What's so special about living in London? Is it the football, pubs or theater? Is it the "polite people and excellent television," as sung by Hava Alberstein? Well, for some, it is proximity to the financial hub and AIM stock market in the City of London. And for others, there is the tax factor. For persons with money who are "resident but not domiciled" in the UK, the UK is one of the world's most popular onshore places to live. These people are commonly known as "non doms." What is the domicile concept? The Israeli tax system does not have the concept of domicile. For UK purposes, domicile is a longer-term concept than residence. Under English law, a person's domicile is the country considered to be their permanent home (such as Israel), even though that person may currently reside in another country (such as the UK). It may be a domicile of origin or choice. Under English law, every person is born with a domicile of origin, which is normally that of the father. A domicile of origin has a great tenacity. Thus, individuals who were never domiciled within the UK, and who work there for limited periods, normally have no difficulty proving that they are domiciled in another country (such as Israel). A "non dom" is generally subject to UK tax on income and gains from UK sources. But they are only subject to UK tax on income and capital gains from non-UK sources remitted to the UK; this is known as the remittance basis. This rule may also apply to individuals who are "resident but not ordinarily resident" in the UK. Ordinary residence is based on intentions when entering the UK and accommodation occupied; a person is generally deemed "ordinarily resident" after visits to the UK averaging 91 days or more for four tax years. In general, gains realized by a non-UK resident trust may be distributed free of UK tax to "non doms" and income tax planning is possible. For UK inheritance tax purposes only, a person may have a UK "deemed domicile" if he or she was an income tax resident of the UK in all or part of 17 of the last 20 UK tax years. A person who does not have a UK domicile or deemed domicile is subject to inheritance tax (on gifts and bequests to others, with certain exceptions) only on assets located in the UK, not elsewhere. Broadly speaking, a UK resident and domiciled person is subject to UK taxation on worldwide income, gains, gifts and bequests. The UK government announced proposals on January 18 to tighten up the residency and "non dom" tax rules. These proposals are not final, but something similar is expected to be enacted in July or August, with effect from this April 6. There may be retroactive effect before then in some cases, and action may need to be urgently considered and implemented by April 5 in conjunction with your UK legal and tax advisors. Following are brief highlights of these UK proposals. What's in store for non-doms? Non doms will start paying a Â£30,000 UK tax charge if they wish to continue to be taxed on the remittance basis on non-UK source income and gains. Otherwise, they must start paying full UK taxes on worldwide income and gains. This applies to those who have been resident for at least seven out of the past nine years preceding the relevant UK tax year (year ended April 5). An individual can be treated as resident in a tax year if he is present in the UK for part of that year. Therefore, individuals present in the UK for just over six years could be caught and need to review their position. An individual may apparently opt to pay the Â£30,000 charge and be taxed on the remittance basis on a year-by-year basis, possibly giving scope for tax planning. It is unclear whether other countries (such as Israel and the US) will allow a foreign tax credit for the Â£30,000 UK tax charge, as it is a lump sum rather than a tax on income or gains. The remittance basis will apply automatically, without the need to make a claim, if the individual's offshore income and gains amount to under a de-minimis of Â£1,000. Remittances Under the UK proposals, the rules regarding "remittances" to the UK will be tightened. A remittance need not be made in cash, but can occur when an individual receives income in the UK in any form, or has the power to enjoy that income in the UK. For example, foreign investment income that is used to acquire a work of art overseas, which is then transferred to a UK home, will now be treated as a taxable remittance at the point that the art is brought into the UK. A possible interpretation of the drafting is that existing assets in the UK bought out of foreign investment income may give rise to a remittance charge from April 6, by reference to the foreign income used to purchase it originally. The "ceased source" rule will be blocked. Until now, it was possible to bring overseas investment income to the UK tax free in a tax year subsequent to the year in which the source was closed. Not any more. The proposed measures are retroactive as they will apply to remittances any time on or after April 6, irrespective of when a source ceased. Affected persons should consider taking action before then. Gifts to close relatives and trusts are no longer effective to "wash out" inherent income or gains. Trusts Numerous changes are proposed in the UK regarding trusts. For example, for gains arising from UK-sited assets (UK real estate) held within an offshore trust, there is no longer any UK capital gains tax protection for a non-domiciled settlor even if he is excluded from benefiting from that trust. If the trust holds UK assets on which there are significant unrealized gains, appropriate tax planning prior to April 6 should be urgently considered. Capital payments to non-UK-domiciled beneficiaries will now be matched against realized gains within the trust structure. This includes gains realized both before and after April 6. And the remittance basis in respect of capital payments from the offshore trust has been removed where the beneficiary is a UK resident. Therefore, if a capital payment or benefit is received from the trust even outside the UK, a UK tax charge may still arise. Consideration should be given to distributing trust gains before April 6. Who is a UK resident? If you travel frequently to the UK but don't plan to become a UK resident for UK tax purposes, this is getting harder. Days of arrival and departure are to be included in determining residence status. UK residency is a question of fact, generally determined by reference to: (1) present 183 days or more in a tax year; (2) stay likely to last two years or more; (3) visits to the UK averaging 91 days or more for four tax years. In cases of dual residency in both the UK and Israel, the UK-Israel Tax Treaty contains additional "tiebreaker" tests. What about Israeli tax implications? In general, Israeli residents who stop being Israeli residents are subject to an "exit tax" - an Israeli capital gains tax at a rate of 20 percent to 47% (currently) - on the market value of their assets one day before they left Israel. They can pay this tax when they depart from Israel; if they don't, they are supposed to pay the tax on the date they actually sell the assets. But upon taking up Israeli residence or returning after residing abroad for three years (e.g. the UK), a five-year exemption is available for dividends, interest, rent and royalties relating to assets located outside Israel acquired while resident abroad; a 10-year exemption applies to capital gains on such assets. This presents interesting low-tax opportunities for Israelis who leave Israel, become UK resident "non doms" for more than three years, acquire assets outside Israel and the UK (such as in the US via an appropriate holding structure), then resume residence in Israel. However, the expected tightening of the UK legislation must be checked out and monitored carefully. As always, consult experienced tax advisors in each country at an early stage in specific cases. [email protected] [email protected] [email protected] Andrew Tailby-Faulkes and Philip Reynolds are tax specialists at Ernst & Young LLP, London. Leon Harris is an international tax specialist at Ernst & Young Israel.