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Westminster fog

Businesses of any sort are much more likely to flourish in an environment that is certain and secure writes Rosemary Marr.

Certainly for UK residents and non-domiciled individuals, their advisors and the trustees responsible for their offshore arrangements, the six months that followed the UK Chancellor's first Pre-Budget Report was an exceptional period full of uncertainty.

However, even in a state of flux, it is possible to predict what changes are likely to happen and anticipate how to react.

Alistair Darling's first Pre-Budget speech, delivered on 9 October 2007, indicated that there was unlikely to be any good news – in fact quite the reverse. For resident but non-domiciled people who had lived in the UK for at least seven out of the last nine years the news was bad, with many of those affected being settlors and/or beneficiaries of offshore trusts.

Published under the headline "Fairness and Opportunity for all", the Report proposed a number of measures targeted at the UK resident non-domiciled community.

The measures announced by Alistair Darling were motivated by a desire to address "flaws and anomalies" in the existing system so that people coming to the UK to live and work would pay a "fairer share" of tax.

Many non-doms already make a significant contribution to the UK economy. There are also quite a few non-doms who are wealthy individuals and who are major contributors to the arts and other philanthropic causes.

Significantly, the typical non-dom is not a user of the welfare state and thus is a net contributor to the economic well-being of the country.

However, pending publication of the draft legislation, there was at this stage little that could be done other than to note the principal areas of proposed change:

– A charge of £30,000 (€38,000) per annum once a non-domiciled individual has been resident in the UK for seven out of the last nine years in order to use the remittance basis of taxation.

– Individuals using the remittance basis will not be eligible for personal income tax and gains allowances.

– In order to determine residence, days of arrival and departure in the UK will in future count towards establishing residence.

– Various loopholes and so-called anomalies will be addressed, such as cessation of source exercises.

With the publication of the draft legislation on 18 January 2008 it became apparent that the changes to the rules were far more draconian than had been indicated in the Chancellor's Pre-Budget speech. There then followed a storm of protest and a period of intense lobbying by business, financial institutions, pressure groups and other interested parties.

Newspaper headlines such as "Top Labour donor leaves Britain in anger over plans to tax non-doms"; "Half the super rich to leave or sell UK investments"; and "Arts donor quits Britain over 'spiteful, philistine' tax on foreign residents" no doubt made uncomfortable reading for the UK's political masters and probably influenced the decision to partially re-think some (but not all) of these radical proposals.

The problem for non-doms, their advisors and trustees was that, despite working in an information vacuum, action was needed quickly before the law change on 6 April. The non-doms themselves had decisions to make and a number did announce that they were preparing to leave the UK for pastures more welcoming.

The Budget delivered by Alistair Darling on 12 March revealed a relaxation of some of the measures in the draft legislation which were detailed in the Budget notes and supplementary documents. While trustees did have some clarification following the Budget the position was still less than clear.  

A new proposed additional tax charge (not a levy) of €38,000 per year will apply to those remittance-basis users who have been resident in the UK for at least seven out of the last nine tax years.

With effect from 6 April 2008, non-doms who are long-term visitors will have a choice of either paying the €38,000 charge in order to retain access to the remittance basis of taxation or of moving to the ordinary basis of UK taxation.

There is also a suggestion that further changes are in the offing. There may be a higher charge for those persons resident in the UK for over 10 years, perhaps a reduction in the €38,000 charge, and possibly a removal of the remittance basis of taxation once a person has been resident in the UK for 17 out of 20 years (aligning income tax and capital gains tax with inheritance tax rules).

In some cases wealthy non-doms have followed the headlines and decided to leave the UK. In these circumstances, existing offshore structures will remain in place but with fresh professional advice required. Of these non-doms, the clear favourite offshore location is Switzerland, although even this jurisdiction has tax implications.

In other cases, non-doms took the time to ensure that the value of the trust funds for which they are responsible is secure and any tax risk minimised.

Wealthy individuals also need to have confidence that they are choosing the right trustees, with the right skills for the task. For responsible trustees in these times, internal training is vital in order to fully understand the new UK tax framework and the ramifications for current and future trustee decisions.

Where the maintenance of bookkeeping, accounts and records should have been important in the past, they become even more so going forward.

The indecision and uncertainty that has surrounded the events of the last six to seven months has not been helpful for wealthy individuals, their advisors or offshore trustees but it has presented an opportunity to enhance relationships with beneficiaries and advisors. Mostly there is sufficient time to plan, with certainty, in order to reach optimum solutions for clients.

The trust service provider who is well prepared and organised, employs professionally qualified and experienced staff, and has good systems in place, will have managed the situation relating to the 2008 UK tax changes competently and to the delight of their clients. Some trusts may well be fully distributed but, based on anecdotal evidence, most are likely to survive and flourish.

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