As discussed in our previous briefing, Labour calls time on the remittance basis, Ed Miliband has announced a policy of abolishing what he called the “non-dom tax regime”, to be implemented in the event of a Labour victory in the coming election. Many individuals who are UK resident but non-UK domiciled (“RNDs”) will be contemplating the implications for them of such a development, if Labour does indeed come to power, and wondering what steps they might take to mitigate its impact.
We would suggest that RNDs should try to resist the urge to panic, and should avoid kneejerk reactions. In our view, it would be highly premature to try to plan around the possible reform at this stage, when there is such uncertainty about which party or parties will make up the next government, and about the exact form of any changes to the tax regime, and indeed when those changes would take effect. It should be stressed that, as with previous changes to the RND tax regime, there is likely to be a consultation process regarding any proposed reform, which will (a) give professional advisers a good idea of how the legislation will be amended, before the changes are implemented, and (b) provide opportunities for advisers to comment and attempt to influence the new rules, to minimise unfairness to existing RNDs.
Nevertheless, there is definitely some merit in considering what kind of steps might be taken by existing RNDs (and some ideas are offered below). Non-UK residents who have been considering becoming RNDs but have not yet committed themselves would be well-advised to adopt a “wait and see” approach - postponing the commencement of UK residence, if possible, until there is greater clarity about the future of the tax regime.
It seems unlikely, in fact, that the remittance basis rules and the other tax rules relating to RNDs would be repealed in their entirety and struck from the statute book. That would present an amazing opportunity for former remittance basis users with unremitted foreign income and/or gains to remit them, after the repeal, without tax.
More likely (if Labour come to power and press ahead with this reform) is that the remittance basis rules remain applicable to historic unremitted foreign income and gains, but that from a specified date the availability of the remittance basis with respect to future foreign income and gains will be withdrawn, from all RNDs except those whose have been UK resident for less than a certain specified period. There is likely to be consultation, and “negotiation”, on how long that period should be, so as to be “fair” to ordinary taxpayers but at the same time attract foreign migrant wealth and skills to the UK.
Making the assumption that this is what indeed happens, the question for RNDs who will lose the ability to use the remittance basis on that specified date is: what should I do, by way of a response to the change of regime?
For some RNDs who are using the remittance basis at present, this may not be too much of a conundrum. Undoubtedly there will be some for whom the remittance basis shields large sums from UK taxation, and who already spend a lot of time outside the UK. Some such individuals may be able to procure that their time in the UK is reduced sufficiently to achieve non-UK residence, without losing all their ties to the UK. Depending on the number of statutory ties to the UK, this may require limiting UK midnights to 120, 90, 45 or 15 per UK tax year. Because of the complexity of the rules, expert advice is advisable.
However, individuals in this position will of course need to consider whether the required change in travel patterns will make them resident anywhere else, and if so what their tax position would be in any new country of residence, factoring in not only the taxation of their income and gains but also wealth taxation, if applicable. And ceasing to be UK resident may not be an option for someone who in due course is seeking to apply for British nationality.
In cases at the opposite end of the spectrum there may, likewise, be little to debate. There are a significant number of individuals for whom the benefit, in pure tax terms, of the remittance basis is marginal. After remittance basis charges have been taken into account, and after tax has been paid on necessary remittances, the saving achieved by claiming the remittance basis may be modest; although there may be actual or perceived advantages in relation to keeping financial information confidential, reducing the scope for HMRC investigation into foreign wealth, and reducing compliance costs. Individuals in this camp are likely to move, without much demur, onto the arising (normal) basis of taxation, perhaps with only a slight increase in the annual tax cost. It is likely that they will need to continue to guard against remittances to the UK of foreign income and gains dating from previous years in which the remittance basis was claimed, which will necessitate on-going segregation of cash and assets with different tax statuses.
The more difficult cases will be those RNDs who currently use the remittance basis, where that basis of taxation avoids a substantial amount of UK tax on foreign income and/or gains, and where it would be impossible, or highly unattractive, to cease being UK resident. How such individuals should react to a withdrawal of the remittance basis will depend, to a large degree, on their personal circumstances – there are definitely no automatic or universally applicable solutions. But ideas that might be considered, with appropriate professional advice nearer the time, include:
- Deferral of tax on investment gains by transferring assets to a company incorporated in a country with which the UK has a treaty which “blocks” the attribution of the company’s gains to its UK resident shareholders, so that UK taxation of such gains is effectively postponed until a sale or liquidation of the company.
- Deferral of tax on investment income by giving assets to an offshore trust, from which the RND and any spouse or civil partner have been excluded. This would potentially also be advantageous for inheritance tax (making the assumption that some aspects, at least, of the current inheritance tax regime for non-UK domiciliaries are retained). Investment gains might however continue to be taxable on the RND, notwithstanding his/her exclusion.
- Deferral of tax on investment income/gains by investing in an appropriate offshore life insurance bond. Partial withdrawals of value from the bond might be possible without any tax being triggered. The bond might be held via an offshore trust, if that would be advantageous for inheritance tax.
- Tax mitigation through the gift of assets to a non-UK resident family member who is resident in a lower (or zero) tax country. Obviously this involves a loss of control and indeed any ability to guarantee any future benefit from the assets given away. However, this simple approach may be attractive to RNDs with non-UK resident spouses, and RNDs from parts of the world where it is common for family wealth to be held by chosen family members as informal custodians.
- The same idea but coupled with some sort of contractual mechanism (e.g. an option) to try to ensure that the assets that have been given away, or their value, can be retracted at a later date, perhaps after the RND has ceased to be UK resident.
- The same idea but preserving influence/control over how the assets are invested. This might, for example, be achieved by means of a limited partnership or family investment company.
The above is not an exhaustive list of the options – it is intended as an illustration of the lines along which RNDs and their advisers should be thinking. It should be stressed also that, at this stage, these ideas are no more than possibilities. Their viability will depend on RNDs’ personal circumstances and also on the details of how the tax regime is amended - assuming that there is, indeed, a significant change to the regime, of the kind which the Labour party has proposed.
RNDs should certainly be braced for possible change, and the need to take advice – neither of which will be particularly welcome. However, with appropriate planning, it may be that any reform of the tax regime will be manageable, and not quite as traumatic as currently feared.