Response by STEP Reform of the taxation of non-domiciled individuals: a consultation issued by HMT/HMRC in June 2011

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1 Response by STEP Reform of the taxation of non-domiciled individuals: a consultation issued by HMT/HMRC in June 2011 The Society of Trust and Estate Practitioners (STEP) is the worldwide professional body for practitioners in the fields of trusts and estates, executorship, administration and related issues. STEP members help families secure their financial future and protect the interests of vulnerable relatives. STEP promotes the highest professional standards through education and training leading to widely recognised and respected professional qualifications. STEP internationally has almost 17,000 members, with over 6,500 members in the UK. Over 4,500 students worldwide are currently studying for STEP qualifications and in the UK STEP supports an extensive regional network providing training and professional development. Introduction We welcome the opportunity to comment on the proposals set out in this consultation document. We agree with the two objectives set out in the consultation document ie that the tax system should ensure that 1) nondomiciliaries who are in the UK for many years should make a fair tax contribution and 2) that nondomiciliaries should be encouraged to invest in the UK. In relation to the first objective, we feel that the rules should be easy to comply with and should not necessitate extremely onerous accounting mechanisms to be put into place in order to comply. In relation to the second objective, as we have previously pointed out in relation to the remittance rules contained in FA 2008, we consider that the way in which the remittance rules currently operate acts as a disincentive to investment in the UK and we are glad that the Government has now recognised this. Currently the regime applicable to remittance basis users appears favourable but the rules are so complex that, when coupled with the negative publicity which non-domiciliaries have received since 2008, the regime is seen as a disincentive to coming to the UK. We welcome the proposals set out in the consultation document in principle, but feel that they do not go as far as is required to reduce the complexity of the rules or to stop non-domiciliaries (especially those thinking of coming to the UK) from feeling unwelcome, and driving those who are already here away.

2 Chapter 2 Increasing the remittance basis charge We have no objection to the proposal to increase the remittance basis charge for those who have been resident in the UK in at least 12 out of the 14 prior tax years to 50,000 other than to suggest that a commitment should be given not to increase this amount for a fixed period. We are concerned that unless this is done, the uncertainty regarding the level of the charge and the possibility of its being increased repeatedly in the future may discourage non-domiciled individuals from coming to, and investing in, the UK. Encouraging business investment STEP welcomes the proposal that the charge on the remittance of foreign income and gains to the UK for commercial investment by remittance basis users be removed. We agree that the incentive should be widely drawn and encourage active investment in a broad range of businesses and sectors. Types of business Queston 1 Are the proposed exclusions from the incentive appropriately drawn? Should other types of business be included or excluded? The proposed exclusions are broadly appropriate, except that we do not see why it is necessary to exclude the holding or letting of residential property if this is done within a business for profit. Particularly in the current market, a property which is developed may have to be held for some time before being sold. Form of business We can see no need to restrict the incentive to investments in companies. A lot of private equity funds are structured as partnerships or LLPs and in order to be effective in stimulating investment in the UK these should be included as qualifying investments. We understand that the Government is concerned that abuse of sidewards loss relief could occur if investments in partnerships are allowed. It should be possible however, to draft rules which will remove the possibility of such abuse. It may for example be possible to provide that if sidewards loss relief is available it can only be claimed against funds which would otherwise be tax free on remittance. It will be important that the new legislation makes it clear that there would be no remittance under Conditions A and B or under Conditions C or D (so that it would not be restricted in the way in which s809w ITA 2007 is limited).

