Treasury reports on Non-Dom consultation
Further to the Chancellor’s comments in his March Budget, the Treasury has released its initial discussion paper on the treatment of non-UK domiciled taxpayers and we now have a better idea of the outlook for them in the years to come. Subject to further consultation, certain changes are expected to be implemented with effect from 6 April 2012. Please click here if you would like to speak to an advisor about how this may affect you.
As expected, the remittance basis charge will however increase from £30,000 to £50,000 for individuals who have been resident in at least 12 out of the past 14 tax years, and there will be a relaxation of the remittance rules for non-doms investing in the UK. Perhaps more importantly, however, the document supports the promise of no further changes to the treatment of non-doms rules for the rest of this Parliament, providing some welcome stability in an area which has been in a state of flux for some time.
Investing in the UK
The March Budget announced a proposal to remove any tax charge in respect of offshore income or gains remitted for “commercial investment” in the UK. While non-doms could of course invest “clean” funds in the UK, the remittance of non-UK income/gains would normally give rise to a tax charge, so this should provide a considerable incentive for non-doms to invest in the UK and also allow them to preserve “clean” funds for other expenditure in the UK.
At the time of the original announcement, it was not clear what the term “commercial investment” would mean, and happily this is a broader definition than many had anticipated. In outline, non-doms will be able to use offshore income and gains to invest in UK “qualifying businesses”, which will mean companies that are substantially trading, unless those companies are focussed on letting residential property. AIM listed and unlisted companies are included, but not main market listed companies.
Some question-marks remain, such as where the bar will be set in terms of “substantially” trading – an “80%+ test” akin to the old taper relief rules seems quite possible – and inevitably there are anti-avoidance provisions to prevent abuse. It is also notable that there is no provision for investment in partnerships (including LLPs), and this is one area which will no doubt be the focus of some pressure in the forthcoming consultation phase.
On a more positive note, non-doms are not precluded from investing in companies in which they are shareholders, or with which they are connected or otherwise associated, and there are no minimum/maximum thresholds for investment or minimum time period investment as it stands. Coupled with the 30% income tax relief available for investments made via the Enterprise Investment Scheme, investment in the UK may be very appealing to a non-dom. The Capital Gains Tax ("CGT") applies in certain cases when an asset is sold for more than it was originally purchased. The taxable gain (profit) may be triggered following the transfer of an asset, although commonly this would follow a sale. A number of tax reliefs are available to exempt or reduce the tax that may apply. Basic tax planning may... More treatment could also be attractive, with the potential to benefit from a 10% capital gains tax rate via Entrepreneurs’ Relief (up to a lifetime limit of £10m), or even to defer a gain from tax entirely by investing via an offshore trust.
Alongside the original proposals, a number of other simplifications are intended. Most significantly:
- Some common-sense has been applied to the “nominated income” rules. This relates to the requirement to nominate specific offshore income/gains when paying the remittance basis charge. If that income or those gains are then remitted to the UK (in whole or in part), a set of hugely detrimental rules are triggered. Avoiding this eventuality has involved a great deal of time and effort on the part of non-doms and their advisors and, in recognition of this, it is proposed that a de minimis remittance of up to £10 of the nominated amount is to be allowed without invoking the draconian rules.
- The cumbersome regime for non-UK currency accounts is to be abolished, for both non-doms and UK domiciled individual alike. At present, cash held offshore in non-sterling accounts can give rise to foreign currency exchange gains and losses, with each payment into or out of an account potentially having a tax consequence. In a welcome move, it is intended that foreign currency bank accounts will no longer be liable to capital gains tax, putting an end to this complicated and burdensome regime. The Treasury appear to have taken the view that FX gains and losses net out in the long run, and therefore seem prepared to create an exempt asset class. A trend towards FX dealing may well follow, as with spread-betting which enjoys a similar exemption from tax.