As discussed in other sections of this website, the United Kingdom with the Republic of Ireland make a distinction between the tax treatment of domiciled and ordinarily resident individuals and non-domiciled but ordinarily resident individuals. Historically, the position in both countries was that non-domiciled but ordinarily resident individuals would only be taxed on remitted income to the UK and indeed could even arrange their affairs before coming to the respective countries so that they could live of capital earned before actually arriving in the UK or Ireland resulting in no income tax obligations whatsoever. Unfortunately in the UK these halcyon days have been somewhat compromised due to legislation commencing back in 2008 but the UK still remains uniquely attractive to the wealthy expatriate community. In particular, despite new rules demanding disclosure of one’s worldwide personal wealth (an obvious precursor to where both the Conservative and Labour Parties would like to be in a number of years’ time) non-domiciled individuals can still enjoy a full exemption from UK income tax on all non-UK remitted income at least for the first 7 years of their permanent relocation to the UK.
The Changes Introduced from 2008
The tax position for UK non-domiciled but ordinarily resident individuals can now be broken down into the following categories:
- Those intending to live in the UK and those only tax resident in the UK for less than 7 out of the last 9 years – In both cases, the old remittance only tax base still applies although the latter would need to structure their affairs as the 7 year residence period approaches. In other words, the UK is still very much a ‘tax haven’ for the wealthy but for how long no one can predict as politically it is very hard to provide a reason why a long-term UK resident should be taxed differently than a domiciled and resident native;
- Those resident in the UK for more than 7 out of the last 9 years – The tax position for such individuals unless they have set-up a private interest foundation (see below) or have elected to pay the £30,000.00 to £50,000.00 annual tax levy is that they are taxed on their worldwide income just as if they were UK domiciled and resident. It should be noted that the levy is per individual and not per household so wealthy couples could end of paying £60,000.00 to £100,000.00 per annum in order to maintain their historic tax benefits
Subsequent to Alistair Darlings 2008 Budget there have been further squeezes aimed at the wealth non-domiciled UK community including seeking to prevent non-domiciled but ordinarily resident individuals from using traditional offshore companies to buy investment properties in the UK and avoid any capital gains or other tax consequences but interestingly the initial rules making non-domiciled individuals liable for tax when they used their wealth to re-invest in the UK even if not using such gains for their own personal use were amended when it was realised that this was de-incentivising non-domiciled individuals form investing their wealth in the UK and incentivising them to invest abroad.
Why Tax Planning Consultancy is so Important for Expatriates
Whilst there are still significant tax benefits for wealthy non-domiciled individuals in the UK even if they have to pay the annual levy/tax there is no doubt that over the next few years their special treatment will be abrogated primarily – despite the potential negative impact on the UK economy – because both major parties consider this effective tax break for the mega rich to be politically too sensitive not to amend. However, notwithstanding this negative outlook the SCF Group is of the opinion that with appropriate specialist advice from our legal and accountancy teams it will be possible for wealthy expatriates to avoid exposure to UK tax on their worldwide assets provided they set-up an appropriate vehicle to segregate their wealth using something like a private interest foundation or trust. The economic case for doing so is particularly strong as the cost of setting up and running one of these specialist vehicles would in most cases be significantly less than the annual government levy, which such structures will avoid and that is not even taking account of the other benefits inherent in using private interest foundations and trusts namely asset, pre-nuptial and inheritance tax protection.