THE UK TAX SYSTEM FOR UK RESIDENT NON-DOMS: PAST, PRESENT AND FUTURE

James Capper and Martin Callaghan 10 December 2014

Copyright © April 20 BDO LLP. All rights reserved.

INTRODUCTION

BDO JAMES CAPPER S ENIOR T AX M ANAGER MARTIN CALLAGHAN S ENIOR T AX M ANAGER

Bullet 1 Trebuchet 9pt BDO grey – bullet 2 Trebuchet 9pt BDO grey – bullet 3 Trebuchet 9pt BDO grey. James deals with UK and international based high net worth individuals and families dealing with complex tax issues and interacts with colleagues in international member firms to ensure his client’s worldwide tax exposures are considered. James’ current focus is on advising non UK domiciled individuals in respect of their UK tax affairs and providing bespoke tax solutions. This includes planning prior to arrival in the UK and also advice for individuals leaving the UK and their ongoing UK tax exposures.

James spent a period of time working in the Channel Islands, has a background in accounting as well as tax, is a Chartered Tax Adviser and also a Fellow Chartered Certified Accountant.

T: +44 (0)20 78933456 E: [email protected]

Martin is a Senior Tax Manager at BDO LLP with over 15 years of tax experience. He specialises in managing complex tax enquiries and voluntary disclosures to HM Revenue & Customs for both UK domiciled and non-UK domiciled clients.

Martin Callaghan is a Chartered Tax Adviser and Senior Manager at BDO LLP in London.

He has experience of dealing with all types of investigations work including voluntary disclosures, tax fraud investigations conducted by HM Revenue & Customs and providing ad hoc advice to other tax advisors.

Prior to working in Tax Dispute Resolution, Martin was a member of BDO’s Real Estate Tax group. He has advised a number of offshore and UK based property investors in relation to commercial property acquisitions in Europe, the Far East and the Americas.

His areas of specialism include the Liechtenstein Disclosure Facility/Swiss Tax Agreement and international tax issues, both corporate and personal, with a particular focus on corporate residence and UK domicile.

Martin has presented a number of times on a wide range of issues including HMRC’s latest procedures for investigating tax fraud. 3

THE UK REMITTANCE BASIS OF TAXATION

REMITTANCE BASIS – THE BASICS

• A UK resident non-dom may claim to be taxed on foreign income and gains only when they are remitted to the UK.

• The remittance basis must normally be claimed annually so may be claimed one year but not the next.

• A claim for the remittance basis leads to a loss of personal allowances (if applicable) and capital gains annual exemption.

• Longer term residents must pay £30,000 remittance basis charge – rising to £50,000.

• The secret of successful planning is segregation of bank accounts so that the source of sums received in the UK may be identified.

THE REMITTANCE BASIS CHARGE (RBC)

• The RBC becomes payable once a non-dom has been resident in 7 out of the 9 previous tax years.

• Must nominate income or chargeable gains. • It is possible to nominate a small amount (no more than £10) and remit it without adverse tax consequences.

• Otherwise nominated income and gains should never be remitted unless all other foreign income and gains have already been remitted.

• If more than £10 is remitted when other income or gains are unremitted, taxation will be charged on notional NOT actual remittances for that year and future years.

WHAT IS A REMITTANCE?

• • • • • A transfer of foreign income or gains to the UK is a remittance A remittance will also occur in situations where an individual uses funds derived from foreign income and gains to: settle debts incurred in the UK (eg. purchases made in the UK using a credit or debit card) pay interest on a debt incurred in the UK settle a debt (including interest) incurred outside the UK, the funds from which were brought into the UK purchase an asset abroad and bring it to the UK (subject to a number of exceptions) pay outside the UK for a service provided in the UK (subject to a number of exceptions).

RELEVANT PERSONS

• • • • • • • A remittance may be made by an individual or a ‘relevant’ person A ‘relevant’ person is: The individual The individual’s husband or wife The individual’s civil partner A minor child or grandchild A close company or closely held foreign company together with their subsidiaries in which any of these is a participator Trustees of a settlement of which any of these is a beneficiary A body connected with such a settlement.

WHEN ARE INCOME AND GAINS FOREIGN?

• • Income: Dividends – when paying company is not UK resident • Capital gains: Shares - UK companies - situs is always UK. Foreign companies – registered shares are situated where registered and bearer shares where bearer certificate is kept Watch out for anomalies, eg.: Royal Dutch Shell is UK incorporated but Dutch tax resident so dividends are foreign source but capital gains are UK gains

WHAT IS CLEAN CAPITAL?

• • • • •

Includes:

• Pre-arrival income and gains arising in tax years before arrival (if previously resident the position is more complicated) Assets held pre-arrival sold at a £loss Assets bought out of clean capital sold at a £loss Gifts received Inheritances UK income and gains that have either been taxed or are specifically exempt.

