CREASEYS' NEWS - FEBRUARY 2012

Am I non dom? Does it matter?

There remains an air of mystique and uncertainty regarding the status and privileges of non doms. The law of domicile is complex and the tax implications have changed massively in the last three or four years. Richard Holme and Abigail Rowsell look at the current state of play. Extensive press comment over the last few years has highlighted the tax privileges given to non doms but there perhaps remains an air of mystique and uncertainty regarding their status and privileges. In practice, we find many people are pleasantly surprised to find that they might be regarded as non dom, even if they are currently living in the UK and have done so for some time. Whereas, others who have departed our shores and are living overseas, are disappointed that they have retained their UK dom status. Why the confusion?

The law of domicile is complex and the tax implications have changed massively in the last three or four years. Given that H M Revenue & Customs no longer gives rulings on domicile matters, it is crucial to take expert advice on your status and consider the implications. 

A person will normally take the domicile of their father upon birth - but this is not always the case for if the child is born outside wedlock, it will take the domicile of the mother. This sometimes leads to somewhat embarrassing questions being asked at an initial client interview on this aspect! Later on, the person's domicile may change if their parent's domicile changes during their childhood and if they decide to live in another country permanently or indefinitely. There have been a number of court cases and the most recent of these has concerned the very mobile entrepreneur, Robert Gaines-Cooper.

Although a person may have decided to live permanently or indefinitely somewhere, it may be difficult to prove this and it is important to keep evidence of intention and, wherever possible, cut any links, however small, with the home country.

Many expatriates will leave the UK to work abroad during their career but retain a UK property 'just in case' they choose to return here. It may be difficult for them to prove that they have lost their UK domicile, if it becomes relevant. 

We have enjoyed some success in maintaining a non dom status in such a situation. The main benefit of non dom status for someone not living in the UK is that they are only liable to Inheritance Tax (IHT) on their UK assets - with the use of offshore companies, even the IHT exposure on underlying UK assets can be avoided.

People living in the UK who are non dom get a variety of privileges but they fall by the wayside after 7, 12 and 17 years to a greater or lesser extent. Since April 2008, the rules have become difficult to follow but in the first 7 years of living in the UK the non dom may avoid tax on unremitted overseas income and gains quite readily. UK capital gains may be avoided quite easily through setting up an offshore trust. After 7 years, it may be necessary to pay the £30,000 levy to avoid tax on offshore income and gains and this is to increase to £50,000 from April 2012 for those who have been here 12 or more years.

Although many of the Inheritance Tax privileges disappear after 17 years, it is normally possible before that time to place assets in an offshore trust and avoid IHT altogether!

Each year, privileges are given and taken away for non doms – from April 2012 there will be an ability to remit offshore income free of tax (!) to invest in UK business. Supposedly good news - but advice will be needed as it may be better still to use an offshore trust to avoid Capital Gains Tax.

What are the disadvantages of being non dom? Well, there can be an Inheritance Tax problem where one spouse is domicile and the other isn't. In that case there may be Inheritance Tax to pay when the first spouse dies, in the absence of planning. 

Can I be non dom one year and 'dom' the next? In a way this is possible since one can opt in and out of the remittance basis and choose carefully to plan tax bills, so that one year worldwide income is declared and in the next, non dom status enables the remittance basis to save tax.

This is certainly an interesting and fertile area to work in and please let us know if we can assist at all in this fast moving area.

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Recent HMRC attack on offshore tax matters – could you be affected?

With a pressing need to raise more revenue for government and an increasing amount of information coming in, even from tax havens, HM Revenue & Customs (HMRC) is launching a number of attacks on UK residents who have not disclosed offshore income and gains. We set out below our considered thoughts on some recent aspects and how we can assist anyone potentially affected.

Switzerland has historically offered a most efficient and yet confidential banking system, although in October 2011, the Swiss and UK government signed a tax treaty designed to ensure that UK residents complied with their tax obligations in respect of Swiss bank accounts, stocks, shares securities, options, debts, etc.

