By Nicola Mawson
As the United Kingdom moves to align its tax regime affecting residents who are not domiciled there with similar systems the world over, experts are warning that this poses massive changes in the tax treatment of income and assets and its effects are wide reaching.
The first finance act under the Labour Party government led by Sir Keir Starmer makes what the UK’s Chartered Institute of Taxation (CIOT) explained are “major” changes for people who live in the UK but are not permanently domiciled there.
Among those is the removal of the VAT exemption for private school fees, increases in some rates of capital gains tax and stamp duty land tax, and the extension of energy profits levy on the oil and gas sector.
Effectively, it means that all those who live in the UK face UK tax on worldwide income.
As chairman of CIOT’s Technical Policy and Oversight Committee, John Barnett, said, “this is a huge change in how the UK treats international taxation”.
The changes in the tax regime now mean that, regardless of where someone considers home to be – where they are domiciled – if they live in the UK, they will be subject to tax on income earned anywhere across the globe and not just if it was taken into the country, as was the case before.
Data source compilation company, Media Hack Collective, stated that there were around 247 000 South Africans living in the UK in 2020, a number that had increased by about 80% in the past decade.
Antonia Nicoloudakis, head of international tax at PKF Octagon, explained that “domicile is a complex legal concept that refers to the country in which a person considers their permanent home or has a substantial connection with. Domicile is different to nationality, citizenship, and residence.”
Barnett explained that “moving from domicile to residence as the basis for taxing people who are internationally mobile makes sense. As well as being a major simplification, it is a fairer and more transparent basis for determining UK tax. Residence is determined by criteria far more objective and certain than the subjective concept of domicile.”
However, South African tax experts are not convinced that the changes are simpler, pointing out that – in many areas – the new law makes it much more complicated for people to be compliant with His Majesty’s Revenue and Customs office.
Michael Kransdorff, an international tax practitioner from the Institute for International Tax and Finance, warned that South Africans need to act now to restructure financial affairs before the changes take effect on April 5. “South Africans in the UK should seek professional advice from experts familiar with both UK and South African tax laws to mitigate potential tax exposure,” he said.
Kransdorff explained that, currently, non-domiciled individuals in the UK are taxed only on their UK income and on foreign income and gains that they bring into the UK. Foreign income and gains kept offshore are not taxed. From April 6, this regime will be abolished. “Instead, all UK tax residents, regardless of domicile status, will be subject to UK tax on their worldwide income and gains, even if the funds are never brought into the UK,” he said.
Previously, explained Nicoloudakis, only funds taken into the island country became taxable in the UK. “This includes transferring money into a UK bank account, using foreign income to pay for goods or services in the UK, or gifting or loaning money to a family member who then uses it in the UK,” she said.
Now, said Nicoloudakis, the concept of worldwide income is being introduced, meaning that UK tax residents will be taxed, regardless of where the income was earned. “This might lead to an increased tax liability for some in the UK,” she said.
Meanwhile, Di Haiden, CEO of Robert Cowen Investments, added that, for people who are already non-domiciled in the UK, the reforms will remove many of the tax benefits associated with the current system.
“Wealthy individuals who previously used the remittance basis to minimise UK tax exposure may face increased tax liabilities on their global income and gains. Planning opportunities such as using offshore trusts will become more restricted, although trusts established before 2025 will retain some protections.”
There is a transition period. Kransdorff explained that people who became UK tax residents after April 5, 2022, will get a limited four-year period where certain foreign income and gains will be tax free. There is also a Temporary Remittance Basis Window, he said. “From April 6, non-domiciled residents will get three tax years, with tax rates set at 12% for the first two years and 15% in the final year, to remit their previously untaxed offshore funds.”
Kransdorff said that South Africans should consider:
- Selling South African assets where appropriate to mitigate UK capital gains tax exposure.
- Reviewing and restructuring trusts to prevent them from being fully taxed in the UK.
- Withdrawing South African retirement savings (retirement annuities, pensions and preservation funds) before April 6, where possible, to take advantage of the current favourable tax treatment.
“This overhaul represents one of the most significant reforms to the UK tax system in decades, with implications for individuals and the broader economy. There may be advantages and disadvantages for South Africans, and obtaining the correct UK tax advice is important,” said Haiden.
Kransdorff added that “those with trusts, investments, or retirement savings in South Africa should seek urgent professional advice to restructure before the changes take effect”.
PERSONAL FINANCE
