Another country
May 2009
Dominic Lawrance explains why some understanding of the non-dom rules is helpful when dealing with major donors
Not unnaturally, there is a lot of interest in the third sector in how charities should attract donations from ‘high net worth’ individuals. Clearly, this is a big topic; but part of the answer may be that charities should consider the philanthropic needs of ‘foreigners’. Why? Because the very wealthy are, to a much greater extent than the rest of us, internationally mobile, and will often be resident in a country other than their country of origin.
This article focuses on individuals who, although resident in the UK, are domiciled elsewhere. A significant proportion of the high net worth community in the UK is domiciled outside the UK and, as I will explain below, a non-UK domicile tends to dictate a particular strategy for charitable giving. Charities can easily accommodate this strategy, at little cost to themselves – but few do, and indeed few charity trustees or fundraising managers are aware of the requirements of this category of donor. Being aware of these donors’ needs, and being ready to accommodate them, could pay dividends.
I will also look, briefly, at the rather more specialised requirements of a particular sub-class of UK resident ‘foreigner’ – US passport-holders living in the UK. There is a serious obstacle to tax-efficient charitable giving by such individuals, although fortunately there is a ready-made solution.
But first, how should charities go about attracting the ‘non-dom dollar’? And what do we mean when we talk about domicile?
Definition of a non-dom
A certain amount of mystique surrounds the so-called ‘non-doms’. A full explanation of the concept of domicile, which is quite separate from both nationality and residence, is beyond the scope of this article. However, an individual born to foreign parents, and who was brought up outside the UK, is likely to have a foreign domicile unless he has formed the intention to live in the UK permanently or indefinitely. If he intends to leave the UK at a particular time or on the occurrence of a particular contingency, he should have non-dom status. Note that it is possible for an individual to keep a foreign domicile for a long period of UK residence – even decades.
Of course, it will never be up to a charity to advise a high net worth donor on his domicile; wealthy non-doms can be expected to have got professional advice on their domicile status. Where charity staff can ‘add value’ in relation to a non-UK domiciled donor is in being aware of how he is treated by the UK tax system, and of the techniques that can be used to maximise the tax-efficiency of his charitable giving. These techniques make sense because, typically, a non-UK domiciled individual is taxed on a different basis from an ordinary UK resident, at least in relation to foreign income and gains.
Most UK residents are taxed on income and gains as they arise, wherever they arise. By contrast, a UK resident but non-UK domiciled individual is, typically, only taxed on income from non-UK sources, and on gains realised on the disposal of non-UK assets, if the income or gains are ‘remitted’ to the UK (although UK income and gains are taxed as they arise). This is known as the ‘remittance basis’. [1]
In broad terms, non-UK income or gains of a non-dom will be remitted to the UK if cash or other assets representing or deriving from the income or gains are brought into the UK or otherwise enjoyed in the UK by the non-dom (although there can also be a remittance if a related person, for example, a minor child of the non-dom, brings such assets into the UK). It follows that the tax planning that is done for such individuals tends to focus on ensuring that their UK expenditure can be funded using cash that does not represent or derive from non-UK income or gains, and generally on avoiding taxable remittances.
Effect on charitable giving by non-doms
In a sense, the tax rules on charitable giving are exactly the same for UK non-doms as for the rest of us – they are entitled to tax reliefs for charitable gifts under various schemes, including the gift aid scheme and the scheme for gifts of qualifying investments, such as shares and interests in offshore funds. I will discuss qualifying investments below. Let’s start with how the remittance basis interacts with the Gift Aid scheme.
The rules on Gift Aid should be familiar. For any cash donation to a UK charity made by a UK resident, the charity can reclaim the income tax on the donation from HMRC. Currently, this tax reclaim is worth 28p in every £1. [2] For example, suppose X makes a donation of £10,000 to a UK charity. The charity can reclaim £2,800 from HMRC, bringing the total amount received by the charity to £12,800.
In addition, a higher rate tax payer is entitled to claim income tax relief (through his tax return) equal to 25p for every £1 given to UK charities under the gift aid scheme. X, in the above example, can claim relief worth £2,500. The aggregate rate of tax relief (split between the donor and the charity) is therefore 53 per cent.
