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Government proposals for non-doms ‘lay traps for the unwary’

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Government plans to change the taxation of non domiciles are seen to lack consistency and lay traps for the unwary, warns accountancy firm Kreston Reeves.

The Chancellor George Osborne announced plans to tighten the rules on ‘non-doms’ in the Summer Budget this year and invited comments on the proposed legislation.

Kreston Reeves Tax Partner Laurence Parry (pictured), author of the firm’s response, says: “One of the attractions of the UK is, we have had a historically stable approach to tax. This is in danger of being lost.”

He says that whilst the new test for being deemed UK domiciled, which is 15 years of residence within a 20 year period, was perceived to be generally fair there is “significant unfairness at the margins.” In particular, the proposed regime for returning UK domiciles is very harsh.

The crucial element in the reforms is how trusts will be taxed going forward. “The Government isn’t ready to bring forward proposals at this stage, and we are unlikely to know the final rules until after the start of the tax year to which they apply. Given these changes are fundamental, this is really not acceptable”.

There are also concerns that the new 15 year rule will cause uncertainty for taxpayers who are resident under the statutory residence test but deemed currently ‘non-dom’, as their main base, such as home, family and main business, are all abroad.

“The proposal will make them deemed domiciled from the 15th year and lead to additional complications and expense for probably very little actual tax to the UK.”

Plans to treat anyone born in the UK, with a UK domicile of origin, as domiciled whilst living here will be “grossly unfair” to those with only limited links and may drive away talented individuals, or deter others from coming.

“We are aware of two taxpayers who left the UK as infants and moved abroad. They are now citizens of other countries but have both been posted to the UK with work.

“The proposed rules will mean any structures implemented whilst they were non-resident would be ineffective for UK purposes. These people will almost certainly not have considered UK tax rules as part of their plans, and may well be worse off (in professional fees if nothing else) than taxpayers who will only have ever been UK resident.

There is also potential for confusion. The test for being a temporary non-resident requires a five year absence from the UK, whilst the proposal in the consultation to avoid being deemed domiciled ‘non-dom’ needs an absence of six years out of a 20 year period.

“To have a test for one tax that requires a five year absence, but for another that requires six, adds to complexity, the likelihood of inadvertent error and also the appearance of deliberately laying traps for the unwary.”

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