How athletes will be affected by the UK’s changes to “non-dom” tax rules
Published 13 October 2016 By: Jon Elphick
On 8 July 2015, the UK government announced its intention to reform the taxation of foreign domiciled persons (i.e. persons not domiciled in the UK under general law) (“non-doms”).1
The changes will be legislated in the Finance Bill 2016 and introduced from 6 April 2017. They will affect non-doms who are resident in the UK for lengthy periods (for example, foreign football players playing for a Premier League football club – “resident non-dom”). They will not affect non-doms who are not resident in the UK for lengthy periods (for example, tennis players who are just visiting for a few weeks to compete at Wimbledon – which we’ll call “visiting athletes”).
The UK’s non-dom rules are well established and have played a key role in attracting overseas talent to the UK. British sport has been one of the areas to benefit from these rules, with a number of professional sports being able to attract a high number of both established and promising international athletes to the UK to further their careers. The proposed changes, coupled with uncertainty around the recent Brexit vote, have therefore been some cause for concern and international athletes are having to re-examine their positions.
Accordingly this article explains the changes to the resident non-dom regime and looks at the potential impact on foreign athletes already living in or thinking of moving to the UK. Specifically, we look at:
- What is a non-dom?
- Why is being a non-dom important?
- What is changing?
- Reduction in number of years a UK resident foreign national can be considered a non-dom
- Additional changes to anti-avoidance rules and offshore trusts
- A brief word on Brexit
- The impact of non-dom changes and Brexit on athletes (practical examples)
What is a non-dom?
In simple terms, a “non-dom”2 is an individual whose family heritage originates outside the UK. This can include foreign nationals who move into the UK, but will also include individuals who were born in the UK if their father is himself a “non-dom” (note a person inherits their domicile from their father in most circumstances, but it can be their mother in situations where the individual was dependent on their mother at birth).
Currently a non-dom moving to the UK can retain a foreign domicile status indefinitely, regardless of how long they reside in the UK.3 The exceptions to this rule are:
- where an individual is resident in the UK for more than 17 out of the previous 20 tax years in which case (until 5 April 2017) individuals become deemed UK domicile for the purposes of UK inheritance tax only;4 and
- where individuals decide to permanently relocate to the UK, in which case they can acquire a UK “domicile of choice”.5 Essentially this means that a non-domiciled individual can choose, should they wish, to adopt the UK as a permanent home rather than retain a domicile outside of the UK.
Some athletes who move to the UK to further their careers may decide to stay here permanently. If their choice to stay in the UK permanently comes after retirement, most foreign athletes moving to the UK will retain the status of being a non-dom for the remainder of their professional careers on the assumption that their career in the UK lasts less than 17 years (see 1 above).
Why is being a non-dom important?
The UK tax position of a resident non-dom living in the UK differs from the tax position of a UK domiciled individual. Whereas a UK resident and domiciled person is liable to pay UK tax on their worldwide income and capital gains each year6(and inheritance tax on their worldwide estate), the tax exposure of a UK resident non-dom can be limited to the income and capital gains arising in the UK.
In order to limit their UK tax exposure, a resident non-dom must elect to be taxed on the “remittance basis”7. The “remittance basis” means that the resident non-dom will be taxed on UK income and gains as they arise, but their liability to UK tax on foreign income and gains will be limited to the extent that they “remit” (meaning transfer, spend or enjoy) these amounts to the UK.
If a resident non-dom remains a UK tax resident for more than seven tax years they will need to pay a Remittance Basis Charge (starting at £30,000 a year and increasing to £60,000 a year after 12 years) in order to continue to claim the remittance basis8. Generally most non-doms will chose to pay the Remittance Basis Charge, although in some cases the economic benefit afforded by claiming the remittance basis is not sufficient for the athlete to pay the charge. (Note that the decision as to whether to pay the Remittance Basis Charge or not is made on a year-on-year basis after the end of the year, such that an accurate financial comparison can be made in order to confirm which approach is more cost effective each year).
As an example, Zlatan Ibrahimović (or simply “Zlatan” as he refers to himself) is a Swedish national and a highly successful footballer. Zlatan moved to Manchester United in July 2016 and in doing so became a UK resident non-dom for UK tax purposes.
Zlatan arrived in the UK with accumulated wealth reported to be in the region of $114 million, (making him the fourth wealthiest footballer in the world)9. Forbes places Zlatan as the 72nd highest paid celebrity in the world10 with an estimated salary of $30.4m and annual endorsement income of $7m. Zlatan holds multiple endorsement deals including a number of global sportswear companies, the Swedish car manufacturer Volvo and a Swedish health drink called "Vitamin Well".
Presumably Zlatan is a resident non-dom for UK tax purposes and, being UK resident for tax purposes (rather than a “visiting athlete”), the income he makes from non-UK endorsement deals (and indeed any other non-UK investments) can remain outside a charge to UK income tax, which ordinarily would be charged at a maximum rate of 45%11. In other words, Zlatan could elect to pay UK tax on the remittance basis and save $3.15m in UK tax a year (subject to paying the Remittance Basis Charge after his seventh year of residence). This is clearly very attractive for established sport stars moving to the UK; although the UK tax savings would need to be weighed up against any taxes incurred in other jurisdictions where Zlatan’s income arose.
What is changing?
In April 2015, the UK government announced its intention to make changes to the way the UK taxes resident non-doms.12 Further “consultations” have taken place since the original announcement. The latest was released on 19 August 2016, and provided a good indication of the final reforms that will be implemented from April 2017.13
Reduction in number of years a UK resident foreign national can be considered a non-dom
The government’s main proposal is to reduce the number of years that a UK resident foreign national can be considered a non-dom.
- The proposal is that, with effect from April 2017, any foreign individual who has been tax resident in the UK for more than 15 (instead of 17) of the preceding 20 years will become “deemed domicile” in the UK14.
- If a foreign national does become deemed domicile then they will become subject to UK tax on their personal worldwide income and capital gains, as well as being subject to UK inheritance tax on their worldwide estate.
This earlier loss of the remittance basis may put off non-doms. However, all is not lost. The government has proposed certain protections15 for trusts that can, with the forward planning, mean that tax efficiency can be maintained.
It is important to note that these rules will also apply to the children of athletes who live with them in the UK. We have noted above that an individual usually obtains their father’s domicile on birth. Whilst these proposals do not mean that a “deemed domicile” will be obtained by a child, they do mean that a child can become deemed domicile in the UK when they reach the age of 16 if they are born in the UK and live here for more than 15 years before they reach 16 years of age16.
Additional changes to “anti-avoidance” rules and offshore trusts
As part of the non-dom reforms, changes are also being made to existing “anti-avoidance” rules that seek to prevent UK residents from moving income and capital gains into offshore structures17.
The existing rules are very complex, but essentially mean that if a company doesn’t have an active trade then the income or gains arising in that company could be imputed back to the individual who set up the structure. This is especially important for image rights structures established by athletes, and any other passive structure established to hold investments.
The existing anti-avoidance rules are not subject to a major overhaul, but will be amended to ensure that they are consistent with the concept of a “deemed domicile” individual noted above.
The rules on offshore trusts are also going to be changed substantially so that providing foreign income and gains remain in trust then there should be no further tax liability on the settlor. The effect of these changes are that trusts can allow foreign earned wealth to be accumulated free from UK tax (and in some cases free from any tax, depending on where the income and gains arise) to be enjoyed abroad on retirement.
Notwithstanding these changes, Zlatan will still be able to retain his non-UK endorsement income through a company should he require, whilst avoiding a charge to UK tax by electing to pay on the remittance basis as above. These particular changes will only affect him if he becomes deemed domiciled in the UK once he has been resident in the UK for more than 15 tax years.
A brief word on Brexit
At present, EU laws affect how the UK tax rules apply to foreign nationals living in the UK. For example, the current EU framework does not allow the UK tax laws to discriminate against foreign nationals on the grounds of nationality.18 Consequently, a large proportion of the UK’s “anti-avoidance” rules currently contain provisions allowing EU based structures (such as endorsement companies and pensions) to remain outside of these rules providing the structures have a suitable level of commercial substance.
Historically the UK government resisted the implementation of these rules for a long time and it is likely that they will seek to change them given the opportunity presented by Brexit. If the UK government seeks any changes, it is in the author’s view likely that these would be drafted in favour of increasing the UK’s tax take rather than protecting the rights of foreign nationals living in the UK. In other words, it may be that once the terms of Brexit have been ironed out, the UK could end up implementing new laws that are less favourable to incoming foreign nationals (including foreign athletes relocating to the UK).
What impact will the resident non-dom changes and Brexit have on athletes?
The precise impact will depend upon the outcome of the non-dom proposals and Brexit negotiations, and of course the personal circumstances of the athlete.
