In this final article in the series, I will look at the detail of the consultation on the proposed new rules applying to non-domiciles that are planned to come into effect from April 6, 2012.
The following is an extract from the consultation paper in relation to the encouragement of business investment that I thought would help to put some flesh on the bones in relation to the type of business that would and would not qualify.
The consultation also states that non-domiciles currently benefit from tax rules that provide significant advantages over other taxpayers. The idea behind these reforms is to ensure non-domiciles make a greater tax contribution, especially when they have been resident in the UK for many years. The proposed anti-avoidance provisions will doubtless be introduced to reinforce this point.
The consultation sought views on the detailed policy design of the changes announced in the Budget. The Government welcomed views from those who are affected by, or have an interest in, the rules on non-domicile taxation and the consultation closed in September.
“In order to encourage investment in a broad range of businesses, the Government proposes to allow tax-free remittances for investment in the following types of business. They would be classed as “qualifying businesses” for the purposes of this policy:
Businesses carrying out trading activity:
It is proposed that this will follow the generally understood definition of “trading” as developed in case law, namely that trade generally involves the exchange of goods or services with a customer for reward. Trading on a commercial basis must constitute a substantial proportion of the overall activities of the business in which the individual invests.
Businesses undertaking the development or letting of commercial property:
This is generally carried on as a commercial business but may not technically fall within the definition of trading activity. The Government recognises that non-domiciles often want to invest in commercial property and that including it will broaden the appeal of the incentive. To qualify for tax relief, development or letting of commercial property must constitute a substantial proportion of the overall activities of the business.
This broad definition extends to all sectors of the economy and caters for entrepreneurial businesses as well as more traditional ones. It would encompass many of the businesses and sectors in which non-domiciles want to invest, for example, manufacturing, retail, technology and importing goods. It would also include financial services businesses where a trade is being carried out.
In keeping with the intention of drawing this policy widely while preventing abuse, there are only a small number of areas that the Government proposes specifically to exclude from the definition of a qualifying business. These exclusions would apply even if the business would otherwise fall under the definition given above.
Holding and letting residential property:
The Government is concerned that including this type of activity would introduce an unacceptable risk of the scheme being used for non-commercial purposes, such as an individual using a business to acquire a residential property in which they live. However, it is not intended to exclude all types of investment in residential property. For example, investing in a business that builds and develops residential property would be permitted, provided this business fell within the definition of trading activity. It is also proposed to allow investment in certain residential property such as nursing homes and hospitals where a commercial trade is carried out.
Where the leasing of tangible moveable property (such as yachts, cars, furniture, pictures) or the provision of personal services (such as nannies, cooks, chauffeurs) is part of the activities of the business. Excluding this type of business is consistent with the objective of ensuring the incentive is not used for non-commercial purposes or direct personal benefit.
The Government does not propose to make any other specific exclusions from the definition of a qualifying business.”
While relatively small compared with the general UK market for financial services, the non-domicile market can, for some advisers and providers, represent a very important one. These latest proposed changes should encourage financial planners to keep at the front of their mind the role that offshore bonds and excluded property trusts can play in overall financial planning for these clients.
Simply put, to the extent that one holds non-UK investments inside an offshore bond, one will have no income or gains to remit and so not only will the arising basis of taxation be avoided but so will the need to pay the remittance basis charge to avoid it.
The IHT-effectiveness of trusts established while not UK-domiciled (or not deemed UK-domiciled) to hold non-UK situs assets (while retaining access via the trustees as a possible beneficiary) has been well known for some time now and this planning oppor- tunity appears to be set to remain with us.
One of the most important aspects of an excluded property trust is that the excluded property status trumps the gift with reservation rules. This means that a settlor can be included as a potential beneficiary under the trust without the trust property forming part of their estate for inheritance tax.