United Kingdom: Special Expatriate Fiscal Regime

The UK is no tax haven, but it does have relatively low tax rates compared with some other European countries, and it has traditionally offered exemption from tax for income from foreign investments for people who are resident but not domiciled in the UK (although see below for changes to the tax treatment of such individuals. For expatriate executives with assets to invest, a UK posting or residential base therefore offers very good tax planning opportunities.

The concept of domicile, which is unique to the English-speaking common law jurisdictions, attaches to a person's original home country, and cannot be changed unless the person moves their whole life, family and base to another country, with the intention of remaining there permanently. Few 'visiting' residents will therefore have a UK domicile.

Foreign investment income has traditionally been exempt from tax for such individuals as long as the income is not remitted to the UK. Therefore they have been able to safely make offshore investments knowing that the income will be reinvested without deduction - the ideal way of turning income into capital without taxation. Note however that capital gains crystallised abroad during a period of residence are deemed to be remitted to the UK, and are then taxed. Some types of mutual or hedge fund impose capital gains unilaterally on members.

American citizens, and nationals of the very few other countries that tax world-wide income on the basis of citizenship, won't be able to take advantage of this UK possibility, but for all other nationals, it has usually been available. This rule led to many foreign celebrities making the UK their home for tax purposes.

For several years before changes were actually made, the Treasury had been making threatening noises about the tax privileges of the 'non-doms'. In the 2003 budget a more formal period of consultation was launched over proposed changes.

Perhaps surprisingly, there was some support for then Chancellor Gordon Brown's plans from some in the accounting and tax consulting professions. Many organisations supported the prospect of reform in this area of tax law, in the hope that new legislation would make the domicile rules simpler. Also, by taking a proactive approach to the reforms, they were hoping to stave off more radical proposals that Brown may have been considering.

In September 2003 the Paymaster-General at the time, Dawn Primarolo, a known tax 'hawk', said she was increasingly hard pressed to justify the current state of affairs to her constituents.

Primarolo told the FT: "There seems to be quite a lot of agreement it is not fair...People pay tax...and they want to ensure they are paying a fair amount compared to anybody else. What I am hoping this time is we will actually get to the bottom of it," said Primarolo.

In January, 2004, the government dropped a further strong hint that the non-dom rules would be amended, with the news that the Inland Revenue (now HMRC) was building a new database of expatriate workers living in the country. The Revenue was said to have set up five regional offices to collect personal details of non-domiciled workers, including names and national insurance numbers. It also began to send out letters to around 6,500 employees asking for information on “inward expatriate employees who are non-domiciled”.

Then in May of that year, perhaps the most famous, now ex-non dom was in the news when permission for a full-scale investigation into the tax affairs of Harrods owner, Mohamed al Fayed was granted at the Court of Session. Lord Reed rejected claims that a tax investigation initiated following the ending of the 'forward contracts' tax break for super-wealthy foreign-domiciled UK residents, constituted an abuse of power on the part of the Inland Revenue.

Explaining the reasoning behind his decision, the judge observed that: "Mr al Fayed works as a director of major companies, but does not appear to be paid a salary. He lives in expensive accommodation, but he does not appear to own or rent it."

"The natural inference from the evidence is that a great deal of effort and ingenuity has gone into creating networks of offshore companies, trusts and other entities in order to minimise liability to tax." He concluded: "In the face of such opaque and sophisticated arrangements, it is important the Revenue should be able to ensure UK tax liabilities are accurately assessed."

When the Budget arrived in March 2005, the Chancellor put off for a further year any change to the highly favourable tax regime enjoyed by non-doms.

The Treasury said: "The Government is continuing to review the residence and domicile rules as they affect the taxation of individuals and will proceed on the basis of evidence and in keeping with its principles. It would welcome further contributions to the debate, which will then be taken forward by the publication of a consultation paper setting out possible approaches to reform.

Delivering his 2006 budget speech, Mr Brown repeated his 'holding statement' of the previous year with regard to the taxation of non-doms.