To help give a feel for the situation though, here are what the author believes are four of the most likely scenarios. These can be summarised as follows, with more details on each scenario contained below:
- Visiting athletes are not likely be affected by these reforms.
- Athletes moving to the UK later in their careers may not be affected.
- Athletes moving to the UK earlier in their careers are likely to be affected.
- Foreign athletes born in the UK, or moving to the UK during childhood, will be affected by these reforms.
Visiting athletes are not likely be substantially affected by these changes
Vivian is an international athlete who competes over longer distances. Vivian lives in Spain for most of the year during training, and for the rest of the year she travels around the world competing at various athletics meets. Vivian makes on average 2 or 3 appearances in the UK each year and, whilst she is a non-dom for UK tax purposes, she would be considered to be a “visiting athlete” rather than a UK resident non-dom (to whom the changes above apply). All of Vivian’s assets are outside the UK, and the only income she receives in the UK is appearance fees and prize money.
The proposed non-dom changes are unlikely to have any effect on Vivian as long as she remains resident outside of the UK. Vivian will continue to pay UK tax on her UK appearance fees and prize money, plus an appropriate proportion of any endorsements earnings she makes each year. (For more on how the UK taxes endorsement earnings of visiting athletes please see this article19)
There may however be some impact from Brexit over the longer term, as the international agreements between the UK and Spain may change. This could affect how the UK withholds tax on income paid to Spanish residents. However, it is unlikely that Vivian’s tax position will change substantially.
Athletes moving to the UK later in their careers may not be affected.
Brooke is a member of the Australian ladies’ international hockey team. She has played club hockey in Australia for most of her career, but now wants to move to the UK to finish her career with an English club. Brooke owns property in Australia that she intends to rent out once she leaves. Brooke also has a number of endorsements with a local sportswear company in Australia, and they have asked her to continue to act as a brand ambassador for the foreseeable future. Brooke is open minded about the future, and she plans to initially stay in the UK for a few years after she retires from playing hockey.
Brooke will be considered to be a non-dom for UK tax purposes. Her open mindedness about her future means she is unlikely to obtain a domicile of choice in the UK unless (and until) she decides to permanently stay in the UK. In the meantime, Brooke will be able to elect to pay UK tax on the remittance basis, and thus avoid paying UK tax on her Australian income if she doesn’t remit any amounts back to the UK.
If Brooke stays in the UK for the next 15 years then she will become deemed domicile in the UK. At this point in time Brooke will become taxable in the UK on her Australian property and endorsement income irrespective of whether she wishes to bring this income into the UK or not. However, there is an opportunity for Brooke to undertake some tax planning before she becomes deemed domicile. As an example, Brooke could settle her non-UK assets into a trust, such that they accumulated outside of her personal ownership but within a vehicle that she and her family could still benefit from. This will enable Brooke to limit her tax liability on her non-UK income, even after she becomes deemed domicile in the UK.
It is unlikely that Brexit will have any tax impact on Brooke’s tax affairs, although it is noted that the availability of UK working visas going forward may become more limited.
Athletes moving to the UK earlier in their careers are likely to be affected.
Anthony is a French football player. Anthony has lived in France his entire life, and his father and grandfather were both French nationals. Anthony started playing professional football for Monaco and signed his first contact this season at the age of 17. Anthony has received an offer to join a Scottish football club. He doesn’t have any sources of income other than a salary, and he doesn’t own any substantial assets. However, Anthony’s parents still live in France and he intends to send money back to them in order for them to acquire some French assets in Anthony’s name.
Anthony is at the start of his career. When moving to Scotland (which is part of the UK for tax purposes), he won’t initially have any non-UK income or non-UK assets. Consequently, the changes to the UK resident non-dom rules may not have a substantial immediate impact on him.
However, if Anthony’s career is successful and he decides to remain in the UK, then he would become deemed domicile in his 16th year of residence. At this time, he would be nearing the end of his career and could build up substantial assets outside of the UK using his income from football. Anthony would want to make sure that he could continue to maximise his income with a view to retiring from football and embarking on new challenges, and consequently he would need to consider tax planning in order to ensure that his non-UK income and assets were retained in a tax efficient manner.
Given the age of Anthony when he moves to the UK, it is likely to be sensible to consider a tax planning strategy in conjunction with retirement planning, such that his assets can accumulate in a tax-free environment.
As Anthony is only 17, he may not meet the possible visa entry criteria that may exist in the UK post Brexit. If he is able to meet the criteria, Anthony should be aware of his international tax position with a view to how he will be taxed on any income arising on the French assets to be acquired in his name.