Although not taking effect until January 2013, persons with Swiss bank accounts or investments must consider their position carefully as if they have not made any voluntary disclosure prior to 31 May 2013, the Swiss bank or agent will deduct a one-off levy of between 19% and 34% of the bank or other balance. For some, this might even be an acceptable levy to pay over but they will then be faced in the future with an annual withholding tax based on UK rates but reduced slightly:

•  Interest and other income      48%
•  Dividends                                  40%
•  Capital Gains                           27%

It is essential that individuals who have not declared Swiss income or gains get in touch with us as soon as possible, so that we can consider the best options for them. It may be appropriate, for example, to make a voluntary disclosure to the tax authorities or to consider the use of other methods of disclosure such as the Liechtenstein Disclosure Facility (LDF).

The LDF is arguably more generous and flexible than the tax treaty with Switzerland in that it permits individuals who make a disclosure to see a maximum 10% penalty imposed, with undeclared income and gains 'only' being taxed back to 1999. 

To assist compliance with LDF, a specialist unit of HMRC has been set up and is extremely efficient. To ease the compliance burden, a flat rate of 40% tax can be paid. This composite rate takes into account virtually all taxes - other than National Insurance. One extraordinary feature of the LDF is that individuals can move a relevant amount of their wealth to Liechtenstein (eg opening a bank account there with a reasonable sum) and then take advantage of the benefits of LDF to voluntarily disclose income and gains arising from anywhere offshore, not just Liechtenstein. 

The LDF does, though, have a sting in its tail as there was a requirement that by September 2011, financial intermediaries in Liechtenstein would identify and report any UK individuals with accounts there and this information has already been passed to the UK tax authorities who will be writing to all affected UK residents by 31 March 2012. 

These letters have started apparently to be received by UK persons who will need to consider their position carefully.

Of course there are many legitimate uses for offshore arrangements, whether this be bank accounts, trusts or companies but their use needs to be carefully considered. Often capital taxation can be readily avoided by persons not resident or not domiciled in the UK. However, they need to tread carefully and take account of ever changing Revenue law and practice. 

A Supreme Court majority decision in the Gaines-Cooper case makes it all the more important that persons claiming to be not resident have made a 'clean break' from the UK and have few connections – the limiting of visits to 90 days is just one of many factors. The absence of rulings for residence and domicile matters does not assist and individuals need to take careful advice. Introduction of a Statutory Residence Test from April 2013 is long overdue and will assist in individuals understanding their position better.

In the meantime, HMRC is gathering increasing amounts of information from a number of different sources. Tax Information Exchange Agreements have been signed with many jurisdictions, including tax havens, and there is the increasing use of powers to obtain information from banks. Some tax authorities have even been known to use information stolen from banks or other sources but at a recent event, we were told by senior HMRC representatives that they would not look to search out such information.

Increased penalties for offshore tax evasion are being applied at three levels based on the country concerned. The highest level of penalty can be 200% of the tax evaded and is reserved for those offending with income or gains in Monaco, Andorra, Panama or the United Arab Emirates. Differing levels of penalty will be based on whether the individual failed to take reasonable care or was deliberately understating and/or concealing the offshore income and gains.

We have been pleased to have obtained some success in making disclosure to HMRC and then negotiating a very low or even a nil penalty in some cases. Thankfully, we have no involvement in any criminal prosecutions but HMRC has indicated that these are likely to be more often utilised in future for offshore tax evaders.

Please feel free to contact ourselves to discuss matters further.


By Richard Holme and Abigail Rowsell

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Ten ways to save tax before 6 April 2012

1.    Minimise your Capital Gains Tax (CGT) bill!

    Capital Gains Tax (CGT) is now generally charged at a swingeing 28% but there are quite a few means to reduce it. Rolling over into an Enterprise Investment Scheme can defer tax for at least three years, while also getting 30% Income Tax relief – the overall short term tax benefit is therefore 58%! In the year to 5 April 2013, a new SEIS scheme may increase this benefit to 78% with 50% Income Tax Relief and the ability to permanently defer gains. For disposal of one's own personal company, certain land and business interests, it may be possible, with planning, to enjoy a 10% rate through Entrepreneur Relief.

