While some of the most drastic changes haven't come to pass as a result of the UK general election, there are still uncertainties in terms of how non-domiciled residents and UK expats might be treated in the years ahead by tax policy.

The recent general election result confounded those who had expected a potentially unsettled period with no party winning an overall majority or a left-of-centre coalition of Labour and Scottish National Party members with a commitment to hike the top rate of income tax, impose a “Mansion Tax” on high-value homes, and scrap or at least dramatically change the UK’s non-domiciled regime. In the event, the Conservative Party won a small but decisive majority under leader David Cameron. While some parts of the business world will have breathed a sigh of relief, it might be premature to celebrate too heavily – the UK faces a potentially unsettling referendum on whether to stay in or out of the European Union. The public finances remain in the red so scope for tax cuts may appear limited for the time being. Also, it is by no means settled that the non-domiciled regime, which was attacked by Labour, will be left alone by the new government.

With such thoughts in mind, Mark Davies, founder and managing director of Mark Davies & Associates, takes a look at the position. The views are his own and not necessarily supported by this publication but it is grateful for his contribution to debate. Readers can respond by contacting the editor at tom.burroughes@wealthbriefing.com

The start of the 2015/16 tax year was very eventful for foreign domiciliaries (“non-doms”) and expats. Firstly, there was a surprise announcement by Ed Miliband on 7 April, then leader of the Labour party, that non-dom status would be scrapped if the Labour party were elected to power. However, as the election result was a Conservative Party victory, Labour’s sweeping changes are consigned to the bin, at least for another five years. Next came the imposition of a revolutionary new tax from 6 April 2015, the non-resident capital gains tax. This is a tax on the gain on disposal of UK residential property by non-UK residents (see below). 

A statutory domicile test?
However, the Conservative win does not rule out future changes to the rules on domicile. Domicile is an antiquated legal term in English jurisprudence defined by hundreds of years of case law. In short, you are domiciled in the place which you consider is your permanent home, but it is distinct from residency and nationality. A person born in wedlock inherits the domicile of his father; this is known as “domicile of origin”. Your domicile of origin remains with you all your life unless it is displaced by physically leaving that domicile, moving elsewhere and making the decision to permanently live abroad whilst abandoning all ties to the place of domicile of origin. This is known as a “domicile of choice”.

Thus it is possible for a non-dom to leave the place of their domicile of origin, move to the UK for an undetermined time while maintaining links to their place of domicile of origin, thereby maintaining indefinitely their foreign domicile and the tax benefits relevant to that status. The reverse holds true, so it is possible for a person domiciled in England to leave the UK and to establish a permanent home elsewhere and legitimately claim a domicile of choice abroad.

There is some uncertainty about the tax treatment where an English domiciled person establishes a domicile of choice abroad and later temporarily returns to the UK. In some circumstances a person’s domicile of origin revives, but in other circumstances a person’s domicile of choice can prevail, resulting in tax planning opportunities.

With careful tax planning it is possible to keep the tax advantages of claiming a foreign domicile of choice, but this situation has recently received public censure by the Public Accounts Committee.

The publicity on domicile has not gone unnoticed by the Conservative Party and it has been reported that it is considering reforms to the rules. The chancellor, George Osborne, is holding an emergency Budget on 8 July and it is possible that reform, or a consultation on reform of domicile, could be announced. We predict that if the rules on domicile are reformed they could impact on persons who were born in the UK and have lived in the UK all their lives, yet still claim a foreign domicile of origin through their father’s domicile. We also predict that modifications could be directed at the expat community, persons with English domicile, such as those who have emigrated to sunnier climates and who have subsequently moved back to the UK or maintained connections to the UK.

There may be some benefit in taking professional advice to confirm a client’s foreign domicile position and to preserve the tax advantages with the establishment of an offshore trust now, particularly if the establishment of a trust was already planned for the future.

Tax on UK residential property

For the last few years the taxation of UK residential property has been a battlefield, with substantial changes to stamp duty land tax, the imposition of new taxes including the annual tax on enveloped dwellings, the annual tax on enveloped dwellings-related CGT, and from 6 April 2015 the imposition of non-resident capital gain tax (NRCGT).

Expats selling UK residential property will be caught by NRCGT. This is a tax on gains arising and accruing after 6 April 2015 and therefore it is advisable to get several professional valuations of property held by non-residents as of 6 April 2015 if there is an expectation that the property will be sold in the future.

If the property was the main home then private residence relief (PRR) can apply to exempt part or all of the gain. If the property qualified for PRR in the past then the final 18 months of ownership are automatically exempt from NRCGT.  Therefore, expats intending to sell their former English homes may consider selling before 5 October 2016 to avoid an exposure to UK tax.

Otherwise an expat can only get PRR if they stay overnight in the property for 90 times in the tax year. The application of the statutory residency test also needs to be considered as staying more than 90 days and having available accommodation means that there are two connecting ties to the UK which may be sufficient to make an expat a UK tax resident in that tax year if he or she had been UK tax resident in one of the three previous tax years.

Common reporting standard
Most non-UK residents in receipt of UK rental income are familiar with the non-resident landlord’s scheme which entails the need to register as a non-resident landlord, prepare income tax returns and pay the appropriate income tax. However, many did not pay tax and for many years went unnoticed. Recently, however, many non-compliant non-resident landlords will have been approached by HMRC in consequence of its latest weapon, a computer system named “Connect”.

The function of Connect is to trawl through data such as Land Registry records and to generate exception reports for investigation. For example, Connect could identify a British Virgin Islands company which owns a UK residential house but is not registered as a non-resident landlord and then list it for enquiry. Currently, HMRC is running an amnesty, the "Let Property Campaign", and so now is the time for non-resident landlords to become compliant. In addition, HMRC has access to flight and Eurostar manifests and accordingly expats should assume that HMRC has a good record of their day count.

Furthermore, the existence of bilateral exchange of information treaties and the adoption of the Standard for Automatic Exchange of Financial Account Information, commonly known as the Common Reporting Standard, will mean that banks, agents and other financial institutions must provide data to the relevant tax authorities automatically. This revolution in information sharing will mean that the tax authorities will have more data on taxpayers than ever before.

Over 40 countries have agreed to implement the initiative whilst others such as Hong Kong, Singapore and the United Arab Emirates have reached agreement in substance and are expected to automatically exchange information from September 2018.

In short, the world is becoming much smaller and even tax-compliant taxpayers can expect to receive more attention than before. Non-compliant taxpayers can expect to face HMRC enquiries as resources are being applied to enforce tax collection. There is a short window of opportunity to regularise your tax either by way of voluntary disclosure or through arrangements such as the Lichtenstein Disclosure Facility.