12 February 2008

New rules for non-domiciled UK residents - welcome clarification from HMRC

Following the publication of the draft legislation governing the taxation of UK resident non-domiciliaries on 18 January 2008, HMRC have today issued a statement clarifying the proposals to amend the basis of taxation of non-domiciled UK residents and their offshore trusts amid concerns about the flight of capital and entrepreneurs from the UK.

These clarifications reflect some of the concerns of tax professionals and market commentators regarding their potentially far reaching effects for the UK economy, but the call to delay the implementation of this highly complex legislation has unfortunately not yet been heeded.

HMRC have issued clarification on the following areas that were of particular concern:

  1. Retrospectivity
    It has been confirmed that the new rules, which as currently drafted would have sought to collect tax from beneficiaries of offshore trusts in respect of distributions they had received as long ago as 1981, will now only apply to distributions made after 6 April 2008. Moreover resident non-domiciled beneficiaries in receipt of distributions after 6 April will not be taxed by reference to gains realised before 6 April, or unrealised gains inherent in assets at 6 April. No detail has been provided on the way in which this will be achieved and we will have to wait to see how the rules are amended.
  2. Taxation of distributions from offshore trusts
    It had been proposed to single out distributions from offshore trusts for a worldwide basis of taxation regardless of whether the recipient was paying the £30,000 levy, which was a serious disincentive to UK residence. We now understand that this will not be the case and distributions from offshore trusts will benefit from the remittance basis that applies to directly held assets.
  3. *Disclosure of foreign income and gains

*One area that was of particular concern to UK resident non-domiciliaries was the extent to which they would have to disclose their worldwide income and gains to HMRC, whether or not they had any liability to UK tax. Today’s statement from HMRC says that provided all remittances are declared, there will be no further requirement to disclose the source of the funds remitted. It seems unlikely that this will affect the requirement to disclose the existence of offshore trusts announced previously and may well not prevent HMRC from seeking evidence of the nature of any remittance in the context of an enquiry into any individual taxpayer’s return.
  1. *Payment of the £30,000 charge

*It was understood from the announcement on 18 January that funds remitted to the UK to pay the £30,000 charge would themselves be subject to UK tax, meaning that the charge was in effect £50,000 for those who remitted offshore income to pay for it. HMRC have today confirmed that funds brought into the UK to pay the charge will not themselves be subject to UK tax.
  1. *Taxation pf the profits of offshore funds

*The UK tax treatment of the profits of non-UK investment funds that did not qualify for “distributor status” owned by offshore trusts has long been unclear and anomalous. The draft legislation issued on 18 January made this position more uncertain, but it has now been confirmed that such profits will only be taxable as and when they are remitted to the UK.

*What they didn’t say
*There is still much cause for concern in the proposals for the taxation of UK resident non-domiciliaries and their effect on the UK economy as a whole. In particular the Government needs to rethink the proposal to tax the UK gains of offshore trusts in the hands of settlors that could lead to a significant flight of capital from the UK. This could particularly damage the property and art markets as investors look to relocate investments and transactions offshore.

*Where do we go from here?
*Today’s announcement is a welcome one that will go some way towards allaying the concerns of UK resident non-domiciliaries. However, further changes are needed to convince international business people that the UK should retain its crown as the premier jurisdiction for themselves, their families, homes and business interests.


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