2.    Utilise annual CGT exemptions and lower rate bands

    All individuals have an annual CGT exemption of £10,600 with no provision for carry forward so try to ensure you use this exemption and potentially save £2,968 (£10,600 x 28%) tax. It may be useful to crystallise a gain and then reacquire the relevant asset but if in the case of quoted shares, it is necessary to reacquire the asset more than 30 days after sale, or indeed arrange perhaps for a spouse or civil partner to repurchase the shares. 

3.    Pensions – possible action required before Budget Day, 21 March 2012

    You may wish to make use of the carry forward pension provisions before Budget Day, as it is rumoured that higher rate tax relief may be restricted from this date. Also, if you do not make use of any unused allowance from the 2008/09 tax year, it will be lost after 5 April 2012. For those who are nearing the lifetime limit of £1.8m, there is the opportunity to apply for fixed protection before it reduces to £1.5m on 6 April 2012. However, applications must be received by HMRC by 5 April 2012 otherwise they will be too late. Please see our helpsheet for further pension advice.

4.    Enterprise Investment Scheme (EIS)

    In order to reduce your tax liability, investment in EIS provides Income Tax relief of up to 30% of the amount subscribed and the opportunity to make tax free gains. There is also the ability to defer Capital Gains Tax on disposals made three years before or one year after the investment. This can be particularly useful if you have made gains but are expecting to make a loss in the future which can be set against the deferred gain when it comes back into charge. This should be at least three years from the date of the investment to avoid a clawback of Income Tax relief. Further information can be found on our helpsheet.

    There are expected increases in the size of companies and the amount of investment that qualifies for EIS for shares issued after 5 April 2012, as well as a general tightening up of the rules.

5.    Reducing Income Tax – avoid that 52% to 60% charge?

    Since 6 April 2009, individuals with income over £150,000 have paid tax on the excess at 50% and for business or employment income this is increased to 52% with National Insurance. In addition, a marginal rate of 60% will arise on income between £100,000 and £114,950. Generous new pension rules may mean that large contributions can be made and attract top rate tax relief. There is every incentive also for property and business earners to utilise limited companies since they pay tax at just 20%. Other ideas include the use of EIS (see point 4) and offshore bonds, which may give a tax free roll up, even on UK income and gains. There are other tax planning ideas which may offer major tax savings (eg investing in certain partnerships which benefit from capital allowances).

6.    Whither trusts?

    Most trusts will be paying tax at 50% on their income but beneficiaries are likely to be able to recover much of this, provided payments are made to them before April 6. Certain types of trust will find that they are paying an overall tax rate of as much as 57% on distributed dividends and trustees should consider changing the terms of the trust so that this rate is reduced to a maximum of 50%. Many clients have moved their stock exchange portfolios to family trusts to save Inheritance Tax but should consider this change to reduce Income Tax. Trusts can also be a useful means of protecting family wealth in these uncertain times.

7.    Saving Inheritance Tax (IHT)

    IHT can be a major burden for many families and a married couple with £1.5m of assets may face a tax bill of £340,000 on the second death. Careful drafting of wills, planning of lifetime giving and financial products will also give rise to major benefits. Generous reliefs for business and agricultural property are carefully policed by HMRC and it is essential to ensure that detailed conditions are satisfied. There are also annual allowances which need to be used by 6 April 2012.

8.    Saving tax on holiday homes . . .

    An individual can normally avoid CGT altogether on disposal of their main residence but where there is more than one residence (eg second or holiday home) judicious use of elections may enable significant tax to be saved on disposal of the holiday home, even if overseas.


9.    Capital allowances – Invest before April 1/ April 6!

    Certain capital allowances for businesses fall from the end of the year – for example, the Annual Investment Allowance falls from £100,000 to £25,000. Contact us if you are contemplating capital expenditure for your business or holiday let.

10.    Have you used your 2011/12 ISA limit?

    Another idea is to transfer shares to an ISA, thus utilising the annual CGT exemption and placing these shares in a tax free environment. The Government is not quick to give tax free allowances but each individual may invest up to £10,680 into an ISA each tax year. This annual investment limit applies to stocks and shares and for the more cautious, up to £5,340 can be invested in a cash ISA.



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