Canny moves may save foreigners’ cash

Some accountants are already advising their foreign clients to take steps to protect their holdings from tax – even though they haven’t had a chance to review draft legislation on the new tax regime for “non-domiciled” UK residents.

And a few canny moves could save foreigners thousands of pounds in tax, as long as they are made before the start of the new tax year on April 6, they claim.

Non-doms with shares held in an offshore trust, for example, may want to consider selling them in the short-term, so they can bring profits into the UK tax-free, says David Kilshaw, a KPMG partner. Non-doms are not obliged to pay capital gains tax on an offshore trust’s gains. So, selling shares and repatriating gains before April, when the rules are likely to change, is advisable.

Another loophole likely to be closed is one that permits married couples or civil partners, one of whom is a non-dom, to gift money in a way that enables the non-dom partner to bring the money into the UK tax-free.

Mike Warbuton, senior partner at Grant Thornton, says: “If you make a gift to your wife and she isn’t domiciled in the UK, the government won’t treat the gift as a remittance of funds if she brings it into the UK.”

Non-doms should also make an effort to take advantage of “source ceasing” rules as they will be scrapped as part of the changes. The most well-trodden route, still permissible before April 6, is to open two offshore bank accounts, one for capital, one for income. Interest generated from the capital account is transferred to the income account. The capital account must be closed by March while the income account can remain open in the next tax year.

Richard Mannion, national tax director at Smith & Williamson, says: “If you closed the capital account in March and then you closed the income account just after April 6, you could remit that income into the UK and it wouldn’t be taxable. In order for the income to be taxable, the capital would have to have been there in the same tax year as when you remitted the income.”

Another matter to consider is whether to sell properties. Non-doms who own homes through offshore companies are able to avoid paying inheritance tax as long as they set up the company before they are deemed domiciled by the UK, which happens after 17 years of residence.

Gains made by an offshore trust controlled by a non-dom are also not subject to CGT. So if a non-dom sold a property before the trust rules change, he would not pay tax on the sale.

Lastly, if you are considering buying a Mercedes or a yacht abroad, you might want to do so in the coming months. Non-doms are still allowed to buy an asset offshore and bring it in tax-free, although that may change.

Come the start of the next tax year, ex-pats, who are not “domiciled” in the UK, but have been living here for at least seven years, will be required either to pay a flat fee of £30,000 each year to keep their overseas gains and income outside the UK tax net, or face standard income tax on all income, including that generated outside the UK.

Only unremitted foreign income of less than £1,000 will be ignored and the authorities are likely to alter the rules for offshore structures controlled by non-doms. If ex-pats pay the £30,000 flat tax, they will also forfeit the privilege of claiming personal allowances against remitted income, worth £5,225 per individual.

This clampdown on non-doms, which was announced by Chancellor Alistair Darling in the pre-budget report has been met with criticism.

Consultation on the changes closes at the end of February and accountants are still lobbying to make the rules more liberal. Draft legislation is expected to be released in the coming weeks.

Wealthy foreigners in the UK spend more than £16bn a year and pay £7.1bn in tax, according to research by Stonehage, a wealth management group.

Leonie Kerswill, a partner with PricewaterhouseCoopers, says the proposals, if they remain unaltered, “may cause some [non-doms] to question whether it is worth staying here and investing in the UK”.