United Kingdom

Hot topics for non-doms 

There are many issues for non-doms to consider. Domicile status in itself is a topical issue. Great care is needed when using unremitted foreign income or gains as security for loans used to fund UK spending. Other topical issues include business investment relief introduced by the Government to attract inward investment and the inheritance tax spouse exemption.

Domicile Status

 

Domicile is largely determined in accordance with case law precedent which is old and complex and, recently, we have seen a notable increase in HMRC enquires into the domicile status of long term UK residents. Having appropriate evidence available to support a claim of being non-UK domiciled (non-dom) is essential.

 

That said, the complexity of the rules also means that those who are legitimately entitled to claim non-dom status often fail to do so resulting in a lost opportunity to structure their affairs more efficiently and use the remittance basis of taxation.

 

In the lead up to the May 2015 general election there was a particular focus on non-doms and their beneficial UK tax status.

 

Whilst Labour had promised to abolish the remittance basis altogether, the Conservatives pledged to increase the annual tax charges paid by non-doms (it is not yet clear whether this is above and beyond increases effective from April 2015) and to continue to tackle perceived abuses of the status.

 

In order to “ensure a fair contribution” from non-doms, the previous coalition Government introduced a consultation which began before the election, as to whether to introduce a 3-5 year minimum claim period for the remittance basis. The aim is to reduce the scope for opting in and out of the remittance basis and to ensure the annual charge is paid on a regular basis.

 

Contact us today to review your domicile status.

 

Using unremitted foreign income or gains as collateral for a loan used in the UK 

 

In August 2014 HM Revenue & Customs (HMRC) announced fundamental changes affecting all UK resident but non-dom individuals (and some trustees and other relevant persons) who were planning to use (or have already used) untaxed foreign income or gains as security for loans used in the UK.

 

Previously HMRC’s widely published approach was that, in commercial circumstances, such income or gains would not be treated as remitted.  In an unexpected change, with no advanced warning, HMRC have withdrawn this ‘concessionary’ treatment.

 

From 4 August 2014 HMRC take the view that it is not possible to put in place such arrangements without remitting the income or gains used as security, resulting in a UK tax liability.

 

Special rules for existing arrangements have been proposed. Although we await the final guidance, HMRC’s current published position is that existing loan arrangements made by affected non-doms, where foreign income or gains were used as collateral, must be notified to HMRC by 31 December 2015. This security has to be replaced by 5 April 2016 with ‘clean’ funds to avoid being classed as a taxable remittance.

 

Any individual affected by the above will need to consider the alternatives available for them.  Clearly current plans should be reconsidered in light of this announcement and swift action may be required to avoid a possible tax charge.

 

Business Investment Relief

 

To facilitate inward investment into UK business by non-doms, Finance Act 2012 introduced Business Investment Relief (‘BIR’).


In short, BIR is designed to allow foreign income and gains to be invested in UK businesses without triggering a taxable remittance.

 

The main heads of the relief are as follows:

 

  • The investment can be made by way of new shares or new debt; 
  • The target company must be a private company which either a) carries on a commercial trade or b) exists solely to invest in private companies carrying on a commercial trade or c) Is a member of an eligible trading group and controls a trading subsidiary; 
  • The target company cannot be used as a conduit to benefit the non-dom investor; and, 
  • On exiting the investment, the funds must be removed offshore within a limited time period.

 

The legislation specifically includes the generation of income from land within the definition of ‘trade’ meaning BIR is potentially available on investments in property acquired to let for commercial or residential purposes.

 

While the basic mechanics of the relief are a sensible realisation of the Government’s policy aims, the unwary non-dom investor could easily find themselves with a sizeable UK tax liability – the relief comes with specific anti-avoidance provisions designed to ensure that the relief cannot be abused. These anti avoidance provisions, when triggered, can potentially result in the amount invested being treated as a taxable remittance.

 

However, despite the scope of the anti-avoidance rules and the need to remove funds from the UK after exiting an investment or make a qualifying reinvestment, this statutory relief provides enormous potential for non-doms who are correctly advised and use the relief in the way intended, i.e. for tax efficient access to UK business by non-doms while preserving clean capital for other UK costs.
 
Additional comfort on whether the proposed investment will qualify for the relief is available through HMRC’s advance assurance service which will allow non-dom taxpayers to approach HMRC in advance of investing.

 

Speak to us today to find out more about the relief, how we can advise you and how we can assist with applications for advance assurance.

 

Spouse Exemption

 

Finance Act 2013 contained amendments to the rules governing the non-dom spouse exemption for IHT. Previously only the first £55,000 of a transfer from a UK domiciled spouse to a foreign domiciled spouse was exempt. This limit was set in 1982 and was designed to stop assets being removed from the scope of UK IHT.

 

These changes increase that threshold to £325,000. This however, is still not as favourable as transfers between UK domiciled spouses where no limit applies. Consequently, these rules now also allow non-doms to elect to be treated as UK domiciled for IHT purposes and so access the more favourable inter-spouse transfer regime.

 

However, this election will not always be beneficial; there are pros and cons which are dependent on the taxpayer’s individual circumstances. Contact us today to see how these changes impact you.

Contact us

Mike Walker

Mike Walker

Partner, Private Client

KPMG in the UK

 

020 7311 8620

Email Mike

 
Daniel Crowther

Daniel Crowther

Partner, Private Client

KPMG in the UK

 

020 7694 5971

Email Daniel

Private Client Updates: Non-Doms

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