Information for Non-UK domiciled contractors
Changes To UK Residence And Domicile Rules
As you may be aware, HM Revenue & Customs have mid january published the draft legislation in relation to the change in residence and domicile rules proposed in the Oct 07 Pre-Budget Report. The changes are extremely wide ranging and will affect not only non-domiciliaries with offshore income and gains in their own name, but also those who have established offshore trusts and companies, or who are beneficiaries of them.
Broadly speaking, a non-UK domiciliary who is resident in the UK will no longer be able make use of an offshore structure to mitigate UK tax unless they pay an annual 'fee' to HM Revenue & Customs of £30,000. If they pay the fee, they will continue to be able to take advantage of some of the existing rules, although even then some of these will be changed, in particular in relation to the ability of offshore trusts and companies to shelter capital gains. If, on the other hand, they do not pay the fee, they will be taxable on their worldwide income and gains (including those in an offshore structure) as they arise, in the same way a UK domiciliaries.
Even if the £30,000 fee is paid, the rules are being changed to restrict the tax sheltering abilities of offshore trusts and companies in relation to capital gains tax. Non-domiciliaries will no longer be excluded from a potential CGT charge on gains arising to an offshore trust or company, and it appears that in the case of a non-domiciled beneficiary of an offshore trust, a CGT charge could apply on a capital payment even if it is not remitted to the UK.
The rules will also be changed to prevent various methods of remitting funds to the UK tax-free, such as the use of income and capital accounts to take advantage of the 'source-closing rule', the remittance of assets rather than cash to the UK, and the gift or 'alienation' of funds or assets abroad to other parties who can then bring them into the UK in another form. Non-domiciliaries will also be required to notify HMRC when they set up a offshore trust, in the same way as UK domiciliaries do now.
On the residence side of things, days of arrival and departure will now count as days in the UK when determining the 91 and 183 day rules. This will particularly affect those who currently make a number of short trips to the UK, or who commute to the UK, for example on a weekly basis. Those of us who make frequent day trips to the UK for business, or even travel between UK airports in transit on trips elsewhere, will also need to be careful, as these days will all now count towards residence.
Listed below are some typical scenarios that will be affected by the new rules:
- Non-UK domiciliaries with interests in Isle of Man trusts or companies whose total offshore income and gains do not exceed approx. £100,000. These individuals will need to consider whether it is worth paying £30,000 a year to shelter income and gains that might give rise to tax of not much more (or less) than £30,000 if they brought their investments back onshore.
- Non-UK domiciliaires who are using offshore trusts or companies to avoid UK capital gains tax. Currently non-doms can use an offshore trust structure to completely avoid CGT, even if the proceeds are remitted to the UK, but under the new rules they will be taxed on remittance (or as the gains arise, if they choose not to pay the £30,000 fee). All investment holding companies or trusts set up by non-domiciliaries will be affected by this.
- Non-UK domiciliaries who are beneficiaries (but not settlors) of offshore trusts. Currently non-doms are completely excluded from a CGT charge on a capital payment to them, but under the new rules they will suffer CGT if the trust has accumulated gains, and this charge will apply even if the payment is made and kept offshore.
- Non-UK domiciliaries making use of income and capital accounts to avoid tax on remittance. This will not be effective under the new rules. Any non-dom clients who are currently accessing their offshore funds or assets tax-free will need to consider if the method they are using will be effective under the new rules.
The above changes are intended to take effect from 6 April 2008, which leaves a very small window of time for those affected to prepare for the increased costs or to restructure their affairs. If you have any queries about how the new rules may affect them, and how they can rearrange their affairs to minimise their impact, we would be very happy to help.
