introduced to widen the Promoters of Tax Avoidance Schemes (POTAS) rules that say that a promoter, who is someone operating outside of the normal professional standards of the majority of tax advisors, will be subject to the reporting requirements and obligations of the POTAS regime if their schemes are regularly defeated by HMRC,” adds Tring.
Alex Ruffel, partner at Irwin Mitchell law firm, says she also sees more ‘fishing expeditions’ where the HMRC has gone through the Land Registry to identify properties owned by non-UK companies and written to them asking why they are not paying certain taxes, even though they have no liability for them. They have also written to non-UK trustees asking for information that they are not entitled to. “However,” says Ruffel, “where these enquiries have been politely but correctly responded to, we have not seen an aggressive challenge back from HMRC.”
Finally, does the UK lose out to other more competitive tax regimes?
“We simply do not know,” says Alex Ruffel. “If non-doms do leave the UK to avoid becoming deemed dom’, it’s likely that they will move to low-tax jurisdictions such as Switzerland, Monaco and the Channel Islands. Dipan Shah adds: “Italy has recently introduced a new non-dom regime and existing regimes in Malta, Ireland, Switzerland and Portugal mean that there are appealing options for families to consider. However, the quality of life in the UK might be enough of a draw to see non-doms remain or come to the UK, despite the tax changes.”