By allowing non-doms to invest in UK companies without paying tax, the government hopes to keep the economy going and the non-doms sweet, says Ed Powles
UNDER NEW RULES introduced by the UK Government, from 6 April 2012, it will be possible to bring funds into the UK free of tax by investing in certain companies, without having to dip into the personal expenditure pot. Properly used, this exemption should dovetail well with a number of other tax breaks for business investment – primarily capital gains tax and inheritance tax benefits – which should give non-domiciliaries a really serious incentive to invest in the UK and mark an important change in attitude towards encouraging foreign investment.
Of course, this is not a blanket exemption and the precise rules have to be analysed carefully. For example, the investment will typically have to be (directly or indirectly) into a trading company. But where relief is available, it is clearly capable of being extremely valuable.
These changes are a welcome relaxation of the current regime for people who are resident but not domiciled in the UK on a “remittance basis”. Under the regime, tax is only due on income and gains that were generated in the UK or that are “remitted” to the UK from outside. That makes it difficult for people who are UK tax residents to bring funds into the UK without incurring a tax charge. If such people want to personally fund a UK business, they would either have to tap into their “personal expenditure” cash or use funds that had been taxed in the UK.
This is a real disincentive from making UK investments. Maintaining a pot of “clean” funds for personal expenditure is essential planning – e.g., to buy property or pay day to day expenses. Given that it’s hard to predict how much spending money is needed over the years, tying up funds for general investments may not always be attractive, especially given that the rules are such that “clean” pots of money have to be invested in a very conservative way.
The amendments address this problem directly. The new rules mean that UK investments can be made in the UK without touching the funds that have been set aside for personal expenditure. That means that there is no need to be concerned with whether a particular investment may leave you with insufficient funds to live on. The investment decision can be made without having to worry about personal day-to-day cash management.
However, the new regime is not just about one exemption (however useful it may be). In the past, the UK has clearly been a magnet for internationally mobile individuals for many years. But recent years have seen widespread changes to the political and tax environment. Aggressive tax changes may have left many people wondering whether the UK really intends to attract external investors. May observers may have thought that, at best, the trend was towards unclear and complex taxation, coupled with confused and contradictory policymaking.
There have been mixed messages. Yes, the UK wishes to be seen to be open for business. But policy has been opaque, not least in the light of the fall-out from the global macroeconomic crisis.
Underpinning the new investment rule (and others) is a key message. Legislators recognise that hastily-introduced tax changes in the last few years led to a climate of uncertainty and hostility. This was counterproductive. The UK, like all other economies, needs to attract talented individuals and inward investment.
In fact, the UK continues to showcase a wealth of features which are helpful to potential residents, including the availability of investor visas and a competitive tax regime for people whose domicile remains outside the UK. So long as they plan properly in advance of becoming resident, the UK is still an attractive destination. The new rule goes a step further in encouraging migration, because it means that there is no need to consider in advance whether “clean” funds have to be set aside for future investments.
Even the notorious £30,000/£50,000 charge only becomes payable after seven years of tax residence. For some, it may not be necessary to pay it every year. In practice, as it happens, a bigger challenge for many will be to establish whether or not they are actually UK tax resident in the first place, given the vague, poorly-understood residence rules. For example, it is possible to become UK resident even without spending 90 days annually here. These rules are acknowledged to be an embarrassment and will change in 2013.
The investment rule represents an acknowledgement that previous over-hasty rules (legislating first, asking questions later) has simply been counter-productive. It is genuinely encouraging that the Government now acknowledges the need for migration, for inward investment – for certainty and stability. If there has been too much tax “stick” and not enough “carrot”, the new rule symbolises a welcome sea-change. It seems that the UK really does remain open for business.
Ed Powles is an associate at Maurice Turnor Gardner