| Could UK’s expatriate loss be Ireland’s gain? |
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| John Bradley takes a look at the fundamental changes which the UK Chancellor has announced in relation to the tax regime applicable to non UK domiciled individuals who are resident in the UK and asks what opportunities, if any, they raise for Ireland. |
Introduction
The changes to the UK tax regime governing non UK domiciliaries have been one of the main talking points of Chancellor Darling’s first Budget. Despite significant scaling back of the proposed reform since the pre-Budget report in October, the adverse impact for individuals, not only in terms of tax cost but also in terms of compliance burden, is considerable.
When one considers the relatively modest increases in Exchequer revenue likely to be generated, it seems probable that these changes could have a disproportionate affect on the UK’s competitiveness in attracting key executives and wealthy individuals generally who play such a vital role in driving the commercial economy.
With a little imagination we could turn this situation to our advantage by using this opportunity to positively revamp the Irish rules and position ourselves as an obvious alternative for any expatriates reviewing their position in the UK.
What are “Non doms”?
Due to their common origins, the UK and Irish tax systems have had similar mechanisms for taxing expatriates known as the “remittance basis of assessment”.
This system applies to individuals who are not “domiciled” in the UK or Ireland (“non doms”). The concept of domicile relates more to the country associated with an individual’s family history and future intentions than to where he or she currently resides. An individual’s domicile is usually the same as his or her father’s unless positive steps have been taken to sever ties.
Under the “remittance basis”, non doms are only taxable on certain foreign income and gains where they “remit” or bring back funds comprising those income or gains to the UK or Ireland as relevant.
Example
Take for example, an Australian citizen, Wayne, sent to act as CEO for a flagship UK subsidiary of an Australian technology multinational over seven years ago. He also has a consultancy role on a restructuring project relating to a French subsidiary.
Wayne has amassed considerable wealth from his career to date. He holds a varied portfolio comprising several investments in funds and property both in Australia and elsewhere, though not in the UK. He took the opportunity to do some forward planning upon moving to the UK and restructured certain investments into an offshore trust.
Wayne was placed on a split employment contract in relation to his UK and French duties. He has only been taxed in the UK on his UK employment income to date. This has adequately covered his family’s living expenses in London. Some of his offshore income has been put to good use on holidays abroad but as he has kept it outside the UK, he has not suffered UK tax on it. Wayne bought a house in Chelsea, financed by a mortgage from his Guernsey private bank. The interest is serviced nicely from his offshore income.
Wayne currently has no UK tax exposures in relation to the offshore trust even in the event the offshore trustees decide to make capital payments to him in the UK. Wayne and his family have become pretty used to Chelsea family life and although they
plan to return to Australia eventually, they are currently in no particular rush.
So how have things changed for Wayne?
As an individual, who has been resident in the UK for 7 out of the last 9 years, if he wishes to continue to be taxed using the remittance basis he will need to pay an additional tax charge of ?30,000 per annum. So if he wishes to continue to avoid tax on all his foreign investment income and gains he must pay this ?30,000 charge. His alternative is to pay UK tax on his worldwide income and gains.
Even if he pays the ?30,000 charge, he will not be able to claim any of the annual UK personal income tax or capital gains tax allowances. What’s more, if he does bring some funds back to the UK to supplement his income there, the ?30,000 will not automatically be deemed to refer to the liability on those funds. So, unless careful planning is undertaken, the funds brought into the UK, however small, could generate an additional tax charge.
The fact that his offshore mortgage is financing his UK property will mean the interest payments may be deemed to be remittances, liable to UK tax. There will be some grandfathering of existing arrangements where the mortgage interest is paid out of his foreign investment income, but not out of his foreign capital gains or employment income. Plus if he or his family receives payments as beneficiaries of the offshore trust whilst they are in the UK they may become subject to UK tax. He will have to engage advisors to make sense of the complex rules he needs to understand to minimise his liabilities.
Some of the more junior Australian secondees who report to Wayne are less concerned about the changes. Their offshore income and gains are less than ?2,000 so they will be exempt from the ?30,000 charge and from the changes to allowances.
Opportunity for Ireland?
The increased tax cost and compliance burden in the UK may cause a number of expatriates to look at whether there are alternative locations which have more to offer. Ireland may be able to offer a viable alternative in certain situations.
We still retain the remittance basis in relation to offshore investment income and gains. We also retain benefits somewhat comparable to the previous UK position in relation to “non doms” and offshore trusts though changes to our inheritance rules a number of years ago had negative implications in this area.
While for some, the ?30,000 charge will probably be a small price to pay to continue to avail of the remittance basis in relation to offshore income and gains generally, however, there will be individuals nearing the end or over their 7 year time limit in the UK, who have significant, though not mega, savings income worth sheltering. For these, Ireland may prove to be an attractive alternative residence location. Careful consideration would need to be made of all comparative factors including, for example, tax efficient pension arrangements that non doms may still retain in the UK.
Ireland would however be in a much better position to capitalise on this opportunity had our rules in relation to employment income of expatriates not been changed fundamentally with neither warning nor grace period in 2006. Prior to this, unlike in the UK, it had been possible for expatriates to be seconded to work in Ireland under a foreign contract of employment and to be taxed only on that employment income to the extent they brought it into Ireland.
The move from a domicile to a residence based system of Capital Acquisitions Tax relevant to inheritances back in 1999 was also counterproductive, resulting in non Irish domiciled individuals falling into the inheritance tax net in certain situations. This is compounded by the fact that the vast majority of Ireland’s double tax treaties do not provide relief in this regard and unilateral relief is limited.
Action Required
A recent index of attractiveness of the world’s financial centres, published by the City of London, ranked London number 1 and Dublin number 13. Despite London’s first place position, its point score had decreased significantly over previous years and one of the most important factors stated for this was the adverse changes to the non doms regime.
If these changes can have a materially negative impact on London’s competitiveness, we should not underestimate the positive impact which improvements to our regime could have.
A simple reversion to our old rules allowing expatriates to avail of the remittance basis in respect of employment income and a return to a domicile based inheritance tax regime would make Ireland a truly alluring alternative to the UK for decision makers in international industry.
If the government still believes it is necessary to protect against “widespread abuse” of the remittance basis on employment income by certain sectors, it could look at some form of capped income tax liability on employment income after a number of years though I query whether this is necessary in the current climate.
It is not helpful that this year’s Finance Act’s only reference to the expatriate’s regime was to deal with a request from the European Commission to put UK non employment income on an equal footing with all other foreign non employment income (i.e. taxable only upon remittance). While it is welcome, that the discriminatory treatment of UK income has been removed, it should have been done long ago. And having accepted the position as discriminatory, the Department should have heeded calls to accord the same treatment to UK gains instead of doing the bare minimum asked of them.
In Summary
In my view, the UK changes to the non dom regime are ill-advised. They have generated considerable adverse sentiment and make tax affairs significantly more burdensome as well as more expensive for expatriates relocating to the UK and the multinationals trying to attract them. And this is all for relatively minimal Exchequer returns. I see this as an opportunity for the Irish government to act quickly to widen the gap between the UK and Irish expatriate regimes and attract not only much needed highly skilled executives but key decision makers who have the power to deliver further growth and employment to Ireland. |
John Bradley is a tax partner in KPMG.
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| Article appeared in the April 2008 issue.
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