Since Alistair Darling’s 2008 Budget, non-domiciled but ordinarily resident UK individuals have seen many of their traditional rights compromised with successive UK Finance Act’s closing one loophole after another to the extent that many people are now wondering whether any benefits still remain? The answer, despite the recent 21st of March, 2012 Budget (which introduced a £15,000.00 minimum annual property tax on £2 million plus property owned by offshore structures and a punitive Stamp Duty Land Tax (SDLT) of up to 15% at the time of purchase) is absolutely, especially for who been in the UK for less than 7 out of the last 9 years.
The Historic Position
The pre-2008 position was quite clear in that all UK ordinarily resident but non-domiciled (in simple terms, generally meaning those with a foreign born father) individuals, were not taxed on their worldwide income but only on remittances received back in the UK. In fact, in certain cases it was even possible for non-domiciled individuals to separate their pre-UK income from capital and live of the latter, which was not taxable. However, as stated this is no longer the position with UK non-domiciled individuals wishing to keep their ‘historic’ remittance only tax base now having to pay an annual levy of between £30,000.00 and £50,000.00 per annum depending on the length of time they have been resident in the UK.
What can be done now?
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
Private Interest Foundations (PIF’s)
Provided it is set up at the right time and in the right way, a private interest foundation will be deemed to be a self-owing separate legal entity without an ultimate beneficial owner (see Carl Zeiss Stiftung v. Rayner & Keeler (1967) App. Cas. 853 PC 1967). Of course there are requirements such as the fact that the donor should not be a direct beneficiary and that the bylaws/regulations are properly drafted with a foundation council genuinely independent from the original donor/founder but subject to these a PIF can still ring fence many of the historic benefits enjoyed by UK non-domiciled individuals.
Other jurisdictions that distinguish between Domicile & Residence
The United Kingdom is not the only country to provide non-domiciled but ordinarily resident individual’s with tax benefits – In fact, the UK’s closest neighbour, the Republic of Ireland, has an even more favourable system more akin to the historic position where-by non-domiciled individuals are only taxed on remitted income but their 2006 Budget did close down the loophole which allowed non-domiciled individuals working in Ireland from avoiding local taxes on income earned in Ireland. Notwithstanding this, Ireland is a very interesting alternative to the UK for those seeking residence in a respectable country which will tax treaty protection against almost all major jurisdictions including France, Germany, Italy and certainly Russia and China.
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