The United Kingdom Her Majesty's Revenue and Customs released its budget on March 12, 2008 containing new significant language and tax structures relevant for UK-domiciled residents and resident non-domiciliarys.

Effective as of April 6, one of the most controversial changes designed to 'level the playing field' by making the super-rich pay more in taxes on wealth they remit to the UK, appears to be having just the opposite effect. The super-rich, the ranks of which encompass hedge fund owners, building /shipping tycoons, and others are estimated to have contributed staggering billions to the UK economy in property acquisition and management, taxes, and multi-national business. They are now leaving quickly and in droves.

One estimate is more than 50 percent of these global citizens will be gone by year-end. Naturally, you can bet that United States Internal Revenue Service , which does not currently tax non-residents on capital gains and some portfolio interest are watching this scenario very closely indeed.

The US economy, hammered by the sub-prime mess, visages of thousands of empty homes in foreclosure, a falling dollar and the greatest balance of payments trade deficit ever, will be seeking new ways to increase revenue. It is only a matter of time, sooner rather than later, if the drum beating from current Democratic candidates is to be believed, that the US tax code is updated to reflect taxation of income generating foreign wealth sitting on its shores. Phooey, you may say, but I think that this is a distinct possibility.

What constitutes a non-resident alien for US income, gift and estate tax planning purposes?

Foreign nationals and United States connection issues: United States government tax and financial planning issues are based on (sometimes very subjectively) US Internal Revenue and US Immigration Service definitions of citizenship, residency, situs of assets, value and kind of assets held in the US, length of stay in the United States computed over a number of years, closer connections to US or other countries, intentions of staying in the US, and so on.

The United States tax regime is different from that of other countries where citizenship and domicile may be considered as two separate and distinct fact patterns. One can be a citizen of Canada forever, for instance, but not be considered resident there and thus, not subject to taxation while living abroad.

The United States citizen or resident wherever he (or she) may live is taxed on world-wide income, from whatever source, within certain thresholds. Foreign nationals, on the other hand, generally, are taxed only on US source income. However, with frequent travel, indeterminate length of stays in the United States, and other closer connection attributes, the foreign national may find that he may, indeed, be classified as a US resident for taxation purposes. There are subjective and specific tests to determine the foreign national's US tax status (as discussed below).

Bermudians (and other foreign nationals) have often diversified their investment and real estate holdings by purchasing and holding assets in other countries, such as the United States. More often than not, these decisions are made without consulting an international tax specialist whose knowledge and experience provide significant advantage.

They can advise as to the most appropriate method of holding other country's onshore assets, both from the perspective of minimising the tax impact from another country's regulatory authorities, as well as the most effective holding vehicle in the event that the owner passes unexpectedly.

While these categories and restrictions may seem trifling to the offshore individual, the US tax rules that come into play may be particularly onerous. Problems often arise when a foreign national NRA (non-resident alien) attempts to sell a US source asset and the documentation on file with the brokerage firm or real estate titling company is not adequate to prove that the NRA may not be subject to US taxes.

Withholding tax may be taken at source at time of sale regardless as to whether the NRA is subject to taxation or not. The problem then becomes one of trying to redeem excess tax withheld (yours) from US Internal Revenue Service, which then may trigger a review by both federal and state tax regulators of the overall investment property records for reporting and filing compliance during the years that it was held for revenue generation.

According to US Internal Revenue Service, foreign persons include:

• Non-resident alien individual.

• Foreign corporation

• Foreign partnership

• Foreign trust

• A foreign estate

• Any other person that is not a US person.

Aliens are classified as resident and non-resident aliens. The federal taxation rules, applicable tax rates and residency requirements are different for foreign nationals who are resident alien and non-resident alien.

State and local income tax residency rules may be different than for US federal income Tax rules. An individual may be considered resident for state taxes, but not necessarily for federal tax, or estate tax. Also, the criteria for establishing whether a foreign national (NRA) is a US resident for estate, gift, and generation skipping tax is not the same as for US income tax.

Immigration rules also differ again as to whether an individual is resident or non-resident.

Resident alien for US federal income tax purposes, a foreign national is considered a resident alien of the United States if he meets either of two tests:

a) A lawful permanent resident of the United States who has received a green card immigrant visa.

b)The substantial presence test based upon a complex calculation of numbers of days in the United States for the past three years, or if the NRA is deemed to be a US resident alien by virtue of the substantial presence test, he may be able to substantiate his real tax home in an examination of the facts and circumstances of his lifestyle, the closer connection test.

For a resident alien, who has a green card and has decided to return to his home country, he must officially revoke his immigration status by either the US Immigration and Naturalization Service or a US consular officer. Many foreign nationals are not aware that until they officially terminate their green card with this final step, even if they have lost it or had their green card expire, they are still considered residents of the United States for tax purposes.

Non-resident alien is a foreign national (NRA) who does not meet the closer connection or the substantial presence test. He may be taxed on US source income, effectively connected under most circumstances.

Anticipating tax events ahead of time, can represent significant financial planning opportunities for many offshore US citizens, residents and foreign nationals.

In the next several features. What is effectively connected income for foreign nationals? We will explore what it means to have two passports, dual nationalities, multi-national families and US citizens living abroad in future articles.

Sources: United States Internal Revenue Service website; HMRC UK website.

Martha Harris Myron CPA -NH1929, CFP® -67184 (US licenses) TEP - Society of Trust and Estate Practitioners. She is a Senior Wealth Manager at Argus Financial Limited, specializing in comprehensive financial solutions and investment advisory services for individual private clients and their families, business owners, endowments and trusts. DirectLine: 294 5709 Confidential email can be directed to mmyron@argusfinancial.bm The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice.