Do I need to worry about the changes to the non-dom rules?
The UK government’s non-domicile rule change is likely to have far-reaching implications for US families living here in the UK.
Why is domicile important?
Those individuals deemed ‘non-domiciled’ in the UK receive favourable tax treatment: They only have to pay tax on the money they bring into the country (remittances). UK domiciliaries, in contrast, are taxed on all their worldwide income and gains.
What has changed?
In the summer budget 2015, the government announced plans to re-organise non-domicile tax status and introduce a 15-year rule. As of April 2017 this will see individuals who have lived in the UK for 15 of the past 20 tax years deemed to be domiciled here for UK tax purposes and therefore subject to tax on their worldwide income and capital gains.
This rule change is yet to be given final ratification, however, at London & Capital we are of the opinion, the sooner that our clients prepare for these changes, the better, whether they have already been here for 15 years or believe they are likely to stay for that long, they would do well to avoid a last-minute panic.
A large portion of the non-dom US clients we come across have historically sent money back to the US and invested it via brokerages in mutual funds and index trackers. Under the new rules these accounts will be subject to UK tax as very few of them have UK reporting status. There is a high likelihood that all gains and income will be taxed at the highest marginal income tax rates, rendering them hugely inefficient.
A case in point
A recent client came over to the UK with his job and initially expected to stay for three or so years. Like others, he ended up meeting his wife and settling down here. As he has lived here for 19 years, he will be impacted by the new rules as soon as they come in. He had been sending his earnings back to the US and has built up an $8 million portfolio, of which $4m is gain, all invested in non-UK tax reporting mutual funds. We are going to start working with his accountant straight away to start trimming down these positions while we still have a US tax year ahead of us.
We are encouraging our clients to begin the process of reorganising their offshore assets to make sure they are invested efficiently from both a UK and US perspective, while there remains one tax year to elect the remittance basis and not be subject to UK tax.
It often makes more sense to do the reorganisation of investments while the client is only subject to, generally lower, US tax rates and before they face the full UK income tax hit.
This new development only emphasises the fact that any international family with US connections will soon realise that if they intend to live in the UK for the long term, they need to have their financial affairs managed by someone who understands how the two financial worlds work and interact.
Of equal importance, there must be robust processes and systems in place to ensure that a worldwide asset base can be reported in a manner that is easily processed by the US and UK tax authorities. In short, anyone dealing with US linked families must have the ability to organise, manage and report on global investments. Fall short on any of these key aspects and clients can expect large reporting costs, fines and the potential for punitive tax bills.
As we have a significant experience in looking after US clients, who are already subject to worldwide taxation on their assets, we have experience and systems for multi-jurisdictional structuring, investment and tax reporting. It is crucial to understand that a US-based hedge fund or brokerage account, which reports in dollar terms and calendar years, won’t speak the same language that HMRC requires for their forms and vice versa.
Now is the time for clients to start organising their assets. Assuming the rule changes come into force, April 2017 will be here in no time.
One final thought
N.B. The yet unclarified rules on basis step-up of offshore assets announced in March 2016 have no doubt created uncertainty around planning pre-April 2017. However, for US tax payers the US tax will be due either way as this step-up in basis will only be relevant from a UK perspective. As a result the portfolio restructuring suggested for UK non-doms is still relevant, regardless of the final legislation.