Chancellor Rachel Reeves will be setting out her stall for the UK as a ‘safe harbour’ for wealthy international professionals tomorrow at the IMF-World Bank Spring Meetings in Washington.
In the following update, Charlie Sosna, Head of Private Wealth & Tax at law firm Mishcon de Reya, shares insight with us on whether a proposed review of tax rules relating to US limited liability companies will be effective in attracting those potentially considering relocating from the Gulf.
ICharlie Sosna, Mishcon de Reya said: “This is a critical opportunity for the government to seize the initiative and position the UK as a stable and safe haven for international wealth in a volatile world. However, the government needs to move quickly and decisively to avoid ceding ground to other countries who are already making moves to attract wealthy families in the Middle East to their shores.
“The proposed consultation by the UK Chancellor on how Limited Liability Companies are treated for UK tax purposes is a relatively narrow issue, primarily affecting high-net-worth-individuals with a US nexus.
“The government should step back and ask itself what role it wants wealthy individuals to play in the UK and whether the current tax and immigration regimes support this. The UK’s immigration regime is in fact a more pressing challenge than tax complications. For instance, those looking to leave the Gulf quickly may be put off by the UK’s complicated immigration route. A promised review on reintroducing the investor visa has fallen silent.
“There are also practical considerations for those in the Gulf moving to the UK. For many, the lack of a domestic worker visa that would allow them to bring the domestic help they see as family has been a major stumbling block and pushed them towards moving to more accommodating jurisdictions.”
Also weighing in on the issue, private client specialist Matthew Harrison, partner at Vialto Partners, a provider of integrated solutions for global work said:
“This is an issue which affects many UK resident owners of US LLCs. These signals from the Chancellor will therefore be welcomed at a time when many individuals will be making significant decisions around travel and residency; all against the backdrop of a rapidly developing situation in the Middle East. We will be watching and waiting for what might come of an announced change to the rules, and the implications that this will have.
“As it stands, HMRC’s published position on the UK taxation of US LLCs is highly problematic for UK resident owners of US LLCs. LLCs are usually ‘transparent’ for US tax purposes, but HMRC consider that they are usually ‘opaque’ for UK tax purposes. This means that the US taxes the income arising to the LLC, and the UK taxes distributions from the LLC without any credit for the US tax, thus giving rise to double taxation – typically exceeding 60% overall.
“The problem is not the UK tax rules; it is HMRC’s published position. In 2015, the Supreme Court held that a Delaware LLC was transparent for UK tax purposes, but HMRC have never accepted that decision. In HMRC’s view, the Supreme Court misunderstood the US legal analysis of the LLC in question, so HMRC have been clear they will challenge any taxpayer who submits a UK tax return on the basis that an LLC is transparent.
“This makes it very difficult for UK resident owners of LLCs to determine the correct UK tax analysis. The Supreme Court decision is the law; it is not open to HMRC to ignore it, but because they have threatened to challenge any taxpayer who does not follow their guidance, very few taxpayers follow the Supreme Court decision because they do not want to engage in lengthy and expensive litigation with HMRC.
“LLCs also give rise to other UK tax difficulties. For example, it is unclear whether they have ‘share capital’. This is a problem with the UK tax rules rather than HMRC’s published position, and so any initiative from the UK government to address the UK taxation of LLCs would be most welcome and would no doubt make the UK more attractive to certain individuals.”