Later that month HM Revenue and Customs felt the need to clarify its position on the issue of tax residence in light of the most recent court case on the matter, and issued the following statement:

"The recently published decision of the Special Commissioners in Robert Gaines-Cooper v HMRC (SpC 568) has attracted some attention from tax practitioners and their clients. In particular, some commentators have suggested that the decision in Gaines-Cooper means that HMRC has changed the basis on which it calculates the ‘91-day test’. This is incorrect."

"The ‘91-day test’ is set out in Chapters 2 & 3 (‘Leaving the UK’ and ‘Coming to the UK – Short term visitors’) of the booklet IR20: Residents and non-residents. This guidance is clear that the ‘91-day test’ applies only to individuals who have either left the UK and live elsewhere or who visit the UK on a regular basis. Where an individual has lived in the UK, the question of whether he has left the UK has to be decided first."

"Individuals who have left the UK will continue to be regarded as UK-resident if their visits to the UK average 91 days or more a tax year, taken over a maximum of up to 4 tax years. HMRC’s normal practice, as set out in booklet IR20, is to disregard days of arrival and departure in calculating days under the ’91-day test’."

It continued:

"In considering the issues of residence, ordinary residence and domicile in the Gaines-Cooper case, the Commissioners needed to build up a full picture of Mr Gaines-Cooper’s life. A very important element of the picture was the pattern of his presence in the UK compared to the pattern of his presence overseas. The Commissioners decided that, in looking at these patterns, it would be misleading to wholly disregard days of arrival and departure."

"They used Mr Gaines-Cooper’s patterns of presence in the UK as part of the evidence of his lifestyle and habits during the years in question. Based on this, and a wide range of other evidence, the Commissioners found that he had been continuously resident in the UK. From HMRC’s perspective, therefore, the ’91-day test’ was not relevant to the Gaines-Cooper case since Mr Gaines-Cooper did not leave the UK."

• "HMRC can confirm that there has been no change to its practice in relation to residence and the ‘91-day test’. HMRC will continue to:
• Follow its published guidance on residence issues, and apply this guidance fairly and consistently;
• Treat an individual who has not left the UK as remaining resident here;
• Consider all the relevant evidence, including the pattern of presence in the UK and elsewhere, in deciding whether or not an individual has left the UK;
• Apply the ‘91-day test’ (where HMRC is satisfied that an individual has actually left the UK) as outlined in booklet IR20, normally disregarding days of arrival and departure in calculating days under this ‘test’. "

The HMRC Brief concluded:

"The guidance provided by booklet IR20 is general in nature. If, on the facts of the matter, a dispute arises over the application of this general guidance and the parties cannot resolve their dispute by agreement, the Commissioners will determine any appeals. The Commissioners are bound to decide the legal issues by reference to statute and case law principles rather than HMRC guidance. Where a dispute relates to particular facts the Commissioners will consider the evidence and make findings of fact to which they will apply the law."

Gaines-Cooper was again in the news in October 2008, when it emerged that he had failed to convince Court of Appeal judges in London that he was non-domiciled for tax purposes.

The ruling left the globe-trotting businessman with a huge tax demand for the years 1993-2004.

The judge dismissed the appeal as “nothing more than an illegitimate attempt to reargue the facts”.

Returning to non-dom rules in a more general sense, the government finally took action in 2007, unveiling planned reforms in the pre-budget report.

Under the new rules, non-domiciled UK residents would be obliged to pay --in addition to the tax collected on UK-sourced income -- an annual charge of GBP30,000 to ensure that they contribute in respect of the foreign income and gains which they keep abroad, and on which they do not pay UK tax. The charge will apply for non-doms resident in the UK for more than 7 years. Users of the remittance basis were also to lose their tax free personal allowances, it emerged.

The Government explained that the measure was targeted to protect competitiveness by ensuring that secondees to the City are not affected (the majority have left the UK by 7 years). The Government added that it would also amend the rules to remove flaws and anomalies that allow remittance basis users to sidestep UK tax where it is due on foreign income and gains, and would tighten up the day counting rules to bring the UK into line with international practice.

Then in March 2008, the new Chancellor of the Exchequer, Alistair Darling announced that the government intended to forge ahead with its controversial plans to introduce the new tax scheme for non-domiciles, albeit with some concessions, in a budget speech that otherwise contained few surprises concerning the tax regime for businesses in the UK.

