VOLTAIRE FINANCIAL

BRIAN DUNK

Brian retired from PricewaterhouseCoopers LLP in April 2011 having spent over 25 years advising wealthy individuals on taxation matters. Before joining PwC he spent 10 years at HMRC where he worked on the administration of Inheritance tax at the Capital Taxes Office and subsequently at Head Office where his responsibilities included advising Government ministers in relation to capital gains tax policy matters.

Brian regularly features in the Citywealth Top 10 Leading Accountants awards. His particular areas of expertise include:

General capital tax planning (CGT and IHT)
Planning for non UK domiciled residents
Offshore trust planning
Planning for tax efficient private company sales
Use of financial instruments and structured products for individuals
Brian has an in depth knowledge of the various ways in which efficient tax structures can be applied to, and benefit, real estate transactions and ownership structures.


James Thomlinson: As you know many of our clients are UK resident but not UK domiciled for tax purposes. I understand that there have been some key changes to the UK tax regime for these people in recent years?

Brian Dunk: Yes. Finance Act 2008 introduced significant reforms to the remittance basis of taxation that applies to non-UK domiciles. The change that caught the headlines was the introduction of an annual remittance basis charge of £30,000 for those who have been resident in the UK for seven tax years or more and wish to be taxed on the remittance basis. However, there are also very significant changes to the detailed rules which apply to establish whether a remittance of taxable income and/or gains has been made and the amount taxable. There are a number of traps for the unwary as these changes gave rise to some unexpected results.

JT: Surely it is easy to see when you have remitted income or gains to the UK?

BD: You might think so. But one of the changes is the introduction of the concept of a relevant person. Broadly, a relevant person is a close relative of the taxpayer, a trust of which he or she is a beneficiary, or a company which he or she controls directly or indirectly. In the past, for there to be a taxable remittance, it was necessary for income or gains of the taxpayer to be brought into the UK by or for the enjoyment of that taxpayer. Now a charge will arise if income or gains are bought to the UK by a relevant person irrespective of whether the taxpayer has any enjoyment. Suppose, for example, that a non-UK domiciled individual settles an offshore settlement of which he is a beneficiary and the trustees invest overseas income in a share portfolio which includes UK investments or UK property. That will represent a taxable remittance of income to the UK for the non-UK domiciled settlor although the transactions may be outside his control and perhaps also his knowledge.

JT: Are there any other such traps that non-UK domiciles should be aware of?

BD: Yes. The use of loan finance to purchase assets in the UK is another area where the rules were tightened up by Finance Act 2008. Prior to 2008 it used to be possible to use overseas income to service the interest charge on such borrowings and provided such overseas income was not used to repay the capital no taxable remittance arose. Finance Act 2008 put an end to this and also meant that certain other overseas financing arrangements were caught. The 2008 changes did include some transitional grandfathering provisions whereby loans that were taken out prior to 12th March 2008 in order to purchase residential property would continue to be treated under the old rules provided that no changes were made to the terms of the loan. Things to watch out for here are that HMRC apply strict criteria as to what constitutes a change to the terms of a loan for these purposes. For example, the exemption will be lost if the original property is sold and a replacement purchased and substituted as security for the loan.

JT: I gather that there have also been changes to the treatment of offshore trusts which have UK resident but non-UK domiciled beneficiaries?

BD: Yes. There were key changes in 2008 to the capital gains treatment of such trusts. Prior to 2008 the capital gains tax rules applicable to offshore trusts which have settlors and/or beneficiaries who are resident in the UK did not apply to non-UK domiciles. But from April 2008 non-UK domiciles can be taxed on the gains of offshore trustees if they receive distributions of capital from the settlement and if a remittance basis user they remit such distributions to the UK. However, non-UK domiciles remain outside the rules that apply to treat the capital gains of offshore trustees as the gains of the settlor if the settlor or a member of his immediate family can benefit under the terms of the settlement. An offshore settlement therefore remains an essential tool for the non-domicile who wishes to manage his UK tax position effectively as it can provide an effective shelter from capital gains tax even for UK assets such as property.

JT: I believe there are more changes in prospect?

BD: Yes; earlier in the year HMRC published a consultation document setting out a number of proposals for changes to the remittance basis rules. As had been feared there is to be an increase in the remittance basis charge. It is proposed that this is increased to £50,000 per annum for those who have been resident in the UK for twelve years or longer.

But the announcement also contains some very good news. In particular the charge on capital gains realised by individuals (whether domiciled or non-domiciled) in respect of foreign currency bank accounts held for purposes other than personal expenditure is to be abolished. This is a very sensible proposal and will be welcomed by all taxpayers and their advisors. The existing rules mean that whenever there is a withdrawal from a foreign currency bank account a capital gains computation is necessary and a capital gain or loss may arise. In this proposal to exempt such gains and losses from the charge to capital gains tax HMRC are recognising that the present charge gives rise to a compliance burden which is totally disproportionate to the tax collected. The other key change proposed is an exemption from the remittance basis charge where overseas income or gains are remitted to the UK for the purpose of investment in companies which operate commercial businesses in the UK. This is a very welcome change indeed and should, for example, prevent some of the problems that I mentioned earlier in relation to investment in UK assets. The proposal is that such remittances will not be chargeable while the remitted income or gains remain invested in stocks or shares. However, there will be a clawback of relief if the investments concerned are divested and the proceeds are not taken out of the UK within a specified period.

JT: So will our clients be able to bring overseas income and gains to the UK to invest in property?

BD: As the proposal stands they will not be able to invest direct in property as the relief applies only to investments in stocks and shares. However, it should be possible to invest in commercial property by incorporating a property investment vehicle (UK or overseas) to make the acquisition. Of course, most non-UK domiciled investors will choose to use an offshore company for this purpose for other tax reasons.

JT: Will this relief allow non-UK domiciled investors to purchase UK property for their own occupation?

BD: No. The relief will not apply to residential property at all, whether for personal occupation or for rental to a third party. There will also be restrictions on investment where the company's business involves the leasing of tangible assets such as yachts, cars and works of art or the provision of personal services such as chauffeurs and housekeepers. The purpose of these restrictions is to prevent the relief effectively being used by a taxpayer to fund his or her personal expenditure in the UK.