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UK professional bodies challenge new benefits charges on non-doms

Thursday, 19 November, 2015

A group of professional associations have questioned the UK government's plans for significant reform of the taxation of non-domiciled residents, in particular the 'dry benefits' charge to be imposed on settlors of offshore trusts.

The reforms were set out in a consultation document issued on 30 September. In essence, they put an end to permanent non-domicile status for tax purposes, so that long-term non-dom residents will have to pay tax on the same basis as UK-domiciled residents.

However, the Institute of Chartered Accountants in England & Wales (ICAEW) say the provisions as presently outlined are 'not fair, reasonable or proportionate'. It also says the government has not allowed enough time for a proper consultation given the radical nature of the reforms, and that the reforms should be phased in gradually with some transitional provisions to prevent retrospective taxation.

The ICAEW has serious concerns with the proposals for trust taxation where the settlor was born in the UK with a UK domicile of origin. 'Taxing an individual with a foreign domicile differently because he or she was born in the UK with a UK domicile of origin is not justified', says the ICAEW. 'A closer connection with the UK should be required for the penal tax proposals in the consultation document to apply.' The Law Society agrees, demanding that a single set of rules should apply.

Both organisations, along with the Chartered Institute of Taxation and STEP, are especially concerned about the benefits charge on offshore trusts set out at paragraph 3.2 of the consultation document. This requires any individual who becomes deemed-domiciled in the UK to pay tax on benefits they receive from any offshore trust and any underlying entities. These benefits will be taxed without reference to the income and gains arising in the offshore structure – which the Treasury itself admits is 'a very significant change' to existing practice.

The four organisations have jointly issued a discussion draft stating it is their 'unanimous view' that this charge 'has a number of insurmountable problems'. In its place they provisionally propose a modified version of the existing non-transferor charge as the basis for taxing non-resident trusts set up by all non-doms.

Sources