19 September 2018

Why discourage wealth when it's never been needed more?


Jeremy Arnold
Partner | UK

First published by Spear's WMS on 18 September 2018.

It doesn't feel like too strong a proposition to say that whether you think Brexit will be good for the UK or not, and whether you think a Corbyn government could be economically positive or not, we are currently in a highly uncertain period of events. Even if the domestic stage wasn't beset by risks, the international environment is singularly unpromising and, in this hazardous situation, one might assume that a nation would seek to secure its prosperity in every way possible. One would certainly expect it to try and retain those who contribute substantially to tax revenue, investment and further job creation, as well as attracting more of these wealth creators.

Unfortunately, to my mind, and that of many others in the wealth management and advisory sectors, we are doing exactly the opposite in the way that we deal with resident non-domiciled individuals. Non-doms have been a declining group of taxpayers for a number of years (HMRC estimates that there were 91,100 non-dom taxpayers in 2016/17, down from 140,000 ten years ago). Non-doms have been a frequent target for political rhetoric and point scoring, but the recent avalanche of legislative changes have really started to take a toll.

Following a fundamental overhaul of the rules for non-doms and the remittance basis in 2008, further changes were introduced in 2017 and 2018 to limit the term of most non-dom status benefits. The remittance basis is not available to long term residents who become deemed domiciled, a concept which now applies for income tax and capital gains tax purposes (in addition to inheritance tax). This, along with the changes to the taxation of certain offshore trusts and holding structures, has curtailed tax advantages as well as introducing a great deal of complexity and uncertainty. From a purely economic perspective, this divested non-dom status of most of its appeal, albeit there may be other reasons why non-doms pay to retain this status.

In addition, new inheritance tax rules have been introduced which tax UK residential property held through offshore ownership structures. It’s worth noting that “offshore” for these purposes doesn’t mean low tax jurisdictions in near and far flung jurisdictions – it includes anywhere outside the UK. These new rules directly affect many non-doms and in many cases will require restructuring and hard decisions to be taken about whether to relinquish non-dom status.

Unexplained Wealth Orders came into play at the beginning of 2018. These investigation tools can be used as part of the recovery of UK assets that the authorities consider are likely to have been funded by the proceeds of crime, and require the individual to explain how an interest in a specified asset was obtained. So far they have only been used in relation to properties belonging to a Central Asian banker, but they are a concern for non-doms who have legitimately acquired assets using non-UK funds, as it is not clear how they will be used in future.

The Requirement to Correct deadline is almost upon us, and any tax non-compliance before 6 April 2017 relating to offshore assets or transfers must be declared and (in most cases) corrected by the end of September 2018. Failure to do this may result in penalties of up to 200% of the tax owed, and an asset based penalty of up to 10% of the asset’s value. Although the rules are not limited to non-doms, there's no doubt that they are impacted more as they tend to have more assets offshore and more complex tax affairs. There is much concern that historic mistakes or filing positions could now lead to heavy penalties, especially as the September deadline coincides with the advent of even greater exchange of international financial information under the Common Reporting Standard. Anything unreported is unlikely to go unnoticed.

In the meantime, our soon to be former EU neighbours are making themselves more attractive through the tax regimes they offer to temporary residents. How do we find ourselves discouraging those very people who create opportunity in a wide range of ways across the economy?

Category: Article