Foreign athletes born in the UK, or moving to the UK during childhood, will be affected by these reforms.
Talupe is a Tongan international rugby player. His father was also a Tongan international rugby player who originally moved to Wales in the 1980’s to pursue his own career. Talupe was born in the UK in 1990 during the time when his father was still playing rugby. He has lived in the UK since. Talupe’s family has business interests in Australasia, and he has recently been given shares in the business. Talupe holds a substantial endorsement contract with a global rugby merchandising brand, which requires him to make a number of personal appearances throughout the world (excluding the UK) each year. Talupe has travelled extensively and intends to remain in the UK for another 5 years after which he intends to retire and move back to Tonga with his young family.
After 5 April 2017, Talupe will immediately become deemed domicile in the UK for tax purposes. That means any income arising from his endorsement contracts and any dividends received from the family business will automatically be taxed in the UK every year after 2017, even if Talupe doesn’t want to bring this money to the UK.
It is recommended that Talupe looks to legitimately restructure his affairs in order to make his UK tax position more efficient going forward. This is likely to provide a substantial tax saving for Talupe on his endorsement earnings and is especially sensible if Talupe does leave the UK in the medium term future and doesn’t need any of his non-UK income in the UK.
It is unlikely that Brexit will have an impact on Talupe as he is already resident in the UK. However, if Talupe earns endorsement income from various EU countries his tax position may change going forward depending on whether the UK chose to renegotiate Double Tax Treaties with separate EU member states.
- HMRC Guidance, ‘Technical briefing on foreign domiciled persons changes announced at Summer Budget 2015’, gov.uk, 8 July 2015, last viewed 10 Oct 2016, https://www.gov.uk/government/publications/technical-briefing-on-foreign-domiciled-persons-changes-announced-at-summer-budget-2015/technical-briefing-on-foreign-domiciled-persons-changes-announced-at-summer-budget-2015
- A person’s domicile is determined under general common law principles rather than being defined by statute.
- Section 1 and 5 of HM Revenue and Customs’ published guidance: “Residence, Domicile and the Remittance Basis” (“RDR1”), June 2016, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/528018/RDR1-residence-domicile-remittance.pdf (last accessed 12 Oct 2016)
- Inheritance Tax Act 1984, Part IX Miscellaneous and supplementary, s 267 (1).
- As determined by common law.
- Income Tax Act 2007, Part 2 Basic Provisions, Taxation of Chargeable Gains Act 1992, s2.
- Income Tax Act 2007, Part 14 Income Tax Liability: Miscellaneous Rules.
- Income Tax Act 2007, Part 14 Income Tax Liability: Miscellaneous Rule, s809H.
- https://www.cheatsheet.com/sports/the-top-5-wealthiest-soccer-players-on-the-planet.html/?a=viewall https://www.sportstardom.com/richest-footballers-in-the-world/5/
- Finance (No. 2) Bill 2016, s1 and s2, https://www.publications.parliament.uk/pa/bills/cbill/2015-2016/0155/160155.pdf (last accessed 10 Oct 2016)
- See footnote 1.
- “Reforms to the taxation of non-domiciles: further consultation” dated 19 August 2016, https://www.gov.uk/government/consultations/reforms-to-the-taxation-of-non-domiciles-further-consultation/reforms-to-the-taxation-of-non-domiciles-further-consultation (last accessed 10 Oct 2016)
- Ibid at Section 3.1
- Ibid see Sections 3.16 to 3.22.
- Section 3.5 of “Reforms to the taxation of non-domiciles: further consultation” dated 19 August 2016.
- Income tax Act 2007, Part 13 Tax Avoidance, s720 and Taxation of Chargeable Gains Act 1992, Part 1, s13.
- The Treaty on the functioning of the European Union, Part Two, Articles 18 to 25, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12012E%2FTXT
- Nicola Parkinson, attracting top talent: why the UK should reconsider the way it taxes non-resident athletes’, lawinsport.com, 31 Aug 2016, last viewed 12 Oct 2016, https://www.lawinsport.com/articles/item/attracting-top-talent-why-the-uk-should-reconsider-the-way-it-taxes-non-resident-athletes
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- Tags: European Union | Finance Bill 2017 | Football | Image Rights | Immigration | Income Tax Act 2007 | Tax | Treaty on the Functioning of the European Union (TFEU) | United Kingdom (UK)
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