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Tax breaks for non-doms: new rules explained

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Last month, the government announced the abolition of tax by non-domiciled individuals on money they bring into the country so long as it is invested in a UK-registered company.

So-called “non-doms” number about 5,400 and include some of Britain’s richest individuals, such as Indian steel tycoon Lakshmi Mittal and Russian billionaire Roman Abramovich.

Here are the details of the new rules:

  1. Exemption will apply to funds held in offshore trusts and companies as well as personal funds.
  2. The investment must be in a qualifying business. The proposal is that the business must take the form of a company. Partnerships and sole traders will not qualify. It is expected that there will be significant lobbying on this point particularly so far as LLPs are concerned.
  3. There will be no upper or lower limit on the amount of offshore income and gains that can be invested.
  4. There will be anti-avoidance rules aimed at preventing taxpayers from exploiting the exemption for non-commercial purposes, for example by taking loans from the company.
  5. The exemption will apply to investment in both share and loan capital.
  6. There will be no restrictions on the investor’s connections with the company. They can be a director and receive remuneration at a commercial rate for the job.
  7. The investment can be made into a “family company” which employs other family members. 
  8. The business must either carry on a trading activity, or the development or letting of commercial property.
  9. The company will not have to carry out the qualifying business activity itself. It could be an investment company, provided it only holds shares in businesses which are companies. There is no minimum ownership requirement so the shares held could be a minority stake which means that private equity companies and venture capital companies could qualify.
  10. The company must be resident in UK or have a permanent establishment here, but the trade itself can be carried on anywhere in the world.
  11. Certain activities are excluded including: holding and letting residential property (except for building and development activities, and nursing homes and hospitals); leasing of tangible movable property (yachts, cars, furniture, pictures); and personal services (nannies, cooks, chauffeurs).
  12. The government is considering whether the relief should be extended to listed companies or focused on unlisted companies and companies quoted on AIM and PLUS.
  13. The consultation document says that government is determined that the relief should be free of unnecessary restrictions and simple to use. There is previous history of the good intentions like this being lost when the legislation is drafted because HMRC wish to minimize tax avoidance. The legislation needs to be free of unnecessary restrictions and simple to use.

Richard Mannion is national tax director at Smith & Williamson

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