The non-UK domiciled individual has, for some time, enjoyed a magical tax status in the United Kingdom.  Whilst new legislation introduced over the last few years has eroded some of the benefits, the mythically named “non-dom” still has preferred tax treatment over and above the “UK dom” and they should take steps to exploit all the opportunities available to them.

This article will highlight some areas of interest from a tax point of view in the context of non-doms acquiring UK property.

Who is a non-dom?

In a logical world, this would be an easy question to answer given its significance from a tax point of view but, alas, the tax world is rarely logical. There is no statutory definition of domicile but there are various factors that are taken into account.

Individuals are born with a “domicile of origin” and, in this regard, individuals acquire a domicile at birth that matches their father’s (whilst sex discrimination law has infiltrated many areas, the law of domicile is not one so the mother’s domicile is not relevant). This means that even if one was born in the UK, it is still possible to establish a non-UK domicile. A non-dom living in the UK will need to demonstrate an intention to return to or settle in the other country as well as strong and sustained links to that country in the interim.  A non-dom actually living in that country is obviously in the strongest position.

A person who has a UK ‘domicile of origin’ will have to show that he or she has left the UK behind once and for all and put down roots permanently in another country in order to cease being UK-dom.

Domicile should not be confused with residence. An individual may be domiciled in one country and resident in another for tax purposes.

UK tax issues on acquiring a property

Everyone (whether non-dom or UK dom) should consider tax when they acquire a property.  They should consider taxes on acquisition, taxes during the course of their ownership and the taxes that could apply when they sell.

The table below summarises the major taxes as relevant to non-doms (both resident and non-resident) acquiring UK property directly in their own name:

Tax planning opportunities

The exact acquisition structure to be recommended when acquiring a UK property depends on a variety of factors and there is no “one size fits all” option. The intention of this article is to highlight a few key areas.

Inheritance tax (“IHT”)

IHT is payable at 40% on death to the extent an individual’s chargeable estate exceeds £325,000 (being the nil rate band). What a non-dom could decide to do to counter this IHT charge is to move the UK property overseas. Such suggestion is often met with a confused look until I explain that they can do this by holding the UK property in a non-UK resident company. The non-dom, therefore, holds a non-UK asset (shares in an overseas company) which, in turn, saves them 40% IHT. This only works if the non-dom is not long term resident in the UK (which, for these purposes, broadly means 17 out of the last 20 tax years). If they are long term resident, they are deemed domiciled (for IHT purposes only) and alternative methods must be considered.

An individual who is not deemed dom but could become so in the future because of a longer term intention to reside in the UK may also consider including a trust (of which they are a beneficiary) in this arrangement i.e. as a shareholder of the overseas company. This ensures that the “excluded property” status of the asset is preserved even if the individual becomes deemed dom in the future.

Capital Gains Tax (“CGT”)

From a CGT point of view, it may be that using a “standard” offshore company means that, if the company sells the property at a gain, the gain is attributed to the non-dom anyway for CGT purposes (if they are UK resident). This attribution can be avoided by using a special type of offshore company, known as a “Protected Cell Company” or “PCC”. Such a company can also be used by UK doms for CGT mitigation.

There may also be CGT advantages to including a trust. Where a non-dom establishes a non-UK resident trust, it enjoys its own special CGT regime. If the non-resident trustees sell the UK property at a gain, no CGT is payable at that time. Rather, the gain is “stockpiled” (which, in layman’s terms, means “the trustees keep a note of it”) and then it is only if the trustees distribute capital to a UK resident beneficiary that CGT becomes payable. So, the trustees could either reinvest the sale proceeds in other assets or distribute at an appropriate time and/or to an appropriate (i.e. non-resident) beneficiary.

As far as the non-dom is concerned, they could break the structure if they wish and permanently avoid CGT either during a period of non-UK residence or during a year in which they have made a remittance basis claim (in the latter case, provided they are prepared to leave the funds offshore).

Income Tax (“IT”) and Stamp Duty Land Tax (“SDLT”)

I have not made any detailed mention of IT or SDLT. The UK tax regime seeks to charge IT on UK source income and rental income from a UK property falls within this category. There is a raft of anti-avoidance legislation which makes it difficult to avoid the IT charge but this should be considered on a case by case basis.

As far as SDLT is concerned, the top rate of SDLT is now 5%.  SDLT is a value based tax and the 5% rate kicks in at £1 million for acquisitions of residential property.  SDLT planning is a whole separate article but it may be possible to mitigate this liability and specific advice should be taken.

Conclusion

This has been a relatively quick canter through what is a very complex area.  Non-doms continue to enjoy significant tax planning opportunities and these should be exploited as much as possible.  Ideally such matters would be considered as part of the acquisition process but they can also be considered where a non-dom already owns a UK property personally but wishes to now take some planning steps.

For more information, please contact Julia Rosenbloom at julia.rosenbloom@friendllp.com or on 0121 633 2000

To read more articles by Walls and Futures Limited please visit http://www.provesco.com/

In continuation of our popular ‘Breakfast with Friends’ seminar series,  Friend LLP were pleased to welcome Oscar Jazdowski from Silicon Valley Bank (“SVB”) on 11 May to discuss their ‘Game Changing Approach to Technology Financing’.

(l-r) Elly Gilbert (SVB), Mark Scotter (Friend LLP), Oscar Jazdowski (SVB) and Georgina Clark (Friend LLP)

About SVB

Founded in the U.S. in 1983, SVB began as an alternative bank for technology start up companies.  Supporting entrepreneurs shortly after they received a first round of venture-capital investment, SVB offered a buffer of venture debt and commercial banking services in order to help allow the fledgling companies to develop.

