by  Reinaldo Soto-Rosa

The headlines of late are filled with talk about the taxing of “Non-Doms” and corporate leaders expressing their strong views on the subject. Reinaldo Soto-Rosa, of St. James’s Place Wealth Management, explains what the new law means for foreign residents in the United Kingdom.

The UK Government’s proposed changes to the taxation of foreign domiciliaries (generally speaking, these are individuals whose father was born outside the UK) will come into force on 6 April 2008. After being announced in the Pre-Budget Report in October 2007, draconian draft legislation was published in January this year.  There was much uncertainly during a period of intensive lobbying by the City and UK industry groups, such as the Society of Trust & Estate Practitioners. This has resulted in a number of UK Government “concessions” and U-Turns over the detail of the proposed changes. The Chancellor announced some significant concessions in this year’s Budget on 12 March and confirmed that there will be no further changes to the residence and domicile rules for the life of this Parliament and the next.  The draft legislation is still to be published but the Budget announcements were encouraging. It is now clear that these changes will be eff ective from 6 April 2008. So, it is important to speak to your advisors, and review your situation now to see if you need to take any action in the next few weeks.  In summary, the changes include the amendment of the residence rules so that any day an individual is present in the UK at midnight will be counted as a day of residence in the UK. For example, this will effect individuals who have been arriving in the UK on a Monday, leaving on a Wednesday, but under the current rules the days of arrival and departure have been ignored, so that only one day counts towards residence.  This means that, these individuals can spend time in the UK without becoming UK resident. Under the new rules, this will count as two days residence and could lead to foreign domiciliaries unwittingly becoming UK resident or, even worse from an UK tax perspective, a UK domiciliary.

An annual tax charge of £30,000 on unremitted income and gains will be levied on UK resident, foreign domiciliaries or not ordinarily UK resident individuals who claim the remittance basis of taxation (i.e., they only pay UK tax on money/assets which are brought into the UK), if they have been UK resident for longer than seven out of the previous nine tax years (unless foreign income or gains is less than £2,000 from 6 April 2008). If an individual claims the remittance basis of taxation then they will lose their UK personal income tax allowances and Capital Gains Tax annual exemption. Alternatively, if no claim is made, foreign domiciliaries can pay UK tax on an arising basis as and when it arises.

HM Revenue & Customs (HMRC) has outlined that the proposed changes are estimated to yield additional tax revenue for the UK treasury of around £350m in tax year 2009-2010. Self assessment data collected by HMRC shows that approximately twenty thousand individuals could be liable to the £30,000 annual tax charge if they choose to continue to be taxed on a remittance basis (source: HM Treasury, paying a fairer share: a consultation on residence & domicile).

IT IS IMPORTANT TO SPEAK TO YOUR ADVISORS AND REVIEW YOUR SITUATION NOW

In addition, the method of bringing income into the UK after closing the source to avoid income tax will be brought to an end. So, if you have some closed income off shore now, you must remit it to the UK before the 6th of April 2008, or it will become income again.  Also, the rules are changing on being able to gift assets to your spouse off shore and for them to remit to the UK. From 6 April, if you do this, when your spouse, or certain other immediate family members, remit the funds, this will be a remittance and chargeable to you.   Off shore trusts are not going to be as badly effected as the proposed changes in the draft legislation. There were significant concessions in the Budget.  There are some aspects of the proposed changes that are welcomed such as the single definition of remittance which makes it much more straight forward for UK tax payers and their advisors to understand what they can and cannot do in the future. It is also now clear that non UK domiciliaries who choose to be taxed on the arising basis will be able to off set any foreign losses against gains – this is a welcome clarification.  Stepping back from the detail it is also clear that after April the most significant UK tax advantage of an off shore trust for a UK resident, foreign domiciliary will be the avoidance of UK inheritance tax on the assets and deferral of capital gains tax, until there is a remittance (if you are claiming).  From a non tax perspective, trusts will also continue to remain useful for control, administration, wealth protection and succession planning. Increasingly, more and more individuals are getting divorced and UK courts are trying to attack structures in foreign jurisdictions (such as the recent Charman case where the UK court made a ruling against a trust sited in Bermuda). Creating and running a trust in the correct way may protect assets from UK courts trying to attack off shore structures. For some, the time may have come to wind up existing tax structures and this should almost certainly be done before 6 April in order that such distributions will be free of UK tax.  Following the winding up of these tax structures it will be necessary to transfer wealth into other structures, which can still offer many of the tax benefits currently offered by off shore trusts.

In the next few editions we will look in more detail at the tax changes for foreign domiciliaries, the issues for trustees and the remaining planning and tax efficient structures available. In the meantime for any advice on new planning strategies and assistance with any remedial action for existing structures, contact Reinaldo Soto- Rosa at St. James’s Place Wealth Management at the contact information below.

REINALDO SOTO-ROSA

Reinaldo is a member of the prestigious St. James’s Place Partnership and specialises in advising businesses and non UK nationals, who are residents from the tax point, about access to tax efficient investments (on and off -shore), Pension Funds (where they can enjoy tax relief), Family Protection, Private Banking, Inheritance Tax Planning and other financial services.

Founded in 1991 by Mike Wilson, Sir Mark Weinberg and Lord Rothschild, the St. James’s Place Partnership is the sole advisory channel for St. James’s Place Wealth Management and comprises some of the most experienced, able and highly regarded professionals specialising in financial services.  Listed on the London Stock Exchange, the company manages funds amounting to over £18.2 billion.  St. James’s Place is the winner of The Daily Telegraph Wealth Manager of the Year 2007.  For more about Reinaldo Soto-Rosa and St. James’s Place Wealth Management, visit www.sjpp.co.uk/sotorosa .

To contact Reinaldo directly call 07739537149

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