In his first budget speech since taking over the job from Gordon Brown in the previous year, Darling informed the House of Commons that the government would be implementing the package of tax reforms "subject to some changes made in the light of consultation".

Key changes to the original proposals announced in the PBR have meant that income and gains in offshore trusts will only be taxed when they are remitted to the UK, even if these come from UK assets. The Chancellor also clarified the government's position regarding children, who will not be liable to the GBP30,000 charge.

Further changes to the non-dom tax proposals mean that: the GBP30,000 charge should be creditable against foreign tax; art works brought into the UK for public display or for repair and restoration will face no new tax charges; where art works owned by offshore trusts are sold in the UK, tax will only be paid when the trust remits the gain to the UK; and people with unremitted offshore income and gains of under GBP2,000 will be exempt from the GBP30,000 charge and the changes to personal allowances.

According to Darling, the rules in this area will not be "substantially revisited" for the rest of that or the subsequent Parliament.

"We welcome the contribution made by people born outside the UK who choose to come and work here. They are an important and central contributor to our economy’s growth and prosperity," Darling told the House.

However, he went on to add that: "I believe that it is right and fair that they should, after 7 years, pay a reasonable charge to maintain the right to be taxed differently from other UK residents."

"Beyond that, as I have said before, we will not seek to charge UK tax on offshore income or capital gains that is not brought into the UK," Darling told MPs.

In March 2009, HM Revenue and Customs's released its latest guide for non-doms.

Running to more than 400 pages, the long-awaited guidance, released on March 31 - just five days before the end of the tax year - shed new light on the rules that affect non-UK domiciled individuals from April 6, 2008, when the new GBP30,000 charge was introduced. However, given the length of the guidance, tax advisers are warning affected taxpayers to take great care in using it.

Matt Coward, Director of Personal Tax Services at PKF said: “As far as individual taxpayers are concerned this guidance is too much and too late – as well as being potentially misleading, or incorrect in some circumstances."

He added: “The guidance confirms that many individuals, who had not previously had to worry about their tax status because they only have modest funds overseas, will now have to consider their position very carefully. Many may take one look at the guidance and feel obliged to submit a tax return unnecessarily, seek professional tax advice over these complex rules or, regrettably, decide to ignore the issue completely.”

HMRC’s new 85 page booklet HMRC 6 replaced booklet IR20 - its long established guidance on residence and domicile issues for self-assessment taxpayers. Although the new guidance is more detailed, tax advisers take issue with some of the statements made.

Coward continued: “Some paragraphs of the guidance seem to introduce new elements to the rules established through case law – at the very least this could lead unrepresented taxpayers down the wrong path. The flowcharts aimed at helping individuals self-assess their domicile status could be dangerous. Unless you are already an expert in this area, using them could produce an incorrect answer and taxpayers should not use them in isolation to determine their tax status."

He added: “In other parts of the guidance, the tone of HMRC’s commentary could be perceived by taxpayers as threatening. If eligible individuals are deterred from making a claim, they could end up paying more tax than they are legally required to."

According to PKF, HMRC’s new internal manual on the remittance basis runs to 274 pages of guidance, but still envisages that its officers will get help from its Offshore Personal Tax Technical Group. Although there are some relaxations – for example where an offshore bank does not follow a taxpayer’s specific instructions – other concessions, on when a tax return is or is not required, could lead to taxpayers in the same circumstances not being treated equally.

Coward said: “These rules are clearly too complex. It is a pity that what started out as a simple concept to charge UK-resident non-domiciled individuals a fee for maintaining the benefits of their tax status has produced over 100 pages of legislation, more than double that in guidance notes, and caused uncertainty for over 18 months.

He concluded: “I am sure that we can regard this guidance as ‘a work in progress’ – soon to be updated to give a clearer position. But even then, it will still be very difficult for individuals to self-assess their tax liabilities correctly, based on these complicated rules."

One in four non-dom taxpayers in the UK who responded to a 2009 poll by KPMG regarding these changes to the tax regime said that they have made the decision to leave the country. Nine in ten of the respondents felt that the new rules have damaged the UK’s reputation as a place to do business.

