ABOUT THE AUTHOR: Steve Bougourd TEP is Associate
Director, Trust & Corporate, Legis Group
A ttempting to provide topical comment, in advance of
publication, on rising taxes, spending cuts and the desirability of
remaining in the UK, I was almost inclined to re-title this article
‘Back to the Future’. Or, with unemployment at a 16-year high and
the Trade Unions massing to confront the cuts, perhaps, ‘I Predict
a Riot’.
By the time you read this the honeymoon period for the UK’s
newly formed Coalition government will be over. The cold reality of
June’s emergency budget will start to bite and England will have
just lost on penalties in the World Cup. Despite the gloom,
hopefully we in the UK will be enjoying the start of a hot
summer!
The story so far
It would be fair to say that non-domiciled UK residents
(non-doms) have borne the brunt of new tax rules in recent years.
For those wise enough to settle their non-UK assets in offshore
trusts, the opportunity to receive tax-free capital distributions
in the UK consisting of capital gains realised after 5 April 2008
has gone. In addition, individuals resident in the UK for more than
seven years now have to pay an annual fee of GBP30,000 if they
still wish to be taxed on a remittance basis on their non-UK
assets, a status that was previously enjoyed at no charge. More
generally, we have also seen the introduction of the 50 per cent
tax rate for those earning more than GBP150,000 a year, a hike in
national insurance contributions and a tax on bank bonuses.
There has been some relief for non-doms however. After a short
spell of speed-dating the Coalition government was formed and the
two parties agreed a compromise. For now at least, the Tories have
dropped their GBP25,000 non-dom fee payable from year one. And the
Lib Dems have shelved their plan to abolish non-dom status for
seven year residents. But this is subject to a further review, so
watch this space.
Domicile
Let’s rewind…what is domicile? Very simply, if you are a born
and bred Brit, you are likely to be domiciled in the UK. An
individual normally takes their ‘domicile of origin’ from their
father and attaining a new ‘domicile of choice’ is possible, but is
notoriously difficult. An individual can only have one domicile.
Any change in status will essentially require the severing of
family ties, businesses and assets and re-establishing the same in
another country with the intention of remaining there indefinitely.
The purchase of a burial plot is often recommended.
Individuals with a UK domicile of origin that have left the UK
to become resident elsewhere are often advised to test their
domicile status by establishing a trust with assets just in excess
of the nil rate band (exemption limit) currently at GBP325,000 to
potentially trigger a tax charge.
Residency broadly applies to the days spent in the UK, although
inevitably the rules are complicated as illustrated in the recent
Gaines Cooper case. He (a Brit), argued that he left the UK and
became domiciled in the Seychelles over 30 years ago and spent less
than 91 days a year in the UK. However, as he still maintained
businesses, owned property and frequently visited immediate family
in the UK, the Court of Appeal stated that England remained ‘the
centre of gravity of his life and interest’. HMRC won the case and
he was ruled UK domiciled. Fair enough. However, despite the fact
that he left the UK in 1976 and had spent less than the widely
assumed threshold of 91 days per tax year in the country, he was
also ruled UK resident. The decision was predicated on the
application of the tax authorities’ published guidelines. As Gaines
Cooper did not leave the UK to take up full time employment, he
needed to demonstrate that he had left the UK ‘permanently’ AND had
spent less than 91 days in the UK. The Court of Appeal ruled that
he had never really left the UK permanently in the first place and
therefore remained resident in the UK for tax purposes.
What does this all mean? If you are UK domiciled and resident
you are fully taxable whereas if you are non-domiciled and UK
resident, tax is paid on UK income/gains with the option not to be
taxed on other income/gains but only if kept out of the UK. If
non-resident, you are taxed on UK income only. And, finally, in
terms of inheritance tax which is payable at 40 per cent, if UK
domiciled (or deemed-domicile – see below), tax is payable on your
worldwide assets. If non-domiciled, tax is limited to UK assets
only, although structures can be used to help mitigate
liability.