AVOID MIXED FUNDS

• • Special rules apply to remittances from mixed funds A mixed fund is not just a bank account – it includes assets bought out of any combination of income, capital and capital gains • Remittances from a mixed fund are taxed on the least favourable basis, ie. income first before capital gains. Also untaxed income and gains are deemed remitted before foreign taxed income and gains. Clean capital is last • Offshore transfers (ie. all transfers which are not remittances) are treated entirely differently • Only possible to unmix a mixed account by remitting all income and gains to the UK and paying tax.

OFFSHORE BANK ACCOUNTS – WHAT IS NEEDED?

Clean Capital Foreign Income Offshore income gains * Foreign Gains * £1,000 of anything

Interest

Capital Account

Capital to UK accounts

Untaxed Foreign Income Account Taxed Foreign Income Account Offshore Income Gains Account Untaxed Capital Gains Account Taxed Capital Gains Account Nominated Income Account

* These accounts should be credited with proceeds of disposals not just gains.

MAKING CLEAN CAPITAL WORK

Deposit clean capital Borrow against capital Invest

THE USE OF TRUSTS

• • • • • Using an offshore trust offers advantages over direct ownership by an individual If the trust is settlor interested: Income is taxed as if received personally Capital gains – whether on UK or foreign assets – are only taxable when a beneficiary (including the settlor) receives a capital payment which is remitted to the UK (assuming remittance basis is claimed) IHT advantages even when the settlor becomes deemed UK domiciled.

PAST, PRESENT AND FUTURE FOR NON-DOMS WITH NON-UK FINANCIAL RELATIONSHIPS

AUTOMATIC INFORMATION EXCHANGE

• The new Global Standard – multi-lateral, automatic exchange of information • EU Directive for Administrative Co-operation – to supersede the EUSD • The aim is to secure the widest possible scope for the automatic exchange of information between the 28 Member States. • It also serves to create a legislative framework for EU Member States to apply the Global Standard of automatic exchange of information amongst themselves.

• The OECD Common Reporting Standard – Early Adopters • Under the proposed regulations financial institutions will be required to capture information in relation to accounts in existence as at 31 December 2015 and new accounts opened on or after 1 January 2016 with first reporting in 2017. • The key year is 2017 – the taxation authorities in all jurisdictions that have significant financial centres will soon be exchanging information • This is of relevance to compliant and non-compliant taxpayers. As things stand it appears unlikely there will be an Alternative Reporting Regime for non-UK domiciled individuals.

THE COMMON REPORTING STANDARD

• The Early Adopter jurisdictions are: Anguilla, Argentina, Barbados,

Belgium

, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania,

Luxembourg

, Malta, Mauritius, Mexico, Montserrat, Norway, Poland, Portugal, Romania, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Turks and Caicos Islands, United Kingdom,

Netherlands

,

COMMON ISSUES FOR DISCLOSURE

• • • • • • • • Previously undeclared bank accounts Domicile status Status of offshore trusts Corporate and personal residence Death estates Remittance rules post April 2008 Anti-avoidance legislation Beneficial ownership.

WHAT ARE THE OPTIONS

• Disclosure Facilities • Offshore Co-ordination Unit • Contractual Disclosure Facility (COP 9) • Campaigns • Settlement Opportunities

CURRENT HM REVENUE & CUSTOMS ('HMRC') ACTIVITY

• • • • • • • • No Safe Havens' publication – road map for strategy from 2013 to 2017 and beyond £994 million additional funding to fight tax evasion and avoidance to 2014-15 Enhanced HMRC teams and technology - CONNECT Use of third party data, international information and whistle-blowers The UK is an ‘Early Adopter’ of the Common Reporting Standard Enhanced penalties of up to 200% for deliberate evasion involving offshore (under Consultation) Increased number of prosecutions as a deterrent

New strict liability criminal offence of failing to declare taxable offshore income and gains

WORK OF THE HMRC OFFSHORE COORDINATION UNIT ('OCU')

• • • • • • Analysis of data using 'CONNECT' computer system Letters issued in batches in relation to Swiss bank account data Voluntary disclosures relating to Switzerland Code of Practice 9 – issued or requested in relation to Switzerland Administration of UK / Swiss Tax Agreement Hub for data received via FATCA.

THE UK TAX SYSTEM FOR UK RESIDENT NON-DOMS: PAST, PRESENT AND FUTURE

The seminar and these accompanying handouts have been written in general terms and therefore cannot be relied on to cover specific situations; furthermore, responses given in the seminar to questions are based on only an outline understanding of the facts and circumstances of the cases and therefore do not form a substitute for considered specific advice tailored to your circumstances. Applications of the principles set out will depend on the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this seminar and these accompanying handouts. BDO LLP would be pleased to advise readers on how to apply the principles set out in this handout to their specific circumstances. Please feel free to contact any partner.

We would be pleased to advise you on the application of the principles demonstrated at the seminar to your specific circumstances but in the absence if such specific advice cannot be responsible or liable to you for the content of our presentation.