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10 concerns for non-domiciled individuals if Labour is elected

The article below was written by Robert Schon, of Robert Schon Tax Planning. Robert is a specialist with an established practice in helping US clients establish themselves in the UK, assisting in acquisitions of both private and quoted companies.

Given the recent announcement by the Labour party, – that it will abolish our long-established income tax and capital gains tax regime applicable to non-domiciled individuals – below are some thoughts to help those individuals who are currently treated as non-doms understand what today’s announcement may mean if our law is changed.

1). I think it most unlikely any change in law will be brought in without first a period of consultation. This is important to allow time to vacate the UK/make contingency plans;

2). My expectation is that the earliest any change of law will have effect is 6th April 2016 and probably 12 or 24 months after. This timetable is dependent on the result of the general election and its robustness. By this I mean if (as is expected) neither major party wins an overall majority and perhaps we have 2 general elections within 4-6 months. I can see the timetable for bringing in a consultation being pushed back and with it the start date for any change in law;

3). The immediate BBC comment suggests that:

  • The Conservatives and Liberal Democrats are not overtly rubbishing Labour for its announcement; and
  • Some UK-domiciled business people have viewed the statement favourably as they say the current rules give an unfair economic benefit to non-doms with businesses here. Following the introduction of Business Investment Relief in 2012 (a Coalition policy) I think this comment has validity;

4). A question regarding the 7th of May is whether the Conservatives/Liberal Democrats will join Labour in announcing the abolition of our non-dom regime. The Coalition is presently consulting on proposals to make it more expensive and complicated for non-doms to elect for the remittance basis once they have been UK tax resident for 7 out of 9 years. The line to be watched is if one or both Coalition parties adopt Labour’s position;

5). My expectation is that any consultation (as stated in point 1) will include a review of how our main competitor nations deal with ‘short’; ‘medium’ and ‘long’ term’ visitors. I think with any new regime we adopt we will still want the UK to be seen as a nation that is open to international labour and, as such, will maintain a modified ‘non-dom’ regime for perhaps the first 36 months or 3 UK tax years that someone is UK tax resident. Thereafter, I can see a sliding scale being maintained to year 7, for example, before becoming subject to UK tax on worldwide income and gains, whether or not remitted here;

6). Current ‘non-dom’ planning is anchored around clients being able to organise their non-UK bank accounts so they can clearly identify the source of any monies they remit here. The optimum position is to have realised and segregated ‘clean capital’ [cash] before the 5th of April in the tax year of becoming a UK tax resident and to remit to the UK funds only from this clean capital account. I think a variant of this planning will be the corner stone for any planning that a client may want to adopt in expectation of becoming taxable here on his or her worldwide income and gains;

7). Should, in due course, the points below be met, then it may still be tax advantageous for the client to realise for cash any non-UK capital assets whilst our current non-dom regime is in force and any proceeds of sale to be passed to the client outside the UK free of any corporate or trust wrapper.

  • Our law change to require all [‘long term’] UK tax residents to pay UK tax annually on the arising basis on their worldwide income and gains whether or not remitted here; and
  • Notwithstanding this change in law, a client wants to remain a UK tax resident,

Assuming the client elects for the remittance basis of taxation in that year of sale/personal receipt this should ensure the proceeds received outside the UK by the client in said UK tax year, and not remitted here, remain free of UK tax in that year;

8). If for any reason the above is not attainable; option 2 will be to try and get non-UK situated capital assets into the client’s personal ownership at a step up in basis whilst our current regime remains in force;

9). For future UK tax years the new regime is likely to mean all future fruits (income or capital gains) receivable by the client outside the UK or in respect of which s/he has a ‘power of enjoyment’ will be taxed here whether or not s/he remits them to the UK;

10). The likely UK tax planning issue is that UK tax on the actual realisation proceeds of non-UK capital assets [or non-UK source income] received by the client personally can still probably be sheltered from UK tax so long as they are realised and received by the client personally whilst our current regime remains in force. Clients and their professional team should have sufficient notice to plan for this result.  Option 2 is to plan for a step up in basis.

If you would like to discuss the above further, you can email Robert Schon, or call on +44 20 7267 5010. If you require assistance with US reporting, please contact us.

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