How athletes will be affected by the UK’s changes to “non-dom” tax rules

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: 

1. 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
   
   
2. 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