Don has asked for some advice about whether there is anything he can do to take advantage of his foreign domicile.
He is employed by a US company and is based in the UK. However, about one-third of his work is carried out on the Continent, where his employer has no direct representation. There are certainly areas that he can look at in conjunction with his employers but, as is always the case with subjects like this, great care is needed. What should he do?
Many types of income and capital gains are only subject to UK taxation if they are remitted to the UK. Don is in the position of having considerable surplus income and so will be able to build up some of his investments abroad, on the understanding that some of it might have to stay there for a while.
Don pays income tax on all his considerable earned income in the UK. One thing to consider is the scope for dual contracts, so that he can be paid separately from the US for the work that is actually carried out abroad.
This income would have to stay abroad because anything remitted to the UK would be taxable. However, making a gift of cash to his wife or children (directly or through a trust) would enable them to use some of the income in the UK. The important thing is that any gift must be effected entirely abroad.
Don may well be based in Geneva in five years, so becoming non-resident then would mean any sheltered or deferred income becoming free from the UK tax system.
One capital gains consideration concerns his employer's shares, which he receives as part of his remuneration each year. They are registered and held in the US and so should already be offshore assets. As part of the dual contract approach, some of them could be wholly paid for and held abroad, avoiding tax on the income that is used to buy them and then the CGT payable on disposal.
The UK CGT regime is now relatively benign when it comes to shares in one's own company, with the possibility of a maximum tax rate of 10 per cent on disposal after only a short period of time. However, if even this 10 per cent can be avoided, so much the better.
The problem is in finding a way to use the proceeds without crystallising a tax charge on remittance. Holding capital assets in trust would enable gains to be pooled by the trustees. This could also include assets such as UK collective investments and shares although care is needed with UK-source income. Payments to UK beneficiaries such as his wife would crystallise the CGT charge, potentially at a rate higher than 40 per cent because of supplementary charges, but could be made so as to use her CGT exemption each year. This would slowly soak up the chargeable gain over time, until he moves abroad.
Capital payments made to his children, being non-domiciled, should be tax-free.
As far as investment income is concerned, he can keep assets for further investment, with income and gains falling within the remittance basis. He would be looking for gross roll-up of income and growth to maximise returns.
One of the principles of the remittance basis is that you cannot be taxed on a source of income once it has ceased.
Where, for example, one has an offshore bank account that has accrued income over a period of time, any remittance to the UK from that account would be taxable to the extent of the income accrued. Ordinarily, one gets round this by ensuring that the interest is paid to a separate account, so that the capital remains untarnished. However, if you simply retain one account, you can only avoid the income tax by closing the account and remitting capital in the following tax year. Since the source has ceased, there is no income to be taxed. This expressly does not apply to employed income, so leaving the employer does not help.
Careful thought will have to be given to what assets are held in trust and what outside. There are potential pitfalls to be avoided in terms of income and capital building up inside the trust and how one makes distributions. One could have one deposit account that receives income from all sources including the trust. Don's wife could have a separate offshore account so that gifts can be made that fulfil the need to be effected offshore, so that money she remits to the UK is hers rather than his.
For inheritance tax purposes, the idea of excluded property is a useful one in that non-UK property settled now will never be part of his UK estate, even if he were to become UK domiciled in the future. This is not so important unless Don thinks he might return to the UK, perhaps to retire.
It is important to note that the Government is reviewing the whole question of the benefits of non-domiciled status and any action that is considered practical should be effected soon.