my friend's accountant sent him the following press release on non-dom....
Private client
<http://www.withyking.co.uk/news/news-detail.cfm> December 03, 2007
Tax update for individuals - Autumn 2007
The taxation of 'non-doms'
The pre-budget report heralded a proposed massive change in the UK tax treatment of those who are foreign domiciled but UK resident. The final detail has yet to come out, and while there is a promise/threat of further consultation, the rough idea of what is proposed is as follows:
* When an individual comes to the UK without the intention of staying here permanently or indefinitely (he or she essentially sees his or her country of birth as their home) they have historically been able to live here on the basis of a reasonably beneficial tax treatment. This treatment was known as the 'remittance basis' and essentially meant that they paid UK tax only on their UK income, UK capital gains and on any foreign income or gains the proceeds of which were received in the UK. Foreign earnings or other income and gains realised on foreign assets were not taxed if the proceeds were never remitted here.
* The proposal now is that once an individual has been in the UK for seven years they will be taxed on their worldwide income and gains on an arising basis whether or not they bring any of the money in question to the UK. If they want to continue to benefit from the remittance basis of taxation then they will have to pay an annual levy of £30,000. For the vast majority of foreign domiciled individuals living here, this clearly makes no sense. One would have to have foreign income and gains which you did not need to bring to the UK in excess of £100,000 per annum to make the payment of the levy worthwhile.
While perhaps understandable in terms of 'fairness', the practicalities of the new arrangement will be extremely difficult. The foreign domiciliary with £10,000 of foreign interest in a foreign currency may well suffer tax in the jurisdiction in which the income arose and will also have to calculate sterling equivalents of the interest, currency gains and losses and seek double taxation relief. The burden will be on them, however, to provide details of this income in their UK self-assessment tax return.
For the substantially wealthy foreign domiciliary there are also indications of some hugely important changes. Normal planning for a foreign domiciliary of substantial wealth was to hold foreign investments which were not intended to be used in the UK within a non-resident trust while the individual temporarily lived here. Such arrangements allowed capital gains to be generated free of UK capital gains tax. Such arrangements would seem now to be at risk, no matter when they were set up and even if the individual pays the annual £30,000 levy. Similarly, mechanisms used to seek to convert income into capital prior to remittance would appear to be at risk.
A silver lining?
As mentioned above, this may not be the end for the offshore trust because, given the change in capital gains tax rates, there may be advantages in UK domiciled individuals creating offshore trusts by Will. These may allow growth of a fund capital gains tax free until such time as payments are made to intended beneficiaries, and without the current penal rates of tax (up to 64%) applying on payments to the UK. Following the changes to capital gains tax, even the supplemented capital gains tax charge reaches only 28.8% - significantly below the income tax rate applying to the higher rate taxpayer.
What to do now
1. Keep a close eye on press releases as more detail becomes clear;
2. Consider realising assets standing at a significant gain, whether held in trust or not, before April 2008;
3. Gather information from your offshore bank/investment manager regarding cash and investments held by you offshore;
4. Keep your fingers crossed that the changes will not be as potentially penal as they at first appear.
