Non-doms could be driven to seek more agreeable locations

To wealthy foreign workers the UK has become something of a high class playground, offering culture, glamour and attractive business opportunities that can be enjoyed within the parameters of a favourable tax regime.

Wealth managers say non-domiciled individuals have in recent years had considerably more scope to protect their income from tax than those who are domiciled here. Under current rules non-domiciliaries only have to pay tax on income and capital gains from offshore assets that are remitted to the UK – and there have been various creative ways to limit some of this liability.

An extremely popular route has been to set up offshore trusts and offshore companies. These provide a legitimate and straightforward way for wealthy non-domiciled individuals to remit capital gains made offshore to the UK tax free, and also give permanent protection from inheritance tax.

While the Treasury last year significantly reduced the tax efficiency of UK trusts for investors based here by introducing hefty initial tax charges, offshore trusts have retained significant advantages for non-domiciled UK residents. UK-domiciled investors have also seen other tax avoidance schemes, such as those centred around research and development, rapidly wiped out.

Richard Baldock, head of global trusts at Rothschild Private Banking and Trust, says: “Over the years what domiciliaries can do has been restricted more and more but the ability for non-domiciliaries to structure their investments has not been restricted anywhere near as much.”

However, the Treasury has recently outlined a more punitive income tax regime for foreign workers – and this could be the start of worse to come.

Wealth managers say clients are concerned that the recent changes are just the beginning of a string of changes that could make the UK significantly less attractive for non-domiciled investors.

Under the new rules non-domiciled UK residents would have two choices: one they pay tax on their worldwide assets, no matter whether they were brought into the UK or not or, two, they pay a £30,000 annual charge to continue with the current remittance system.

But the Treasury could also bring in stricter rules around some of the more creative tax avoidance schemes that non-domiciliaries have been using.

Karina Challons, head of the specialist tax group at HSBC Private Bank, says: “The £30,000 charge might not be that much of a bother for the ultra-wealthy but people are concerned that this is the start of a much more aggressive approach.”

Already the Treasury has its eye on offshore trusts and companies. Advisers say the government could effectively block the tax advantages of these structures.

The government could, for example, extend the proposed £30,000 rule to capital gains in relation to these particular structures so the non-domiciliary would be taxed on the gain unless they paid this charge.

Or it could reduce the time given to set up these investments. Currently non-domiciliaries have 17 years to set up offshore trusts and make payments into them before they are treated in the same way as a UK domiciliary. This could potentially be reduced to 10 or even seven years, reducing the schemes effectiveness for IHT protection.

“Changes to these types of trusts would be a disaster for wealthy non-domiciles,” says Challons.

Advisers also say the tightening of the tax rules could affect certain types of offshore bond wrappers, which have traditionally allowed non-domiciliaries to remit a certain amount of capital – typically 5 per cent – tax-free each year.

Wealth managers say this type of action could seriously erode the ability for UK non-domiciles to protect their funds from tax, and could be the trigger of a mass exodus from the country.

“Curtailing what non-domiciliaries can do gives them another factor – other than the traffic, weather and house prices – to go elsewhere,” says Baldock.

Rothschild has seen a sharp increase in the proportion of work it does for non-domiciled clients, versus those permanently based here, compared with five or 10 years ago. Around 75 per cent of the UK planning it does now concerns non-domiciliaries, says Baldock.

If the tax regime were to change, Baldock believes non-domiciliaries would leave for more favourable jurisdictions such as Switzerland or Monaco. The Swiss government, in particular, could look to attract wealthy investors by being open to negotiation over how much tax they are willing to pay.

This could have a huge impact on London’s economy and the property market, as well as its reputation as a leading financial centre.

Challons says that clients are already thinking hard about whether or not they want to stay in London.

“People are now looking at the UK more as a short-term gap and might move offshore – for example to Switzerland – within two to three years.”

She says that already clients have decided to put their property purchases on hold and continue to rent instead.

“People are doing less planning. They are waiting to see what happens and are not so ready to commit,” she says.

Baldock says any action is now best deferred until the Treasury releases detailed proposals, either just before or just after Christmas. “It is likely that non-domiciliaries will need to take action before April 5 to rebase assets with latent gains whether held personally or in trust,” he says.

Some advisers do still have hope that the UK will retain its attractiveness to foreigners.

Julia Whittle at Punter Southall, says: “The UK is less of a haven than it used to be but there are still ways to organise assets to be beneficial. The £30,000 charge is not that much of a problem, especially when you consider that other jurisdictions have high wealth taxes.”