The UK’s changes to the tax rules for non-doms

in Tax, 16.09.2016

On Friday 19th August the UK’s tax authorities, HM Revenue and Customs, released their long-delayed consultation document setting out proposed changes to the UK’s tax system for non-domiciled individuals (non-doms).

HM Revenue and Customs (HMRC) announcements cover a wide range of measures, confirming HMRC’s intention to remove the “remittance basis” of taxation for non-doms who have resided in the UK for more than 15 years, and removing the possibility to shelter UK residential property from UK inheritance tax through the use of offshore structures. KPMG UK’s flyer details KPMG full commentary on the changes, but two key points to note for those with financial holdings in Switzerland are as follows:

1. UK/Swiss Tax Co-Operation Agreement

Historically, UK-resident non-doms have been able to limit any exchange of information between national authorities under the UK/Swiss Tax Co-Operation Agreement (“The Agreement”). It is understood that the Agreement will presumably be replaced by the Automatic Exchange of Information as of 1 January 2017. The information under the AEoI, including details about accounts held by non-doms, will then be delivered in 2018 relating to the year 2017.

Whilst The Agreement remains in force, Swiss banks are able to limit the information which is shared with the respective national authorities by annually certifying their clients’ UK non-dom status, whilst fully complying with the terms of The Agreement (assuming no taxable remittances have been made). From April 2017 we expect that this certification will not be possible for long-term residents (i.e. those who have been UK resident for more than 15 out of the last 20 years). Such individuals will become taxable in the UK on a worldwide basis (subject to any treaty relief), with global taxation and reporting of annual income and gains. Whilst no specific announcements have been made on this point, in the light of these changes we expect that current protections for non-doms under The Agreement will be removed for long-term UK residents. Banks should therefore review which of their clients are likely to be affected by this next April and notify them early so that they can consider their positions prior to any changes taking effect.

2. “Cleansing” of non-UK funds

Secondly, in a surprise concession, HMRC confirmed that non-dom UK taxpayers will have the opportunity to restructure foreign bank accounts and holdings between 6 April 2017 and 5 April 2018 for greater tax UK efficiency. This appears to be a ‘one-time’ offer applicable to all non-doms (regardless of how long they have been UK resident) and takes the form of a relaxation of HMRC’s current rules concerning non-UK accounts, which are very prescriptive. At present when money is brought to the UK from a non-UK source then strict rules apply to determine what the funds are (i.e. earnings, investment income, capital gains etc. or ‘clean capital’). The impact is, broadly, that those funds which will result in the highest UK tax charge are deemed to be remitted first, such that any so-called ‘clean’ funds (money that results in no UK tax charge at all) becomes “trapped” behind everything else in the account. Many non-doms therefore structure specific accounts for this purpose, to be clear that any remittances only arise from clean capital. However, where no such structuring has taken place, or where clean capital has since been exhausted, non-doms can find themselves subject to punitive tax charges.

HMRC now propose to relax these rules temporarily (between 6 April 2017 and 5 April 2018) to allow taxpayers to restructure their offshore accounts and holdings (known as “mixed funds”), with the result that it will now be possible to segregate these into the different constituent parts and to pick the source for any UK remittances thereafter. This presents a fantastic opportunity for non-doms to make significant UK tax savings on payments into the UK. However, the work required to establish the relevant balances in any given account is an involved process, reliant upon sufficient records being available to reconstruct the different ‘pools’ in any given fund. This is why we see that technology for analyzing such mixed fund balances is extremely valuable in this context.

 

 

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