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Lisa Macpherson, national director of tax at PKF accountants and business advisers, says that the original proposals included measures that non-domiciles should pay UK tax on unremitted foreign income used to service interest-only foreign mortgages secured on property in this country.

These have been watered down so that they do not apply to existing loans until the mortgage expires or 5 April 2028, whichever is the earlier. 

Tax on foreign earnings 

Disappointingly, UK tax will apply on foreign income used to pay the interest on such mortgages taken out after 6 April 2008 or from 12 March 2008, where the terms of an existing loan are varied or a further advance is made. 

Macpherson says that the vast majority of UK resident non-domiciles will have acquired a property in this country using this method as it avoids them having to incur UK tax on foreign earnings used to pay their mortgages.

Non-domiciles have legitimately bought property this way and it would be manifestly unfair to alter the basis of taxation at this stage for existing mortgage holders.

It might not be a complete U-turn but it is a significant concession to non-UK domiciles that will make the changes announced in the Pre-Budget Report easier to swallow.

Real remittance and children 

There are also further relaxations to the proposals for taxing gains of offshore trusts, as well as concessions allowing the £30,000 charge to be creditable against foreign tax. 

In addition, the £30,000 will be able to be treated as a payment of the UK tax relating to a real remittance and children will not have to pay the annual charge.

PKF says that this is welcome news, as it shows that the Chancellor has taken note of the representations made and made the necessary changes.

The revised proposals state that income and gains in offshore trusts will only be taxed when they are remitted to the UK, even if these come from UK assets such as property.

This is a significant change and means non-UK domiciliaries should be able to continue to invest in UK assets through their offshore trusts.

Also, where art works owned by offshore trusts are sold in the UK, tax will only be paid when the trust remits the gain to the UK.

Changes applied without amendment 

The Chancellor has confirmed that the rules that attribute trust gains to UK resident domiciliaries which are now to be extended to non-domiciled individuals will allow for the rebasing of trust assets to 6 April 2008, so that non-UK domiciliaries are not taxed on gains accruing before 6 April.

Macpherson points out that the same cannot be said for offshore companies owned by non-UK domiciliaries.

The changes proposed in the consultation are to be applied without amendment, except where the company is owned by offshore trustees, when attributed gains from the company will be accorded the same treatment as other trust gains.

Macpherson says that non-domiciles looking to leave the country may well reconsider their position in light of this. She adds that it is unusual that such major changes were noted only briefly in passing, in the Budget speech.

“It appears that the Chancellor has tried to bury the details in the paperwork to avoid the embarrassment of being seen to make a u-turn. It all adds to the view that moves like this should be opened up to full consultation before being implemented rather than hurried through,” Macpherson concluded.

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• Tax regime threatens to topple London
• CIOT critical of non-dom proposals

Related links

• HM Treasury
• PKF