As we all know, the UK Chancellor has launched a fiscal attack on the UK’s non-doms, who may now suffer harsh tax penalties for living or investing in the UK. The initial headline changes seemed to suggest an annual charge of £30,000 was the most important measure, but now it appears that the devil is in the detail.

As we all know, the UK Chancellor has launched a fiscal attack on the UK’s non-doms, who may now suffer harsh tax penalties for living or investing in the UK. The initial headline changes seemed to suggest an annual charge of £30,000 was the most important measure, but now it appears that the devil is in the detail.

Non-doms are essentially foreigners who live in the UK but do not intend to stay here forever. They include some of the best known foreign businesspeople living and working in the UK. Given that non-doms invest substantially in the UK, this attack could not have come at a worse time when the economy appears to be heading for such a dramatic slowdown and many non-doms are already leaving – the UK is expensive enough for foreigners already without a new taxing regime.

It had been anticipated since last year that measures would be introduced to take away certain tax privileges enjoyed by the non-domiciled community. However, draft legislation has now been published which goes beyond even the most negative of predictions. Worse still, this legislation will come into force on 6 April this year, leaving those affected precious little opportunity to assess the impact of the new regime, let alone consider what should be done to reorganise their affairs before April.
Traditionally, the UK has been something of a tax haven for non-doms who live in the UK. Under current legislation they are taxed on offshore income and gains to the extent these are brought into the UK (benefiting from what is known as the "remittance basis") and can organise their affairs (largely through the use of offshore trusts) to receive capital in the UK tax-free. The ability to put in place such planning did not rely upon any legal "loopholes". Simply, the relevant tax rules have always stated that they do not apply to non-UK domiciled individuals.

The UK Government has been reviewing this tax treatment for years. However, given the substantial wealth brought into this country by non-doms, the government always seemed reluctant to take action.
Not anymore. The changes, explained further below, mean that non-doms now face a tight deadline of only a few weeks in which to review their tax positions, on the basis of draft legislation which will not become law until the summer and may change between now and then.

Non-doms who have been living here for 7 out of the last 9 years will have to pay an annual charge of £30,000 if they wish to continue benefiting from the remittance basis, plus additional tax on income and gains actually remitted (where no credit is given for the £30,000 already paid). Claiming the remittance basis will also mean that they will lose their income tax personal allowances and capital gains tax annual exemption. US citizens living in the UK face particular difficulties as it does not appear that the £30,000 will be creditable against their US liabilities.

This charge will apply to children as well as adults. For a family of five non-doms paying the levy out of taxed funds, this could mean an effective annual charge of £250,000. Failure to pay the levy means that tax will be suffered by reference to all worldwide income and gains (which can be expensive, or in some circumstances impossible, to calculate). This could be sufficient incentive to leave the UK.

Non-doms will now need to undertake extensive reviews of how family wealth is held to establish whether they should elect to pay the charge.

Non-doms can currently remit capital gains from offshore trusts tax-free - so long as the trusts are managed properly. Although the legal community expected the new rules to introduce a tax charge on such gains to the extent they are brought into the UK, the draft legislation goes much further - non-doms receiving capital from an offshore trust will now will now almost inevitably suffer a tax charge of between 18 per cent and 28.8 per cent (assuming the proposed new capital gains tax rate of 18 per cent is introduced) even if the £30,000 is paid and all assets are kept outside the UK.
Therefore, non-doms are now likely to suffer heavier penalties for using offshore trusts than holding assets personally. This follows the earlier attack on UK trusts created by UK domiciliaries in 2006. There unfortunately seems to be a general perception that the use of trusts constitutes tax avoidance, which ignores the important functions of trusts in retaining control over family wealth, asset protection and succession planning.

Non-doms with offshore trusts now have very little time to consider whether these vehicles should be unscrambled. Structures left in place could give rise to steep tax charges in the future – however, rushing to unwind a complex structure could equally be an unwise move. Non-doms are therefore left between a rock and a hard place.

HM Revenue & Customs is also extending its information gathering powers by requiring the disclosure of many existing and new offshore trusts set up by non-doms. Trusts going back as far as 1991 may now have to be disclosed to HMRC by 2009.

Even if funds benefiting from the remittance basis have not actually been remitted into the UK, they may be deemed to have been remitted in certain circumstances. These circumstances have been considerably widened with retrospective effect. Therefore, individuals with offshore mortgages or chattels located in the UK that were purchased abroad will need to take advice before April.

Additionally, non-doms making gifts abroad to family members out of offshore income or gains may find themselves facing a tax bill if the recipient brings the money into the UK, even though the non-dom never benefited in any way from the funds given away.

In moving beyond simply taking away a beneficial tax regime, and imposing (within a matter of weeks) what will actually be a penal regime for many foreigners living in the UK, the new rules will be seen as sending a political message. This will without doubt lead many non-doms to wonder what will be next, and to consider whether they should remain living in the UK. Many of these individuals are perfectly happy to pay more tax, but are most concerned by the uncertainty of where the UK regime is heading. Even if they decide to remain, they are likely to consider selling some of their UK investments.

Neighbouring jurisdictions are making serious efforts to put in place beneficial regimes to attract talented individuals and inward investment. At a time when our banking system is in crisis, the property market threatens to falter, and worldwide recession appears to loom, measures threatening to drive wealth, investment and intellectual capital from the UK could not come at a worse time.