3 We consider that the incentive should extend to companies quoted on markets such as AIM and PLUS quoted. Question 2 What would be the impact on both investment and complexity of extending the incentive to listed companies? In relation to companies listed on a recognised stock exchange, we believe that in order to be most effective in encouraging investment in the UK and to keep the relief simple, investments in these companies should qualify for the relief. It should apply not only to situations where quoted companies are looking to raise new finance but also where shares are being bought on the open market. An existing shareholder will often invest further money into the company by way of a rights issue when new finance is required. Many people hold shares in quoted companies for the long term and this should be encouraged. In addition, this would avoid the problems which would otherwise arise where shares in a private company are purchased and the company is listed at some later date. However, where small shareholdings in quoted companies are bought and sold on a regular basis, this would require the keeping of detailed records in addition to those required for capital gains tax purposes. We suggest that it be further provided that, if investments are traded within a designated discretionary investment account, then to the extent that the proceeds of a disposal are retained for re-investment within the same account, the exemption should not be withdrawn. It needs to be made clear whether investments in EIS and VCT schemes will qualify for this exemption. Where a loan is taken out in the current tax year in order to make qualifying UK investments, and after 5 April 2012 the loan is refinanced using foreign income and gains, can it be made clear whether the exemption will still be available? Channel of investment We welcome the confirmation that there will be no tax charge on the remittance of foreign income or capital gains held in investment vehicles or trusts. Could this treatment be extended to remittance by any relevant person (as defined in s809m ITA 2007)? Form of investment We believe that relief should be available in relation to as broad a range of investments as possible including investments in shares, loan capital, and also (as noted above) in partnership capital.

4 UK businesses Non-domiciliaries often invest in non-resident companies for other tax reasons and so we welcome the fact the relief will be available for investments in non-resident companies which trade in the UK through a permanent establishment. Can it be confirmed that this will include non-uk companies investing in commercial investment property and residential investment property? Companies holding shares in other companies We consider that investments in holding companies should qualify even though they may also hold property investment companies or treasury companies within the group. We suggest that a test similar to that contained in s105(4) IHTA 1984 would be appropriate: ie that the business of the holding company consists wholly or mainly in being a holding company of one or more companies whose business qualifies. Size of investment We welcome the proposal that there should be no maximum or minimum limit of the investment in the UK for the purposes of this relief. Time limit for investment What will be the time limit for the investment of money which is remitted to the UK? What will be the position if the investment falls through after the money has been remitted to the UK? Can it be made clear whether foreign income and gains remitted to the UK to pay valuation fees and other incidental costs incurred in the course of the investment will also qualify for the exemption? Connection to the qualifying business In a start up situation in a family run business it is usual for the family members working in the business to take remuneration at rates lower than those which would apply to other employees. Can it be made clear that this will not lead to a loss of relief as long as money is not otherwise extracted from the business eg by way of loan or dividend? Anti avoidance Question 3 Are the proposed anti-avoidance provisions suitable? Would it be appropriate to require remitted income or capital gains to be taken out of the UK or reinvested within two weeks of the disposal of the investment? The two week period mentioned in para 2.49 by the end of which one must have taken the funds out of the UK on a disposal or reinvested them is too short. Setting a period which is too short will act as a disincentive

5 to reinvestment particularly where advice may need to be sought about the suitability of the reinvestment. It may be difficult to know what funds need to be taken offshore eg where there are part disposals or disposals of shares which were acquired at different times and using different pots of foreign income/gains or where the proceeds are received in instalments. A period of at least 60 days should be allowed. The monies which are retained under contractual arrangements (eg under an escrow arrangement), should not need to be taken out of the UK until this is contractually possible. In addition, we consider that money which will be required to pay the capital gains tax liability on the disposal especially in relation to a part disposal should not need to be removed from the UK in order to avoid losing the exemption. Under general principles the base cost and the capital gain are indivisible and this gives rise to issues relating to the remittance of gains to the UK for investment. Will the ordering rules set out in s809q ITA 2007 apply when gains are brought to the UK? Which part of the proceeds of a disposal of the UK investment at a gain will need to be removed from the UK in the permitted period after the disposal and how can the gain be separated from the funds originally invested? Will the funds have to be divided between the account they originally came from and a new account or can they be put into a new account? If the period for export or reinvestment is too short then it is likely that non-domiciliaries will simply insist that sale proceeds are paid into an offshore bank account as a matter of course. Should the Government be encouraging a situation where taxpayers are in effect encouraged to remove the whole of the disposal proceeds from the UK even though UK capital gains tax may be due on any gain realised on the disposal? Will funds to pay this tax be capable of being brought back to the UK in such situations without a charge on the remittance? In paragraph 2.51 it is not clear what is meant by amounts of value taken out of a business which are not a permitted commercial payment and, in particular, whether this will include the sale of part or all of an investment. It is not clear what would be covered by payments to a third party which are linked to payments made to the individual. It will be important that, if there is going to be a specific anti-avoidance rule, it should clearly worded and not so vague that individuals can be inadvertently caught by it. Claiming the relief Question 4 - Would a mandatory requirement to claim the relief for business investment on a Self Assessment tax return be an appropriate way of monitoring the policy? If not, what alternative monitoring approach would be appropriate?