Today, SVB has worked with over 30,000 technology companies across the globe and have an impressive client portfolio including; Zoopla, Wonga, OpenCloud, Digg and Twitter.

Globally, SVB offers a full range of banking services tailored to the needs of technology and venture capital firms:, Commercial Banking, including credit, global treasury management and investment services , Funds Management and Valuations, Benchmarking & Capitalisation Table Management.

Sector focus

Working exclusively in the technology, life science and venture capital industries, SVB offers services and financing to all sizes of company, and emphasises support on companies that have venture-capital backing, particularly if they are in early-stage growth. SVB then works with the companies as they grow and throughout their lifecycle.

As Oscar explained, SVB is uniquely placed to support technology companies as “losses don’t scare [them]”. For the first ten years that SVB were supporting start up companies, many had little or no revenue. The support of venture capital and SVB funding allowed the companies the breathing space they needed to develop unique and innovative products. As well as financial support, SVB also offer their clients the expert knowledge they’ve gained through thirty years of experience in the sector.

Silicon Valley Bank is already lending money to UK companies and entrepreneurs and plans to roll out a full range of FSA licensed services for corporate customers at the beginning of 2012, pending approval.

The UK technology market

Having been educated in the UK before moving to America, Oscar has been very impressed by the rapid development of the UK technology market over the last few years. In his experience, one of the most distinguishing features of industry in this country is the focus on innovation.

Our experience in the technology sector

Friend LLP’s developing relationship with Silicon Valley Bank comes at an exciting time for our firm as in April 2011 we launched a specialist Technology, Media and Entertainment division with the aim of advising these specialist industry sectors that are often poorly understood by the majority of professional advisors.

What sets us apart from other accountancy firms is not just our determination to provide sound and commercially minded advice to businesses operating in these sectors, but that we have actual experience in the day to day operation of businesses in these sectors through our associated company Friend Media Technology Systems Limited (Friend MTS).

Friend MTS provides a variety of software-based services to companies (global and national) that operate in the digital media, security, marketing and entertainment industries.  Our close affiliation with Friend MTS means that a high percentage of our employees have a cross-section of skills and understand how these companies and these sectors work.

More information about our Technology, Media and Entertainment division can be found here.

Our thanks go to Oscar Jazdowski for a compelling introduction to Silicon Valley Bank. More information about Silicon Valley Bank can be found via their website: www.svb.com/UK/

Friend LLP is delighted to announce that Julia Rosenbloom has been promoted to Director in the firm’s tax department.

Julia joined the firm in early January 2011 to expand the firm’s private client offering with her extensive experience in tax planning for high net worth individuals, owner managed businesses and entrepreneurs.

Julia expressed “I am delighted to have been promoted to Director, especially so soon after joining the firm.  This demonstrates the firm’s commitment to expanding its taxation services and I look forward to playing a key role in that process”.

Managing partner Malcolm Friend agreed that “the tax advisory element of the practice is one which we are keen to develop and with Julia’s qualifications and experience, she is extremely well placed to play an important part in that development.”

For more information, please contact Julia Rosenbloom on 0121 633 2009 or julia.rosenbloom@friendllp.com

Accountancy expertise in the sectors of Technology, Media and Entertainment is severely lacking, particularly to SMEs and start-ups.  Very few advisors operate in the right market position and have appropriate skills to service the multitude of truly innovative companies based here in the Midlands.

A gap in the market?

Big 4 accountancy firms may have appropriate knowledge and expertise in these sectors, but their market focus is to service the needs of global players.  Conversely, smaller and independent accountancy firms may operate in the right market space to service SMEs and start-up companies, but lack the knowledge and expertise to advise these companies correctly.

The pace of change in these companies is often very quick, and as such, accountants and advisors with SME and start-up clients in these sectors need to be pro-active in maintaining client relationships, and be able to react quickly and incisively to time-pressured situations.

The solution

At Friend LLP, we fill that gap in the advisory market.  We provide Technology, Media and Entertainment companies with high quality, sector-specific advice; adopting a holistic partner-led approach without costing the earth.

What sets us apart from other accountancy firms is not just our determination to excel in these sectors and provide quality advice to these companies, but our actual experience in the day to day operation of these businesses through our associated company Friend Media Technology Systems Limited (Friend MTS).

Friend MTS provides a variety of software-based services to companies (global and national) that operate in the digital media, security, marketing and entertainment industries.  Our close affiliation with Friend MTS means that a high percentage of our employees have a cross-section of skills and understand how these companies and these sectors work.

Not only are we market-leaders in our advice and thinking, but we have developed a trusted network of non-financial advisors (lawyers, funders, engineers, industry consultants etc) enabling us to assist companies at every stage of their development.

Recent experience

Over the last 18 months, Friend LLP has undertaken a significant amount of work in these industry sectors, and has seen considerable demand from both new and existing clients for knowledgeable, well-thought out advice.

We commonly assist our clients with issues such as;

• Company and share valuations
• Financial due diligence (vendor and acquirer)
• Monthly reporting to funders
• Forecast models
• Management of cash flow constraints
• Correct treatment of taxation (R&D tax credits etc)
• Capitalisation of Intellectual Property
• Availability of UK and European Government grant funding

If you have any questions or would like to enquire about our services and expertise, please contact Georgina Clark on 0121 633 2034 or georgina.clark@friendllp.com