There has been much discussion in the newspapers over recent months on the possibility that the rules affecting the taxation of those individuals resident in the UK, but domiciled elsewhere, may be changed. How realistic is this prospect and how may changes in the legislation affect the use of trusts already set up?

To summarise briefly the present advantages to non-domiciled individuals, their income and gains which arise outside the UK are only taxed at the point funds are remitted to the UK (the "remittance basis"). This rule allows income and gains left outside the UK to remain free of tax. The benefits of these rules can be enhanced by the use of non-resident trusts.

Following the 2003 Budget the government issued a background paper discussing the taxation issues surrounding residency and domicile, inviting comments. The background paper, in the main, consisted of a rehearsal of the rules covering residence in the UK, and indicated that any changes to the existing rules covering the taxation of non-domiciled individuals should

  • be fair
  • support the UK economy, and
  • be easy to operate

The paper contained no specific proposals, and there was no time stated by which comments were to be made. The omission of the timescale has been highlighted, resulting in a statement from the Inland Revenue (in early September) that comments should be made by the end of September – but there has been no further indication of when firm proposals for change may be published.

In the meantime, the major accountancy firms have made their own representations to the Inland Revenue. Additionally, particularly in relation to the second criteria ennunciated in the background paper, leaders of major UK industrial firms, together with leaders of the CBI, have met with Gordon Brown to highlight the potential damage to the UK economy if the legislation is changed adversely. Major UK firms need to recruit the best brains in the world, and a favourable taxation regime assists in this recruitment.

Areas of the UK economy which could be affected by any changes are:

  • The financial sector. Many European banks have a major presence in the City of London, because the UK tax regime is favourable to employees seconded from Frankfurt, Geneva, Paris. If these banks cannot persuade senior staff to re-locate, the fear is that the City of London will lose out to Frankfurt as a financial centre.
  • The property market. Foreigners have invested hugely in UK property, particularly in London and the South East – their withdrawal could see a property market collapse
  • The Greek Shipping community. This community has already told the government that they would leave the UK if the legislation is changed adversely.
  • The resident, but non-domiciled, business community. In today’s electronic age there is no need for the owner of a business to be resident in the UK to conduct his business here. A large scale withdrawal of business leaders will affect the vibrancy of the UK economy.

We do no know what the government may propose. It could be that a long term resident of the UK will be denied the tax benefits currently available, without limit, to non-domiciled residents. However, it is certain that whatever changes may be introduced, arrangements will be policed to ensure that the remittance rules are observed to the letter, particularly with reference to "constructive remittances". It will become increasingly important to ensure that the use of non-resident trusts will withstand such close scrutiny.

In the light of the current examination of these issues, those who have the opportunity to establish that they are not domiciled within the UK, under current rules, will be well-advised to do so.

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