6 Under s809d or s809e ITA 2007, there may be remittance basis users who are not required to claim the remittance basis (and so do not need to file a self assessment return) and who may wish to use foreign income and gains from prior years to make the investment in the UK. Paragraph 2.56 states that individuals will have to declare whether they have remitted income or capital gains to the UK for investment and if so how much they have remitted and in what businesses they have invested. This does not seem to take into account the fact that the remittance and the investment may be made by a trust or a company (or another relevant person) with funds which legally do not belong to the individual. Paragraph 2.57 states that the provision of the stated information would allow the policy to be monitored however, it is not usual to have to report remittances that are not taxable. Will HMRC refuse such claims if the listed information is not supplied? There will need to be identification rules for remittances so that one will know what income/gains are brought to the UK, what is left offshore and what money is taken out of the UK when the investment is disposed of. Interaction with the remittance basis charge We consider that the relief should also be available to those who in prior years have been taxed on the remittance basis and who wish to invest foreign income and gains generated in those years but who are taxable on the arising basis in the year of investment. Question 5 - Would the policy outlined be an effective means of encouraging investment in the UK? See our comments above. Question 6 (a) Do you think that the proposed solution for each simplification would be effective? We welcome the proposal to simplify the nominated income rules. Could it please be confirmed that, where up to 10 of foreign income/gains in a foreign account is nominated and then 10 is remitted to the UK, s809i and s809j ITA 2007 will no longer apply to that account in relation to the income/gains of that year ie that one can effectively elect out of ring fencing by nominating and remitting 10? This proposal will be not be of assistance to those who have nominated the full amount of income/gains necessary to give rise to an additional tax charge of 30,000. The result of the rules in s809i and s809j ITA 2007 is that these taxpayers will still need to keep complex records for many years to avoid inadvertent remittances and we are not convinced that the situation need be as complex as it is. Can consideration be given to getting rid of the remittance of nominated income and gains rules generally because in practice