How does the remittance basis fit in with this? Non-doms who have been resident in the UK for any length of time typically have large sums outside the UK, representing foreign income and/or gains, and limited resources which can be used tax-free in the UK. Clearly, it makes sense for such an individual to make charitable gifts out of foreign income and/or gains, instead of running down the funds that can otherwise be used for UK expenditure. At the same time, the individual will want to get tax relief, where possible, to reduce the tax payable by him on UK income and/or gains (or on unavoidable remittances of foreign income and/or gains).
If a non-dom (who is a higher rate taxpayer) makes a cash gift to a UK charity using unremitted foreign income, and the various conditions in the Gift Aid scheme are satisfied, the individual will be entitled to tax relief worth 25p for every £1 given to the charity. But there’s a potential problem: if the gift is made to a UK bank account of the charity, that will qualify as a remittance of the foreign income (the income will have been brought to the UK by the non-dom; it is irrelevant that this was done in the course of making a charitable donation). The remittance will trigger tax for the non-dom at 40p for every £1 given away – turning the 25p tax benefit of his gift into a 15p tax cost. Disaster!
There is a simple solution to this problem. There will be no remittance by the non-dom if his donation is made to a non-UK account of the charity. Clearly, at that stage, the income won’t have been brought into the UK so it can’t have been remitted. Following the receipt of the money in the offshore account, the charity can transfer it to a UK account, without any remittance by the non-UK domiciled donor – the income will have been brought to the UK, but not by the non-dom himself. So, any charity seeking to attract gifts from non-UK domiciliaries should consider opening a non-UK bank account for this purpose.
A word of caution: this technique may not work to prevent a taxable remittance of foreign income or gains if the charity is a company of which the non-UK domiciled donor is a member. The reasoning is technical, but it turns on the definition of ‘relevant person’, and the fact that if non-UK income or gains are brought to or enjoyed in the UK by a ‘relevant person’, that will be treated as a remittance by the non-dom himself. The list of persons who will be regarded as ‘relevant persons’ in relation to a non-UK domiciled taxpayer includes any ‘close company’ of which he is a member, and it is possible for a corporate charity to qualify as a ‘close company’. This issue should be relatively uncommon.
Having a non-UK account sends out a clear message that your charity is clued-up about, and willing to engage with, non-dom donors. However, it isn’t absolutely necessary. A non-UK domiciled donor could be encouraged to open a CAF ‘account’ and make a gift to CAF’s Jersey bank account; a payment could then be made out of the CAF ‘account’ to your charity. [3] This ‘around the houses’ approach would avoid a taxable remittance for the donor, but would obviously be much less convenient for him than a direct gift to a non-UK account in the name of your charity. There is also the ‘private foundation’ option: a wealthy non-dom may have his own charitable trust, with a non-UK bank account, which non-UK income or gains can be passed through en route to your charity.
Gifts in specie by non-doms?
High net worth individuals tend to be more likely than the average donor to be interested in making non-cash gifts to charity. The remittance problem can raise its head here too.
Gifts in specie can attract two separate forms of tax relief. Where an asset given to charity is standing at a gain, any CGT that would otherwise have been triggered by an arm’s length sale (or a gift of the asset to a connected person) will be avoided. This relief is arguably less important for a non-dom, who can take advantage of the remittance basis in relation to non-UK assets, than an ordinary UK resident.
The other relief which may be available is from income tax, under the scheme for gifts of qualifying investments (‘QIs’). Where this applies, the relief may be worth up to 40 per cent of the value of the assets given away – a powerful incentive. (All of the tax relief goes to the donor, so there is no tax reclaim by the charity.)
As explained above, the tax benefits of a charitable gift made by a non-UK domicilary can be wiped out if, in the course of making the gift, he triggers tax on foreign income or gains. The holy grail for a philanthropically-minded non-dom is achieving a charitable gift using non-UK income or gains without any remittance.
