The consultation document issued by HM Revenue & Customs a few days ago provided further clarity on the future in relation to remittance basis taxpayers in the UK. 

From April 2017 we will see the abolition of remittance basis taxation for anyone who has resided in the UK for more than 15 years in a 20-year period. The much-criticised situation whereby a person with a non-UK domicile of origin could in theory be born and live their entire life in the UK, yet continue to pay tax on the remittance basis, will therefore no longer exist. Also, those who acquire a foreign domicile of choice will no longer be able to retain resident non-domiciled status should they elect to return to the UK.

With the sting thus drawn from the most common criticisms of the non-domiciled regime, it now seems likely that the availability of remittance basis taxation will continue indefinitely as a means of attracting foreign wealth to the UK.

This does not necessarily mean that banks can now return to “business as usual” in serving RND customers, as the demographic profile of the remittance basis taxpayer group will shift decisively towards new arrivals to the UK. Banks will need to reassess their offerings to remain relevant to the changing needs of their clients in the RND space.    

The more long-standing among the current population of RND individuals - often with very significant wealth and long-established banking relationships offshore - will cease to enjoy access to the remittance basis, and so will no longer have compelling reasons for banking offshore at all. Unless offshore banks can offer a UK-specific service proposition that is at least equal to that available onshore, these clients may well take the opportunity to review their banking arrangements and move clean capital back to the UK. This could potentially bring to an unexpected close some well-established client relationships among offshore operators who have failed to prepare for the development.

Also, in the 8 July 2015 Budget, the chancellor announced significant additional funding for HMRC to address “serious non-compliance by trusts, pension schemes and non-domiciled individuals”. This signals a further ratcheting up of pressure on remittance basis taxpayers, which has been growing since the passing of complex legislation regarding remittances and the formation of HMRC’s High Net Worth Unit in 2009. Further milestones have included the Swiss International Withholding Tax rules and the Crown Dependencies and Overseas Territories (CDOT) regime, both of which contained specific provisions and documentary requirements for those wishing to claim non-domiciled status.

We firmly expect as a result of these developments that the quality of service provided by the financial services industry to RND investors, both historically and on an ongoing basis, will come under intense scrutiny. This will come from authorities, as well as from clients, who may be alarmed at the direction of travel. Not only will HMRC gain more visibility of offshore arrangements via exchanges of information made under FATCA or the Common Reporting Standard, but they may, under new rules currently under discussion, be subject to severe criminal penalties, including for behaviour (such as, for example, wrongly calculating the tax due on a remittance) which is merely careless, as opposed to deliberately dishonest.

This will be of concern to banks, many of which may not have fully digested the ramifications and complexities of dealing with remittance basis taxpayers. Our experience is that banks’ service proposition has generally been delivered on a very informal and unstructured basis, often according to a “hearsay” understanding of the applicable considerations, or on the basis of client instructions which may be misconceived or outdated. We believe that this decentralised and often highly manual approach is no longer sustainable, and that banks and others need to take action to achieve greater central control and visibility and a higher degree of automation.

Of particular interest to banks will be the question of whether their actions and practices may contribute to the existence of mixed funds in client accounts, or tainted remittances by clients. In view of these concerns, banks may wish to review and improve their on-boarding process, contractual terms and control/reporting structure. 

On the operational side, any provisions for capital and income segregation of investment proceeds (whether manual or automated), the quality of cash management discipline, and the effectiveness of any system blocks or alerts around the investment suitability process should also be reviewed and improved.

Individual bankers will have to have a detailed understanding of the new rules: when will a client be RND, what is the right asset allocation in light of changing domicile status, and how the client can access offshore losses, will all become even more important questions under the new regime. Properly trained bankers, with appropriate risk awareness, will be a keystone to having a successful practice in this area.

Banking for resident non-domiciled remittance basis taxpayers is operationally complex, and this complexity inevitably brings with it some risk. Certainly, the question of whether to continue offering differentiated services to RND clients is a valid one to ask. However, it remains the case that this is a highly attractive (and self-replenishing) client sector, and the benefits of developing a market-leading capacity are huge. With the market generally undeveloped and the future of the sector now clearer, the time is right to remediate and improve the service.

Disclaimer

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global EY organization cannot accept responsibility for loss to any person relying on this article.