7 most non-domiciliaries will be encouraged to nominate and remit up to 10 so that these rules are likely to become otiose? Foreign currency bank accounts We welcome the proposal to remove all currency gains and losses within an individual s foreign currency bank account from the scope of capital gains tax. This will greatly reduce the compliance costs in relation to such accounts. However, this is not just an issue which affects individuals but also affects foreign currency bank accounts held by non-resident trusts where the calculation of gains for the purposes of s87 TCGA 1992 is greatly complicated by the need to take into account currency gains and losses on foreign bank accounts. We consider that these accounts should be treated in the same way as accounts held by individuals. Could this treatment be extended to Money Market/Liquidity Funds? These are widely used as deposit account alternatives and are favoured by wealthier non-domiciled individuals as they provide better diversification of risk for cash sums. However, there are regular contributions and withdrawals from the funds and so this is a real issue in practice. In the US, debit card/atm cards are available for a number of these funds. The dividends from these funds are treated as interest rather than dividend payments (to ensure tax parity with deposit accounts) where the funds have a stable net asset value. Taxation of assets sold in the UK Subject to our comments below, we welcome the proposal that the remittance of exempt assets such as art works and antiques purchased overseas using foreign income or gains where the asset is brought to the UK to be sold should not lead to a tax charge. However, although helpful we feel that this would only be a partial solution because even though there will be no tax charge on bringing the asset into the UK, as the non-domiciliary owner is UK resident, any gain realised on the sale of the asset in the UK will be subject to UK capital gains tax on the arising basis in the year realised and this is a major disincentive. This is to be contrasted with the situation where the individual sells the asset abroad eg in New York or Hong Kong when the gain would only be subject to UK tax if and when a remittance occurs. One way of incentivising UK resident, non-domiciliaries to bring assets such as artworks and antiques to the UK for sale would be (in addition to the proposal to allow the asset to be brought here without a tax charge) to allow them to take the proceeds out of the UK within a specific time and then tax the gains on the disposal only if and when these are subsequently remitted to the UK (so that the gain is in effect treated in the same way as if the asset had been sold on an offshore market). Although this would mean that the capital gains tax charge would be deferred, the fact that the sale would have taken place in the UK would generate VAT

8 and other taxes in the year of the sale. We appreciate that the capital gains tax charge on sale of asset will not apply to non-resident trusts. Many art works are held through non-resident trusts and companies and so the rules providing that there is no remittance on the importation of art for sale in the UK should be extended to assets brought to the UK by any type of relevant persons. Paragraph 2.85 should be clarified. We understand that the intention is that there will be no restriction on what the purchaser does with the asset. In addition, it is not clear how long before the disposal the asset can be brought to the UK and still qualify for this treatment. Paragraph 2.85 only specifies that the assets are brought to the UK temporarily? The marketing of expensive artworks or antiques may take some considerable time. We understand the intention is that the 275 day limit should apply but since this is a lifetime allowance it will be inadequate particularly where the art has already been in the UK earlier. There should be a standalone allowance for art that is marketed for sale. The VAT regime on import of art adopts a two year rule that may be appropriate here. The rules need to take into account how these assets are sold in the UK and to make it clear that the exemption will apply whether the assets are to be consigned to an auction house or a dealer. In the case of an asset being brought to the UK to be sold at auction, it is not unusual for a period of six months to pass between the asset being consigned to the auction house and the auction. It must be clear what will happen if the asset remains unsold at the end of the first auction, will it be possible for it to remain in the UK until the next auction? For this reason we suggest that a period of 24 months would be suitable provided that the intention to sell can be documented (eg by way of a consignment agreement). In the case of sale through a dealer, this may also take some considerable time and again we suggest that 24 months would be suitable. If the policy is to help the UK art market and auction houses to compete internationally, we believe that the exemption from the charge on the remittance of foreign income or gains to the UK should be extended to cover the purchase of art works or antiques on the UK market where the assets acquired are later removed from the UK. Would it be possible to provide for the use of the proceeds of sale or indeed other monies that would otherwise be subject to tax if brought into the UK to purchase works of art in the UK if these then leave immediately so the UK resident individual does not enjoy the art here, but the art market picks up the fee for the sale? It is not just the flow of works of art into the UK which is an issue for the art market, but also the ability to purchase works of art in the UK and take them out again. This is a global market we should want people to purchase art here. Will the exemption extend to musical instruments? Foreign domiciliaries allow instruments to be used by young up and coming musicians in the UK or they sell through some of the leading music dealers in