Trusts and tax-planning
And this is where trusts can play a key part in non-dom tax
inheritance tax planning. Given the domicile rules, it is perfectly
conceivable to retain non-dom status and be resident in the UK for
a generation and beyond. As illustrated above, if a ‘domicile of
origin’ is maintained there are no grounds for attaining a new
‘domicile of choice’, so the UK tax authorities cannot have it both
ways. However, there is also a ‘deemed domicile’ rule for UK
inheritance tax purposes only. If an individual is tax resident in
the UK in any part of 17 of the previous 20 tax years, they will
become liable to tax on their worldwide estate. However, if an
individual settles non-UK assets into trust before becoming deemed
domiciled, the assets will be ‘excluded property’ and therefore out
of scope.
Of course, any tax planning arrangement should be underpinned by
UK and relevant foreign tax advice and it would be prudent for
trustees looking to take on tax planned structures to have such
advice on file. Thereafter, they should remain very aware of
beneficiaries’ tax status and any changes in the tax rules, so they
can be proactive and engage with them and their tax advisors when
required.
Cuts ahead
With the UK Government having to tackle a record deficit of
GBP163 billion (the largest of the G20 countries), public sector
cuts totalling over GBP6 billion have been announced. But to bring
this into context, this still represents less than 1 per cent of
public spending.
By the time you read this article, the emergency budget will
have come and gone. It has already been announced that the capital
gains tax rate (18 per cent) will rise in line with income tax
rates on non-business assets, although this is likely to be capped
at 40 per cent. That said, its impact will be limited as currently
the amount of capital gains tax collected represents less than 1
per cent of the entire tax take. I would expect to see significant
increases in fuel, tobacco and alcohol, but again, relatively
speaking, this will not amount to very much. Building on the
Coalition’s momentum, and with the Labour Party currently
leaderless, an increase in Value Added Tax from 17.5 per cent has
to be a real possibility, to say 20 per cent, bringing the UK more
into line with its EU partners.
Whilst turning the screw on the rich has populous appeal and
with deeper pockets they can arguably afford to pay more, the past
and new UK governments point to the wealthy and ask them to pay
their fair share. I am sure that higher tax payers would already
argue that 50 per cent in excess of GBP150,000 is considerably more
than 20 per cent on GBP35,000. To my mind, higher earners can only
be squeezed so much and there will be a tipping point. The UK rich
list suggests that about 50 per cent of the top 100 are either
non-doms or are Brits that have left the UK to live elsewhere.
These people are wealth generators, they build businesses, employ
people and those businesses pay taxes on profits. Working people do
not receive state benefits, they pay taxes and spend money; which
creates a ripple effect across the economy.
Voting with your feet
The wealthy and their businesses can afford to vote with their
feet and move to lower tax jurisdictions such as the Channel
Islands and Switzerland. We have seen Guy Hands and his firm, Terra
Firma move to Guernsey, while BlueCrest, another hedge fund manager
has left the City and set up its head office in Guernsey and
located its trading arm in Geneva. If a levy is also imposed on
banks in the UK without it being applied globally, affected banks
will also consider changing their tax domicile.
Rhetoric often refers to tax haven abuse, but tax competition is
actively pursued by EU countries such as Belgium and the
Netherlands that offer tax breaks to encourage relocation. The UK
government’s Foot Report states that ‘the Crown Dependencies make a
significant contribution to the liquidity of the UK market’. In
addition, both Guernsey and Jersey are recognised, alongside the
UK, as ‘jurisdictions that have substantially implemented the
internationally agreed tax standard’ regarding transparency and
exchange of information for tax purposes. The Channel Islands are
also ‘All Crimes’ jurisdictions, which effectively means that
business cannot be accepted if it is or appears to be contrary to
domestic laws. This includes tax evasion, which is a criminal
offence.
In conclusion, in the UK there is little doubt that it is going
to get worse before it gets better and the wealthy will carry much
of the burden. So back to the words of The Clash, ‘Should I stay or
should I go now?’… ‘If I go there will be trouble, if I stay it
will be double’.