All too often, UK resident non-domiciles (RNDs) are viewed simply in the context of their tax position by those operating in financial services. This is hardly surprising given that, since April 2008, there have been multiple changes.
Nevertheless, it should be recognised, first and foremost, that domicile is a concept of general law. As such, anyone coming to the UK without an intention to leave could be treated as domiciled in the UK under general law.
With HM Revenue & Customs starting to take a much greater interest in the ‘actual’ domicile of longer-term UK RNDs, it could open an opportunity for UK IFAs to engage with a client segment that has been, until now, restricted to private bankers, international accountants and private client lawyers.
Changes to UK RND tax rules 2008
Until April 2008, UK RNDs had a privileged tax position that allowed them to claim the remittance basis of tax indefinitely, thus avoiding any UK tax on overseas investments and attracting no charge for doing so.
There were also at least five fully legitimate tax loopholes such as ‘cease-sourcing’ and ‘alienation’, which would, through a couple of convoluted steps, allow the UK RND to bring these tax-deferred assets onshore without paying any UK taxes.
These loopholes were removed in April 2008 and a remittance basis charge (RBC), a fee for claiming the remittance tax basis, was introduced. Any UK RND, tax resident for at least seven of the previous nine tax years, had to pay an RBC of £30,000 ($39,500, €33,500).
A second layer of RBC was added in April 2012, meaning that any UK RND, resident for 12 of the previous 14 years, would have to pay £60,000 to continue being taxed on the remittance basis.
Implications of Finance (No 2) Act 2017
More radical changes were introduced from 6 April 2017. Most significantly, Finance (No 2) Act 2017 introduced a limit on UK RNDs being able to claim the remittance basis of tax.
The extent and definition of being UK deemed domicile was increased such that, once a UK RND has been tax resident in the UK for 15 of the previous 20 tax years, they can no longer claim the remittance basis of tax and their worldwide assets will be automatically assessed on an arising basis of tax.
This is a significant change and one that requires both UK RNDs and those with the newly created deemed-domicile status to consider how they invest their worldwide assets to be most tax-efficient.
For many years, most tax and legal practitioners have recommended trust structures and corporate vehicles to their wealthy UK RND clients to help them maximise tax efficiency around their non-UK situs assets.
There was good reason for this, as the tax-deferral capabilities of these structures, combined with the ability to claim the remittance basis of tax indefinitely, helped to maintain a relatively benign UK tax presence.
As well as redefining the legal concept of deemed domicile, the Finance (No 2) Act 2017 also introduced some distinct changes to the taxation of offshore trusts. On the face of it, the ability to defer taxes on non-UK income and gains, within the trust structure, remains in place.
However, unclear and badly drafted legislation means that, for deemed-domicile individuals, gains from certain assets, such as offshore non-reporting funds and the tax applying to income generated by underlying corporate structures, are potentially liable as they arise.
Where once there was certainty, now there is doubt.
Challenges with domicile classification
When dealing with UK RNDs we must also consider where they will go next; usually this means a return to the country of origin or moving to a third country.
Much of the traditional planning described above most likely skirted this issue and, to a degree, assumptions of indefinite UK residence may well have been employed.
However, in this new world of ‘dubious domicile’ and HMRC challenges to domicile classifications, it is increasingly necessary for UK RNDs, and indeed deemed-domiciles, to demonstrate that they intend to leave the UK in future.
HMRC will increasingly look at whether such intention is evidenced by the individual’s personal, economic and social position, including future planning.
As such, another potential problem with the typical UK RND wealth planning structures used to date is that offshore trusts and offshore companies are designed to deliver benefit while the individual is tax resident in the UK.
Clearly, this is the initial and main purpose of the planning. But if we assume, as we now must, that the UK RND will move on to another jurisdiction, rarely do these structures carry their tax advantages cross-border.
This is especially true of trusts where individuals are likely to end up in civil law jurisdictions: European countries with legal systems based on Napoleonic Code.
The biggest problem is that civil law legal systems do not recognise the difference between ‘legal’ and ‘beneficial’ ownership, which is the fundamental basis of a common law trust.
The structure is further weakened because, typically, the settlor of the trust – the UK RND individual – retains access to the assets by being named as a beneficiary. This makes common law trust structures vulnerable to attack by civil law tax authorities.
I would also ask whether a client can truly understand this trust concept themselves if their own traditional legal system does not acknowledge such a structure.
Requirement for multiple accounts
The other long-established method by which UK RNDs’ non-UK situs assets have been held is as direct portfolios and cash accounts.
Again, before 2008 this would have been a fairly simple process.
But since the codified order of remittance – in its most simplistic format, income, gains, capital – was introduced in April 2008, the bank or investment house must manage a client’s assets across an increasing number of multiple accounts, endeavouring to automatically segregate income and gains away from clean capital.
For income-producing assets such as interest-bearing cash accounts, bond coupons or company dividends, this is still relatively easy, although a separate account is needed for each different type of income.
However, when the assets are invested in a portfolio that produces capital gains the effect is that the capital and gains are merged into one fungible asset.
In other words they cannot be separated and so, when an asset is sold at a gain, the total proceeds, both capital and gain elements, must be paid into a separate account. In an actively traded portfolio the clean capital account is likely to disappear quite quickly.
It is also crucial to make sure all UK investments are excluded from these portfolios, adding another layer of administration for the asset manager and creating another potential area of failure.
It is in this sea of shifting sand that advisers can prove their worth and their value for UK RNDs.
Further reading:
Non-UK portfolio service launched for resident non-doms
By Mike Foxall, marketing consultant, Wealins