9 London. Often the cello or violin sits there for some time while the music shop explores potential buyers. The same problem as in relation to art arises. Question 7 Would two weeks be a suitable period of time before which the proceeds of the sale of an exempt asset should be taken out of the UK? We have dealt with this question before question 6(b) because it ties in with our response to question 6(a). Paragraph 2.86 indicates that the money must be taken out of the UK within two weeks of being received by the individual. Again we feel that two weeks is too short a time to ensure that proceeds are taken out of the UK and suggest that 60 days would be more appropriate. It needs to be clear what the situation will be if the proceeds are received in instalments as this is not an unusual arrangement where assets are sold at auction? Will the time limit run from the date of receipt of each instalment or the last instalment? The time limit needs to start running from the receipt of each instalment. Question 6(b) Can you propose other ways in which the remittance basis rules could be simplified, provided that they meet the principles described in paragraph 2.63? Mixed funds We would welcome the abolition of s809s ITA 2007 and a simplification of the mixed fund rules. We cannot see why it is necessary to have different rules for onshore and offshore transfers. Services The rules on remittances of money to pay for travel costs is a real disincentive to travelling with UK carriers. Individuals are flying to Paris or Frankfurt in order to be able to start onward legs from there so that the bulk of the fare for their journey is not remitted to the UK. In addition, those who arrive by private jet find these rules a real disincentive to coming to the UK. We would ask for the exemption in s809w ITA 2007 to be extended to travel services where the journey starts or ends abroad. Could consideration be given to amending s809w(4) ITA 2007 to allow payments directly to the UK bank account of UK service providers to qualify for exemption? The current rule requires professionals and other service providers to open foreign bank accounts which creates a lot of unnecessary administration. The exemption only applies where Conditions A and B in s809l are met, and therefore not where Conditions C and D are met. Although it is likely to be fairly rare that this is an issue, we suggest that it is extended to C and D. For example, say a parent has given his adult child a half share of a foreign property and cash. The child is not a relevant person, but is a gift recipient. The child pays the whole cost of a UK service relating to

10 the property, which is for the benefit of the child and the parent. That is a remittance by the parent. If the parent had paid for his own half share, there would have been no remittance. Another simplification for s809w ITA 2007 would be the deletion of sub-section (5), which denies the s809w exemption in certain situations. Chapter 4 of the Remittance, Domicile and Residence Manual suggests HMRC does not understand what this provision could possibly relate to, and neither do Kessler or Clarke in their commentaries. We are not aware that the deletion of this enigmatic sub-clause would result in any loss to HMRC. Charitable donations A great many non-domiciled individuals wish to make donations/grants to UK charities and although larger charities will usually have a foreign bank account, many smaller charities often do not. The gift has to be made through CAF s offshore account which can be costly and bureaucratic. It would facilitate and encourage such charitable giving if foreign income and gains could be transferred directly to the UK bank account of UK charities without a charge on the remittance arising. In addition, the exempt property rules in s809x ITA 2007 should be extended to include property brought to the UK which is donated to charity. This would allow property to be imported for that purpose and prevent a charge arising on personal property which is exempt under s809x on importation but is subsequently donated. Section 809X ought also to be amended so as not to bring into charge property scrapped, lost or stolen, save for any insurance proceeds recovered. Rebasing elections We suggest that the time limits for rebasing elections should be reconsidered. Either the time limit should be extended or rebasing should apply automatically without the need for election. Where there have been transfers between settlements (ie s90 TCGA 1992), the transfer may have taken place before any of the beneficiaries of the transferee settlement were UK resident and the trustees of the transferor settlement may not have made an election in time. The trustees of the transferee settlement are not currently able to make the election when the first capital payment is made. In other situations, trustees may not have not made an election because they had no cause to do so in circumstances where capital payments have not given rise to any UK tax liability and may be out of time by the time a UK tax exposure arises. Relevant persons Uncertainty still arises due to the wide definition of beneficiary contained in s809m(3)(e) ITA 2007: any person who receives, or may receive, any benefit under or by virtue of the settlement. This seems wide enough to include trusts where the trustees have an unrestricted power to add beneficiaries - which is a fairly standard form of trust.

