George Osborne’s non-doms tax plan excludes offshore trusts

George Osborne’s plans to tighten tax rules for wealthy foreigners living in Britain will leave many offshore trusts outside the UK tax net, according to proposals published on Wednesday, reports the Financial Times.

The Treasury’s consultation on “carefully targeted” changes to the rules for “non-doms” — people who live in Britain but do not consider it their permanent home — would reassure clients after the chancellor decided to axe permanent non-dom status, tax advisers said.

David Kilshaw, partner at professional services firm EY, said the planned changes to the non-dom rules — which exempt offshore income from UK taxation unless it is brought into the country — “reinforce the message that the government is keen to welcome new non-doms without driving the existing ones away”.

The chancellor’s move to crack down on certain aspects of the non-dom rules followed an election campaign where the Conservatives came under pressure when Labour vowed to abolish the status, ridiculing aspects such as the ability to inherit it.

It also followed controversy over the tax affairs of Stuart Gulliver, HSBC chief executive, who is a non-dom despite being raised in Britain. The new proposals would mean that Britons who emigrate and become domiciled overseas would become liable to tax on a worldwide basis if they return to the UK.

The proposals would also mean that a non-dom living in Britain would be deemed to have acquired a UK domicile after 15 years residence, making their overseas income and capital gains subject to UK taxation.

But if they set up an offshore trust before that point, its income and gains would be untaxed unless any of their family receive a benefit from the trust.

The Treasury had signalled plans to provide “some protection” for people who had set up offshore trusts when it first outlined the reforms in the summer. It said otherwise people would have been forced to take “punitive and administratively burdensome measures” to recreate a history of past transactions in the trust that might have been set up years ago.

Mark Davies, of advisory firm Mark Davies & Associates, said the proposed rules on offshore trusts amounted to a “welcome reprieve” as it provided for a proportionate tax charge on the benefits received and not the taxpayer’s worldwide income and gains.

Arabella Murphy, head of wealth at law firm Maurice Turnor Gardner, warned that the technical difficulties of drafting the offshore trust rules would potentially end up with the detailed legislation being delayed until the 2017 finance bill.

“The intention is excellent. The reality is it will be a bit of an uphill task to do the drafting.”

Mr Kilshaw said the issue had been a “big concern” to some non-doms who had feared that the Treasury would make it harder to put assets into trust. He said the consultation was likely to provide comfort to many non-doms.

He added that another result of the measures might be to encourage “boomerang” non-doms in cases where people leave the UK for six years to “refresh” their non-dom status.

He said: “The international community is set to get even more international.”

Stephen Herring, of the Institute of Directors, said its members were likely to approve of the Treasury’s attempt to strike a balance between attracting talented individuals to come to the UK and equalising their treatment with that of Britain’s entrepreneurs after they had lived a long time in the country.

Jolyon Maughan, a barrister who has advised Labour on the non-dom issue, said the Conservatives were highly unlikely to go into the next election leaving themselves exposed to criticism over the generosity of the non-dom rules.

“I am reasonably confident we should expect to see a gradual shortening of the 15-year period over the parliament.”