An important point here is that QI relief is only available for gifts of certain investments specified by the legislation. Many of these are by definition UK assets and cannot, therefore, represent unremitted non-UK income or gains of a non-UK domiciliary (if a non-dom invests foreign income or gains in a UK asset, he makes a remittance). So, in practice, the need to avoid a remittance is only likely to apply in relation to a limited range of QIs: shares and debt securities issued by non-UK companies or governments that are listed on recognised stock exchanges, and interests in offshore funds (this includes most hedge funds and money market funds).
There are various ways of achieving a gift of such investments to a charity without triggering a taxable remittance. Bearing in mind that a charity will almost invariably want the value of the investments rather than the investments themselves, and that the investments will almost invariably be held for the non-dom by a non-UK resident broker or nominee, the simplest approach is for the non-dom to transfer his beneficial interest in the investments to the charity and (once that has been done) for the broker or nominee to sell or redeem them (on behalf of the charity) and transfer the proceeds of sale to the charity’s bank account (it does not matter if a UK account is used for this).
The transfer of the beneficial interest in the investments should be effected by a deed of gift signed by the non-dom. It is crucial (to obtain QI relief) that this gives the charity the beneficial interest in the investments themselves (not the proceeds of sale). Ideally the charity should sign a letter to the broker or nominee instructing it to sell the investments that are held for it. The investments must not be sold until the deed of gift has been signed and dated.
Responsibility for getting this kind of planning right will lie with the non-UK domiciled donor’s tax advisors rather than the charity’s staff. However, it can only be helpful in attracting non-dom donations for fundraising personnel to be aware of, and able to talk to potential donors about, the possibilities that are ‘out there’for making charitable gifts (including in specie) representing foreign income or gains, without remitting them.
Anglo-American issues
Lastly, a few words on a particular class of foreign donor, with even more specific requirements – US passport-holders living in the UK. As US citizens, such individuals are taxed in the US on their worldwide income and gains; as UK residents they are also taxed in the UK.
This may sound like cruel and unnatural punishment. However, in general, being taxed in both countries is not too onerous, as tax paid in one jurisdiction is available as a credit for tax payable in the other, under the US/UK double taxation treaty.Unfortunately, the treaty rather falls down when it comes to charitable giving. It is highly inefficient for an individual in this position to give to either an ordinary UK charity or an ordinary US one – in either case the broad effect of the treaty is to deprive the individual of the income tax relief that normally attaches to a charitable gift.
Thankfully, there is a ‘quick fix’, in the form of the so-called ‘dual-qualified charity’ (actually, two charities: a US company which is the sole shareholder in a UK one). There are a number of such organisations which have been set up to receive gifts from UK-resident US citizens, and pass them on to other charities of their choice (acting, essentially, as a tax-efficient conduit). [4] A gift made via a dual-qualified charity will be far more efficient, for an individual in this position, than a direct gift to a UK charity or indeed a US one.
Again, charities cannot be expected to act as tax advisors, but there is a huge amount of value to be added by being aware of the problem faced by philanthropic UK-resident US citizens, and being able to direct them towards the solution. Where foreign donors are concerned, a little knowledge is (contrary to the cliché) no bad thing.
[1] Long-term UK residents who are non-UK domiciled now have to pay a £30,000 fee for the remittance basis. An individual in this position can elect not to pay this fee and to be taxed in the same way as a UK domiciliary – in which case the techniques for tax-efficient giving by non-doms, discussed in this article, won’t be relevant.
[2] The amount of tax which can be reclaimed will go down to 25p in every £1 in April 2011.
[3] See www.cafonline.org
[4] The best-known is Southampton Row Trust Limited; an alternative is The Anglo-American Charity Limited.
[2] The amount of tax which can be reclaimed will go down to 25p in every £1 in April 2011.
[3] See www.cafonline.org
[4] The best-known is Southampton Row Trust Limited; an alternative is The Anglo-American Charity Limited.
Author: Dominic Lawrance
Dominic Lawrance is an assistant solicitor at Macfarlanes LLP, specialising in tax, charity law and philanthropy. He is a member of the Charity Law Association
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