11 Can it be clarified in writing whether this definition include situations where: a relevant person who, although not currently a beneficiary, could be added in future; a child or grandchild who, although it is specifically stated that such beneficiaries may not benefit whilst minor, may benefit after reaching majority; and/or the class of beneficiaries includes future born children or grandchildren. Estranged relevant persons There is no time limit between a gift to a relevant person and the eventual remittance by him which gives rise to a tax charge on the taxpayer. During the intervening period the parties may have become estranged and the individual may find himself at the mercy of the donee, who will be able to control when the tax charge arises for the individual and who may indeed not even let the individual know that it has arisen thereby causing him to be non-compliant. The rules are based on the supposition that the individual has ongoing contact with, and control over, the other classes of relevant person. This may not necessarily be the case. Duties of a relevant person and compliance There is no duty on a relevant person to inform either the individual or HMRC that he has remitted sums/assets to the UK thereby giving rise to a tax charge on the individual. Unless he does so the individual will not be aware of his liability and may inadvertently become non-compliant. The relevant person may forget to tell the individual especially if some time has elapsed between the relevant person receiving the sum and his remitting it. Other areas requiring simplification Notwithstanding the requirements of paragraph 2.63 of the consultation document, we suggest that the provisions discussed below should be reviewed with a view to their simplification. Condition B section 809L ITA 2007 derived property The need to trace foreign income and gains possibly through numerous layers of investment/transactions and without any time limit is very onerous and administratively complex. It also raises the possibility of future inadvertent non-compliance particularly by those who are not professionally advised. Where assets are gifted either directly or where onward gifts are made by the donee, it should be made clear whether there needs to be any conscious intention that the gifted income or gains will be brought to the UK before tracing is required or whether tracing has to be done no matter how many parties the income or

12 gains/assets go through. Over a period of years it will be extremely difficult, if not impossible, for the original donor to keep track of the position and to know whether he needs to report a remittance. It needs to be made clear whether derivation occurs where a transaction takes place between the taxpayer and a relevant person at market value. It is also not entirely clear whether derivation occurs in relation to a number of fairly common transactions eg subscription of shares, loans on market terms to relevant persons etc. Conditions C and D s809l ITA 2007 The issue we have with these conditions is that the legislation is very unclear. Condition C provides that the amount remitted is the amount of the foreign income or gains traceable to the enjoyed property (s809p(11) ITA 2007). This can give rise to a substantial tax charge even though the enjoyment is limited in extent or time as there is no limitation on the amount or extent of the enjoyment and this seems excessive. Condition D in particular is so unclear that it is difficult to see what it catches and whether what it catches is in fact what it was meant to catch. Tax law, even anti-avoidance provisions, should be clear so that taxpayers can tell whether or not they fall within those provisions. The guidance given in the Remittance, Domicile and Residence Manual does little to clarify matters in relation to these conditions. Whilst we understand that the Government may be concerned that if these provisions were more specifically targeted there could be a loss to the Exchequer, we feel that it is wholly inappropriate to have tax legislation that is so unclear that taxpayers cannot tell whether or not they are compliant. Relevant debts We note that in Remittance, Domicile and Residence Manual paragraph it is stated that where property is used as collateral for a relevant debt but where offshore income or gains are used to service and repay the capital, this will mask the collateral being used. It would be useful if this could be clarified and confirmed by an appropriate amendment to s809l ITA Section 13 TCGA 1992 As we have indicated in the past we would suggest that s13 TCGA 1992 be reformed so as to provide at least no worse a regime than s87 TCGA 1992 for foreign companies, with full allowance for any gains tax on the apportionment of allowable expenditure to the participator s investment. Question 8 - Should the situations outlined in paragraphs 2.98 to fall within the new statutory treatment for employees who are not ordinarily resident and carry out duties in the UK and

13 overseas? Are there any other situations which are not covered by SP1.09 and might require legislative provision? We will leave it to other representative bodies to deal with this issue. Submitted by STEP UK Technical Committee on 9 September 2011.