In January 2010, HMRC announced the publication of some new, and some replacement, guidance which reflects the 2008 Finance Act changes and other recent changes. Some wholly new guidance was being issued in some areas, such as domicile, to help people correctly self-assess their tax liability.

HMRC said that it would be introducing two new guidance manuals, the 'Residence, Domicile and Remittances' manual and the 'Transfer of Assets' manual:

• The new guidance on the remittance basis forms part of the Residence, Domicile and Remittances manual. The new guidance on domicile was also moved to that manual in autumn 2009. Additional technical guidance on residence for incorporation in the new manual was provided later in 2010.
• The new guidance on the application of the remittance basis to the Transfer of Assets legislation was moved to the new Transfer of Assets manual when it was published later in 2010.

January 31, 2010, saw the passing of a key deadline for trustees of offshore trusts, who needed to consider whether they should make a crucial "rebasing" election by that date in respect of non-UK trusts.

The election allows UK resident but non-UK domiciled individuals to save capital gains tax and stems from the major changes to the UK residency rules that came into effect from April 6, 2008, but which are only just beginning to bite as relevant tax returns now have to be filed.

Chris Mills, Director in the Private Client team at Grant Thornton, comments: "High net worth non-doms will want to consider carefully the pros and cons of making an election. Once made, it is irrevocable and applies to all assets in the trust, most assets in its underlying companies and those subject to the offshore income gain regime, regardless of the assets standing at a gain or loss. If there is an element of doubt as to whether a capital payment has been made then the trustees should consider whether to make the election to cover off the risk that the deadline for the election is missed."

He added: "All non-resident settlements with one or more current or potential non-UK domiciled beneficiaries should seek advice on the availability of the election and the consequences of making an election. Trustees should also be made aware of the relevant time limits for making the election."

The election was introduced to help the transition from the old residency rules to the new ones. If an individual had a trust set up before April 6, 2008 then, when that trust eventually disposes of assets, there may be gains that relate to those pre-April 6, 2008 assets. These can benefit from the so-called "rebasing" election, which allows a revaluation as at that date which in many cases will lead to a saving of capital gains tax.

If the trustees wish to make the election, they need to complete a form (called the RBE1) and it must be submitted to HM Revenue and Customs (HMRC) on or before the January 31 following the end of the first tax year (beginning with 2008/09) in which one of the following occurs: a capital payment is made to a UK resident beneficiary, or the trustees transfer all or part of the settled property to another trust. This means January 31, 2010 is an important deadline for many trustees as, if they miss this date, the opportunity to make an advantageous election will be missed.

However, not everyone will need to make an election at this time. For example, neither of the conditions mentioned above may have arisen in 2008/09. Others may opt to give up the chance of an election to keep their offshore tax affairs private from the eyes of HMRC.

According to the private client practice at KPMG, for non-dom taxpayers, this could be "the most important tax return of their lives." The firm also warns that these returns could "have a significant impact on the future of the UK as a financial center."

"UK resident non-dom taxpayers have to decide whether to claim the remittance basis – keeping their offshore profits outside the UK tax net – or to pay UK tax on their worldwide income or gains. For those living here for 7 or more years, they also have to pay the GBP30,000 'fee' if they want to use the remittance basis," explained David Kilshaw, head of private client advisory at KPMG in the UK.

"These are complex new rules, which tax payers and HMRC alike are struggling with. HMRC can be expected to enquire into a large number of returns to make sure they are correct, and rightly so. But it is also to be hoped their approach will be sympathetic and understanding. If HMRC were to be unduly aggressive or suspicious in their dealing with the returns filed, this could be the straw which causes many non-doms to leave the UK," he cautioned.

In a written ministerial statement on December 6, 2011, HM Treasury announced that draft legislation to core reforms to non-dom taxation would be published on the same day and be included in the Finance Bill 2012. Part of reforms consists of a higher GBP50,000 annual charge, relief for business investment and 'technical simplifications' to existing non-dom rules.

The statement went on to say that legislation for the statutory residence test required further consideration and would be announced in the Finance Bill 2013 instead of 2012 as originally announced. Reforms to ordinary residency will be introduced at the same time.