HISTORICALLY NON-DOMICILED INDIVIDUALS ORDINARILY RESIDENT (OR NOT) IN THE UK COULD USE OFFSHORE COMPANIES TO AVOID CAPITAL GAINS AND INHERITANCE TAXES AND/OR SEPARATE WORLDWIDE INCOME FROM UK INCOME.

Historically the United Kingdom and the Republic of Ireland were unique in Europe in making a distinction between a person’s domicile and residence for tax purposes. In most European countries once an individual became ordinarily resident for tax purposes then he or she would normally be liable to tax on the same basis as local nationals, which generally equated to becoming liable to tax on their worldwide income. Obviously there were and still are the well-known ‘tax havens’ such as Monaco, Andorra, Liechtenstein etc. but unlike these the benefits in the UK derived from an ancient and rather politically incorrect view that to be subject to British taxes one had to be British domiciled, which roughly equated to proving that your Father was born in the UK*! In other words, this domicile ‘test’ which became so beloved of the international jet-set and made London the primary home for the World’s billionaires and super-wealthy actually derived from laws that were based upon ‘racial’ purity and not only that were sexist to boot! Putting aside the strange origins, the UK’s domicile and residence rules meant that the world’s wealthy could simply separate their UK and non-UK wealth/income and – with a little bit of tax planning advice – almost decide how much tax if any they would like to contribute. In short, by using the fact that ‘shares’ were deemed movable property under international law they could even invest in the UK and still avoid capital gains or inheritance tax exposure simply by using an offshore tax free company to hold UK investments.

However, since the Chancellor of the Exchequer’s 2008 UK Budget the tax treatment of non-domiciled but resident individuals, changed significantly especially for those who have been ordinarily resident in the UK for 7 out of the previous 9 years. The current position is that the ‘traditional’ status quo still exists for those non-domiciled but UK resident individuals that have been in the UK for less than 7 out of the preceding 9 years. This means that a person deemed non-domiciled by Her Majesty’s Revenue & Customs (HMRC), is only subject to pay UK income and capital gains taxes on those sums physically remitted back to the UK and not on his/her worldwide income/capital gains as would otherwise have been deemed the case if they were UK domiciled. However, it is clear that whilst advantages still exist they are merely vestiges from the past and there is almost unanimous agreement by all tax planners that it is only a matter of time before Non-Dom’s are treated in exactly the same manner as domiciled individuals.

In the interim period, non-UK domiciled but UK tax resident individuals who have resided in the UK for more than 7 out of the last 9 years have three possible scenarios depending on the action or inaction taken, namely:

1. Where a non-domiciled but UK tax resident individual does nothing he or she will become taxed on their worldwide income and capital gains in a very similar manner to UK domiciled and resident individuals. Of course, just as for UK domiciled and resident individuals they will be able to use domestic tax planning tools to mitigate their tax exposure but not to a level that otherwise might have been possible;
2. Where a non-domiciled but resident individual elects to pay the annual £30-£50k duty, they can continue to benefit from the exemption on non-domiciled individuals having to pay income and capital gains tax on their worldwide assets. However, it should be noted that under Taxation of Chargeable Gains Act (TCGA), 1992, have been extended so that non- domiciled individuals, even when paying the duty, will now become subject to UK tax on all UK investments even when such investments have been made using an offshore company. It should be noted that it is the view of most tax planners that (as already inferred) this annual duty/tax is only an interim position and that the full wealth and asset disclosure required by HMRC will eventually be used to enforce full worldwide taxation;
3. Where a domiciled or non-domiciled UK tax resident establishes a private interest foundation (PIF) this can both avoid the need to pay the annual £30-50k duty and also maintain the ability to invest in the UK using tax efficient companies without falling foul of the TCGA extended provisions. However, the circumstances must be correct and proper advice taken as to ensure that inadvertent tax events are not created.

In précis, the 2008 and subsequent Budgets have considerably restricted the historic benefits available to the non-domiciled but UK resident community including the best known benefit of owning UK residential properties through offshore companies. In addition, the punitive annual tax on enveloped dwellings (ATED) has made it either necessary to register the offshore company as a local company paying tax – and hence benefit from the HMRC approved exemptions and reliefs – or seek to de-envelop properties individually worth over  £500,000.00 in as economic a manner as possible.

In précis, the 2008 and subsequent Budgets have considerably restricted the historic benefits available to the non-domiciled but UK resident community including the best known benefit of owning UK residential properties through offshore companies. In addition, the punitive annual tax on enveloped dwellings (ATED) has made it either necessary to register the offshore company as a local company paying tax – and hence benefit from the HMRC approved exemptions and reliefs – or seek to de-envelop properties individually worth over  £500,000.00 in as economic a manner as possible.