In his Pre-Budget Report the Chancellor announced possible changes to the taxation of non-domiciled individuals living in the UK, commonly known as "non-doms". HM Treasury has now published a consultation document on the proposals. The changes are likely to take effect from 06 April 2008 and will have a huge impact on many non-doms. The consultation period ends on 28 February 2008 and Mishcon de Reya will be submitting comments raising our concerns.

The most publicised proposal is the annual charge of £30,000. This will apply to non-doms who have been resident in the UK for more than seven out of the last 10 tax years and who wish to continue to benefit from the remittance basis of taxation. This annual charge seems almost certain to go ahead.

If you are non-domiciled, the remittance basis currently allows you to avoid UK tax on your foreign income and capital gains unless these are brought to the UK. Going forward, if you are non-domiciled and you have been in the UK for seven out of the last 10 years, you will have a choice. You can pay the annual charge of £30,000 and continue to benefit from the remittance basis. Otherwise you will be treated just like any UK-domiciled tax payer, meaning that your worldwide income and gains will be subject to UK tax on an arising basis, whether or not they are brought into the country.

The consultation paper considers whether the £30,000 annual charge goes far enough. The Government makes other proposals, including charging all non-doms £30,000 per year irrespective of how long they have been here, and/or applying a higher annual charge after 10 years of UK residence. There is also a proposal to remove the benefit of the remittance basis altogether after residence in the UK for 17 out of the last 20 years. This is an extension of the current inheritance tax "deemed domicile" rule, and would mean that if you are non-domiciled and have been a long-term UK resident, your worldwide assets would automatically be subject to UK income tax, capital gains tax and inheritance tax. The proposals in this paragraph appear to be the only ideas genuinely up for consultation.

The consultation paper also states that non-doms who claim the remittance basis (and potentially pay the annual charge of £30,000, or more) will not receive the benefit of any personal tax allowances. They will have to choose between using the remittance basis or enjoying their personal allowances.

The consultation paper makes it clear that the Government intends to attack the current capital gains tax advantages of holding assets through an offshore trust. Currently if the offshore trustees sell a trust asset and make a capital gain, that gain can be received by non-domiciled beneficiaries entirely tax-free. That's the case even if the gain was received in the UK, or the asset was a UK asset. However, from April 2008 it looks like this benefit is almost certain to be abolished. This means gains arising in an offshore trust and received by non-domiciled beneficiaries in the UK are likely to be subject to capital gains tax in the same way as gains on personally-held assets. Where you are a beneficiary of an offshore trust that was set up mainly for its capital gains tax benefits, these changes are likely to be very far-reaching.

The consultation paper also highlights an important change for regular visitors to the UK who are anxious to avoid becoming resident here for tax purposes. From April 2008, regular visitors will have their days of arrival in, and departure from, the UK included in their annual "day count". This means that a four-day visit to the UK will now count as four days' presence in the UK, where previously it would only have counted as two days. If you are a frequent visitor to the UK, this could put you over the permitted annual day count limit, with the result that you become UK resident for tax purposes. You may need to watch this carefully, and perhaps make less frequent, but longer, visits.

Although all these proposals have been included in a "consultation" document, it appears that most of them are not up for discussion and are likely to become law in April. With so little time to go, all non-doms, whether or not they have an offshore trust, should be aware of how the changes will affect them. In the last few weeks, we have already been advising many of our non-domiciled clients on the urgent steps they can take before April to improve their position.

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This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.