UK: Briefing Note – Budget 2011

Last Updated: 24 March 2011
Article by Smith & Williamson

UK tax changes affecting non-UK domiciliaries

The Chancellor of the Exchequer George Osborne today announced the outcome of the review into the taxation of non-domiciled individuals ("non doms") that the Government has been carrying out since June 2010.

Four new proposals will be subject to consultation in June this year with a view to legislating in the Finance Bill 2012 and the measures becoming effective from 6 April 2012.

New £50,000 charge for longer term UK resident non doms from April 2012

In order to be taxed on the remittance basis on their foreign income and gains, non UK domiciled taxpayers who have been UK tax resident for seven out of the preceding nine years currently pay a £30,000 charge in addition to the loss of their personal allowance and capital gains tax exemption.

From 6 April 2012 this charge will be raised to £50,000 for those non UK domiciled taxpayers who have been UK resident for twelve or more years out of the previous fifteen years. We will therefore have three categories of non doms moving forward – 'short term' (UK resident for less than seven out of the previous nine tax years), 'medium term' (UK resident for at least seven years but less than twelve), and 'longer term' (UK resident for twelve or more years out of the previous fifteen years) with different charges applying in order to access the remittance basis. In addition there will be a fourth category of those who are "deemed domiciled" for Inheritance Tax (IHT) purposes only, having been resident in the UK in seventeen out of the previous twenty years.


If these changes are implemented from 6 April 2012 as planned the new higher £50,000 charge would apply to anyone who became (and has since remained) UK tax resident prior to 6 April 2001.

This change was not unexpected although it is perhaps confusing that it was not applied on the same basis as the IHT deemed domicile test (which looks at UK tax residence in the previous seventeen out of twenty years).

The new higher charge may make it uneconomic for longer term UK residents to pay tax on the remittance basis. However, any move to an arising basis of taxation does bring additional disclosure to HMRC as to sources of income and gains as well as adding to compliance costs. Non UK doms typically have offshore assets in foreign currency and all income and gains need to be recalculated in £ sterling and on a UK tax basis.

Official figures released recently stated that approximately 5,400 non doms paid the £30,000 charge for 2008/09. It is expected that the new higher charge will raise around £70 million and an additional £60 million from those who choose to be taxed on an arising basis moving forward. It is expected that a small number of individuals will become non resident as a response to this new charge and that has been factored in to the Treasury costings. It is also expected that there will be an increase in tax planning as a response.

New exemption for foreign income and gains remitted to the UK for the purpose of commercial investment in UK businesses

The Chancellor announced that foreign income and gains remitted to the UK for the purpose of commercial investment in UK businesses will not be subject to tax.

No details of this proposed relief have been given and in particular, what 'commercial investment in UK businesses' actually means. It is unlikely to apply to investments made in quoted UK companies and we will have to await further details. There will be anti-avoidance rules to prevent funds remitted to the UK for other purposes being channelled through this route.

The Government hopes by introducing these rules that the current tax disincentive for remitting funds to the UK will be removed opening the UK up as a place to do business.


This relief is extremely welcome and will hopefully achieve its objective of encouraging non doms to invest in the UK and thereby generate additional UK tax revenues. However, it is frustrating that there are no details available. As the relief will not be available until next year any non dom thinking of investing in a UK business may now be tempted to put their plans on hold as it is unlikely that any such tax relief will be backdated.

In order to take full advantage of this relief it will be even more essential than ever for non UK doms to segregate their foreign income, foreign gains and clean capital.

It is unclear what is meant by 'commercial investment' and whether any tax advantaged investments such as EIS and VCT companies will be included. It is also unclear as to how long such an investment would be required to be held. Further details will emerge in June as part of the proposed consultations.

It is also unclear whether this relief would extend to "nominated" income or gains which can currently have very significant tax implications if brought to the UK.

Additional technical simplifications

The Chancellor announced that the Government will "simplify some aspects of the current tax rules for nondomiciles to remove undue administrative burdens".


No details of these have been announced but any simplification of the complex legislation will be welcome.

No further substantive changes to non dom taxation in this Parliament

The Chancellor announced that there would be no further substantive changes to the taxation of non doms for the remainder of this Parliament.


This is welcome as the rules are extremely complex and there is still uncertainty as to whether foreign income and gains have been deemed to be remitted in many complex situations. However, it does leave open the possibility of further tweaks being made to the legislation if loopholes are found or HMRC considers that it is not operating as intended.

Very few tax enquires were raised by HMRC into non dom Tax Returns for 2008/09, being the first year in which the new rules were applicable. This is despite the fact that 123,000 non dom Tax Returns were submitted and £5.9 billion of additional tax was paid in 2008/09, the latest year for which figures are available. A specialist HMRC unit has been set up to deal with non doms and we consider it only a matter of time before HMRC increase their focus in this area. In particular they are likely to want to investigate whether adequate records have been kept to demonstrate whether amounts remitted to the UK are taxable as income or capital gains or non taxable.

The Government also announced its intention to tax "very high value property, where evasion and avoidance are widespread and some of the wealthiest are not paying their fair share. We will also be redoubling our efforts to find ways of ensuring that owners of high value property cannot avoid paying their fair share." This relates to the avoidance of Stamp Duty Land Tax.

We will have to wait until the publication on the proposed consultation documents in June 2011 for further details.

Statutory Residence Test

The Chancellor announced that, following consultation later this year, a new statutory residence test will be introduced from April 2012.


This is extremely welcome as there are very few existing legislative rules regarding UK residence. There have been a number of high profile court cases in recent years on the subject which have only proved to highlight how complex is the current position. In addition taxpayers who sought to rely on the guidance given on the subject by HMRC in the booklet IR 20 (now replaced by HMRC6) have found that this did not give them any protection when their case came to court. It has made it extremely difficult for advisers to give clients any degree of certainty as to their UK tax residence position – whether going overseas for 'full time employment abroad' or otherwise.

It is hoped that the rules will mirror those of other countries such as the US 'substantial presence' test which has been in place for a number of years and is tried and tested.

There will inevitably be winners and losers but, in general, taxpayers will generally value the certainty such a statutory rule gives. Detailed records of movements to and from the UK will need to be kept in order to demonstrate that the test has been satisfied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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