Tax experts criticise ‘thin’ non-dom consultation paper

The UK Government’s consultation paper on non-domicile status is “thin on the ground” when it comes to detail and, if introduced as proposed, will fail to treat some ‘non-doms’ fairly, according to tax experts.

“It feels like this new legislation is being rushed through,” said Dean Mullaly, managing director of Mark Dean Wealth Management, suggesting the detail included in the proposed legislation is “thin on the ground”.

Senior industry figures agreed that the paper is light on detail, and also expressed their disappointment with the Treasury’s decision to reduce the consultation period, particularly given the extent of the changes.

The document, published on Wednesday, revealed that long-standing offshore trusts – set up by non-doms before they acquired UK-domicile status – would be exempt from the government’s plans to toughen up its tax restrictions on non-dom individuals.

Sensible

This, Mullaly argued, is a sensible move: “Defining what was original capital or income would be a nightmare, and many of these trusts were legitimately set up while the individual was a non-dom.

“These people prudently planned around tax legislation in force at the time and have no doubt paid a lot of money in fees,” he said, adding that it would be unfair to move the goalposts.

Boomerang

Managing director of Trident Tax Alan Kennedy agreed, saying this rule is a “sensible compromise” to encourage non-doms to remain in the UK.

However, he said it’s important to be aware that this compromise won’t apply to UK-born individuals who acquired a domicile of choice overseas before deciding to return to the British Isles.

“For those people that the government regards as ‘boomerang’ non-doms, their UK domicile of origin will revive as soon as they become a UK tax resident again,” Kennedy said, meaning they would have no protection from UK tax on any offshore trusts they set up when they acquired non-UK domicile status.
“The effect of this is that all income and gains of the trust will be taxable on an arising basis if the settlor who is returning to the UK is regarded as having retained an interest in the trust.”

Reverse

Ray McCann, partner at New Quadrant Partners, said it was inevitable there would be “significant grandfathering” in relation to trusts.

However, he also argued the consultation “goes into reverse” where it affects the treatment of UK-born individuals who have since acquired a foreign domicile.

“If the rules are introduced as proposed, they will require so many caveats to make them operate at anything like sensible and fair, which will most likely be unworkable for both advisers and HMRC,” McCann said.

“Where an individual has genuinely relinquished their historical UK connection (accident of birth) they should be treated in the same way as anyone else if they come back to the UK.”

The consultation also confirmed George Osborne’s plan to reduce the 17-year window of time it takes for an individual to gain UK-domicile status (and therefore subject to UK tax), to 15 out of 20 years.

Generous

Tax advisers suggested there might be some pressure to reduce this further, with some even suspecting the government might like to abolish the word ‘non-dom’ altogether.

McCann said the 15-year rule “remains generous” by international standards and means long-term non-doms can continue to enjoy a tax-advantaged position.

Mark Davies, director of Mark Davies & Associates, said there might be increased pressure to reduce the non-dom timespan further if the new rules fail to instigate a fall in the number of non-doms in the UK.

Complicated

He also pointed to the different set of rules which apply to non-doms and UK-doms: “[The Treasury] hasn’t decided whether the rules for non-doms will change or whether there should be three rules: one for UK doms, one for nondoms, and one for deemed-doms.

“The proposed changes will be complicated and it will require a lot of time to draft the legislation,” Davies said.

He also said he had doubts as to whether the rules are compliant with European Union principles, which enable EU residents to move capital freely within the EU and third country states without discrimination.

Modernise

Tax advisers agreed that the government’s paper is lacking in detail, but suggested the principles of the reforms are clear as the government looks to modernise the domicile rule, without causing any issue to new foreign individuals coming into the UK.

McCann said: “If the ending of permanent non-dom status leads to some stability then that will be a good thing, but I expect there will be a lot of criticism aimed at the government over the treatment of UK-born domiciles who have largely severed their UK connections.”