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News Bulletin
Ø GENERAL ENQUIRIES – K. Gill or M. Zobek Ø PROFESSIONAL INTERMEDIARY ENQUIRIES – Charles Baker MA SCF Director
Non-Dom £30,000 Tax Levy Madness may be avoided by use of Foundations There is little doubt that Alistair Darling has secured a premier position amongst the pantheon of inept Chancellor’s of the Exchequer. Certainly, the ill-thought out changes to the 200 plus year old domicile and residence rules have already resulted in the declared departure of 7 of the London based Greek shipping families back to either Athens or New York, non-domiciled but resident investors – even where they have elected to pay the annual £30,000 levy – now find that they have been given incentives to invest outside of Britain whilst almost 50% of ‘key’ workers in the City of London are suddenly faced with possibility of having to pay the levy but potentially with it not being deemed a tax payment under many international tax treaties! An ‘impressive’ performance no-doubt, but one which must be seen as part of general failure to secure the economic interests of the UK or to understand that no country’s fiscal policies can be viewed in isolation – In today’s world tax competitiveness is a vital component to economic success! In fact, within Alistair Darling’s short reign business start-up entrepreneurs have been penalised and will now be subject to at least a 22% corporate tax rate; the 10% income tax rate has been abolished (albeit with ‘forced’ amendments for pensioners and students); the proposed controlled foreign company (CFC) rules (which are likely to subject foreign source income to the 28% corporate tax rate) have resulted in the UK’s 3rd largest pharmaceutical firm Shire upping sticks and moving the Republic of Ireland where there is an ultra competitive 12.5% corporate tax rate and no taxes on royalties and patents.
Historical tax position of Non-Doms
Non-domiciled but ordinarily resident individuals, which historically refers to all those individuals of non-British paternal descent (save where they have made Britain their domicile of choice) have historically only been taxed on income which is generated in or remitted back to the UK but not on their worldwide income. In other words, wealthy expatriates could control their exposure to UK income and capital gains (CGT) taxes whilst enjoying the benefits of the UKs extensive double taxation treaty network with other countries. This tax ‘loophole’ whilst obviously not equitable did attract some of the wealthiest international families to London and certainly gave the City of London an advantage over New York and Frankfurt in attracting the best international brains to the City. In addition, apart from the advantages to UK lawyers, accountants, financial and shipping experts of having such individuals located in London, the ability of non-domiciled individuals to legally use offshore companies to invest in the country and yet avoid domestic CGT meant that much of such individual’s wealth was maintained within these shores as it made excellent financial sense. However, since the 6th of April most of the historical benefits enjoyed by non-domiciled individuals resident in the UK for 7 out of the last 10 years have been abolished unless they elect to pay the £30,000 annual per person levy. However, apart from the fact that the levy is itself a disincentive to remain in the UK the legislation also prevents those paying the levy from using offshore companies to avoid exposure to UK CGT on UK investments where a Non-Dom remains the ultimate beneficial owner of an offshore company – In other words, without correct advice, Non-Doms are now encouraged to invest outside of the UK!
It would be nice to say that PIFs will provide a ubiquitous remedy to the changes introduced by the Chancellor but in reality the limited number of professionals capable of setting them up correctly together with the costs involved – albeit considerably less than the annual £30,000 levy – will mean this solution will only be available to a fraction of the Non-Dom community. The reason that PIFs are attractive is that unlike ordinary private limited companies they are self-owning entities – conceptually the civil law equivalent to English common law trusts – but unlike trusts and notwithstanding the above are treated under English case law as the equivalent to private limited companies (See: House of Lords in Carl Zeiss Foundation v. Rayner & Keeler (1967) App. Cas. 853 PC 1967). Therefore, in précis a PIF is a self-owning legal entity without any ultimate beneficial owner(s) exempt from the anti-avoidance provisions aimed at trusts. The result is that both non-UK income can be shielded (whether the levy is paid or not) from UK tax exposure as can also existing UK investments using offshore companies since the ultimate beneficial owner is the PIF and not an individual Non-Dom. However, it cannot be over-stressed that given the weak legislation in certain PIF jurisdictions expert advice is an absolute necessity before proceeding. However, if created correctly a PIF may maintain the principal donors right to determine the foundation at any time before his or her demise but specifically a well drafted set of foundation regulations would have an anti-duress clause to prevent any 3rd party seeking to use a court to try and order a donor to use his or her reserved rights. Certainly within any valid robust PIF there must be a genuinely independent Foundation Council but one subject to the scrutiny of a ‘protector’ – a party who must sanction all financial and significant transactions – who may, if appropriate even be the original donor or ‘originating party’. In respect to the jurisdictions that can provide PIFs they include Lichtenstein, Switzerland and more recently – under Law 25 of 1995 – Panama. However, in the case of the latter jurisdiction it is vital to use a licensed trust and company firm as it is the non-publically registered regulations and management facilities that make the difference between a valid and invalid PIF. For non-dom individuals ordinarily resident in Britain the key points to note are:
· The application of taxing non-domiciled individuals on their worldwide income only applies where such individuals have been ordinarily resident or will become ordinarily resident in Britain for 7 out of the last 10 years
· Non-domiciled but ordinarily UK resident individuals resident in Britain for less than 7 out of the last 10 years still need to make a declaration in respect to their worldwide income and assets but can still avail of the old non-domiciled benefits. In other words, such individuals can – at least until the next Budget – control their exposure to UK taxation using the ‘old’ remittance system. However, now that non-doms have been targeted there is little doubt that slowly but surely all remaining ‘loopholes’ will be closed within a few years
· Investments made by non-doms using offshore companies – no matter how long they have been in the UK - will now become subject to capital gains tax (CGT). The closing of this ‘loophole’ is particularly odd as it in effect provides non-doms with a disincentive to invest their wealth in the UK as it will become fully taxable whether or not the £30,000.00 Levy has been paid
· The £30,000.00 Levy is per individual and not per family unit which means that many working non-dom couples will find themselves having to fork-out up to £60,000.00 each year!
· The only know method of avoiding the current changes is by setting up a private interest foundation (PIF) with correctly drafted regulations so as to include anti-duress clauses and independent foundation councils be they located in Liechtenstein, Panama or Switzerland
Exodus of Business and Non-Domiciled Individuals from the UK has already started! At least 4 of the major Greek Shipping families have already announced their departure from the UK leaving specialist lawyers and accountants with no choice but to leave with them or significantly pair back their UK operations. Estate agents in prime areas such as Kensington and Chelsea, Belgravia and Knightsbridge have already noted that there has been an increase in the number of prime properties (mostly owned by offshore companies) being put on the market. Major UK businesses such as Shire Pharmaceuticals – the 3rd largest UK pharmaceutical firm – and advertising giant WPP have announced that they intend to re-domicile their business activities to the low 12.5% corporate tax regime of the Republic of Ireland and in the process re-affirm that country’s position as the EU’s second wealthiest state after Luxembourg. From any objective assessment it really seems that the UK has recently been scoring numerous ‘home’ goals that threaten the City of London and even worse specifically benefit this country’s main financial competitors in Dublin, Frankfurt, Luxembourg and New York – Mr. Darling, I hope you are reading this article and try and make good your disastrous running of the UK economy or perhaps you are a closest member of the Scottish Nationalist Party (SNP) and this is all part of your plan to break up the UK!!
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