UK: Reforming The Taxation Of Non-Domiciled Individuals: Government Consultation

Last Updated: 25 July 2011
Article by Bart Peerless and Lyndsey L.M. West


Details of proposals for a new, wide-ranging incentive for remittance basis, UK resident non-domiciliaries to invest into the UK without triggering a taxable remittance have been announced by HM Revenue and Customs ("HMRC") and HM Treasury. Alongside this is a package of proposed policy changes aimed at simplifying certain aspects of the so-called remittance rules affecting UK resident non-domiciliaries. In addition there is to be an increase in the annual charge payable by certain UK resident, non-domiciled remittance basis users.

The package of proposed changes was published by HMRC and HM Treasury on 17 June 2011 in the form of a consultation document with a view to the changes coming into effect from 6 April 2012. Some details of the proposed changes still have to be worked out and we will be contributing to the consultation process which closes on 9 September 2011.

In brief the package of proposals is as follows

  • non-domiciliaries who have been resident in the UK for at least 12 out of the last 14 tax years will have to pay a higher charge of £50,000 per annum in order to claim the remittance basis. Non-domiciliaries who have been UK resident for at least seven out of the last nine tax years will still have to pay the existing £30,000 charge in order to claim the remittance basis.
  • The Government proposes to allow tax-free remittances for investment in "qualifying businesses" which, broadly, covers businesses carrying out trading activities or businesses undertaking the development or letting of commercial property. Under the proposals as currently drawn the investment must be made into a company (rather than, say, a partnership). However, any kind of person or entity may make the investment, whether an individual, company, trust or partnership. There is no upper or lower limit for the amount invested. When realising the investment, in order to avoid a taxable remittance, the proceeds of sale must be removed from the UK or reinvested into another qualifying business within a specified period, provisionally fixed at two weeks from the disposal although this is one of the points specifically open for consultation.

Proposed measures to simplify the operation of the remittance basis include the following:

  • sums within individuals' foreign currency bank accounts are to be exempt from UK capital gains tax. This applies in respect of both domiciled and non-domiciled UK resident individuals;
  • certain "exempt" assets purchased from foreign income or capital gains may be sold in the UK without a remittance charge, providing the sale proceeds are removed from the UK within a specified period; provisionally this is set to be two weeks, but this is open for consultation;
  • HMRC's current practice in relation to resident but non-ordinarily resident employees who perform duties both inside and outside the UK under a single employment contract is to be written into statute. Under current HMRC practice a simplified version of the so-called mixed funds rules is applied to the employment income of this group, thus making it easier for them to determine their UK tax liabilities on their employment income. Enactment of this practice will therefore provide greater clarity and certainty.

These proposals are welcome. In particular the possibility of making tax free remittances for investment purposes seems likely to open up opportunities for tax efficient investment into the UK by UK resident non-domiciliaries who are taxed on the remittance basis.

In the rest of this briefing note, which is based on the consultation document, we provide further details of the above proposals. The proposals are likely to change, at least as far as the detail is concerned, as they pass through the Parliamentary process.

Increasing the remittance basis charge

The so-called remittance basis of taxation is potentially available to UK resident non-domiciliaries. If the remittance basis applies to such individuals they pay tax on non-UK income and gains only if such income or gains are remitted to the UK. UK resident non-domiciliaires who are not on the remittance basis of taxation pay income and capital gains tax on an arising basis on their worldwide income and gains.

If UK resident non-domiciliaries wish to pay tax on the remittance basis then, with certain exceptions, they must claim the remittance basis in their UK self-assessment tax returns. Furthermore, once such an individual has been UK resident for seven out of nine tax years, in order to continue to be taxed on the remittance basis, he/she must pay an annual charge. Since the charge was introduced in 2008 it has been fixed at £30,000. Under the proposals contained in the consultation, however, for UK resident non-domiciliaries who have been UK resident for at least 12 out of the previous 14 tax years the charge is to be increased to £50,000 per annum.

As a very approximate indication, from 6 April 2012 individuals should consider whether they will be better off by paying the £30,000 charge to be taxed on the remittance basis if they have an annual minimum level of unremitted, non-UK income of £95,000 or an annual minimum level of unremitted non-UK gains of £120,000. UK resident non-domiciliaries potentially liable for the £50,000 charge will need annual income of at least (very approximately) £140,000 or annual gains of at least (approximately) £190,000 before it would be worthwhile for them to consider claiming the remittance basis and paying the charge. (These figures take account of the fact that remittance basis taxpayers are entitled to neither an income tax personal allowance nor to a capital gains tax annual exempt amount). However the actual figures in specific cases are likely to vary widely depending on a number of factors including the mix of offshore income (for example, the extent to which it is made up of dividends, interest, rent and so forth) and gains, how much UK income and/or gains the individual in question has and how much non-UK income and/or gains he/she remits to the UK.

Encouraging business investment

Under current rules overseas income and capital gains remitted to the UK by UK resident non-domiciliaries claiming the remittance basis are liable to UK tax, regardless of the purpose for which such income or capital is used. This can be a significant disincentive to investment in the UK by remittance basis, UK resident non-domiciliaries. Under the proposed relief, however, overseas income and capital gains remitted to the UK by such individuals for the purpose of commercial investment in a qualifying UK business would no longer be liable to UK tax in consequence of the remittance.

"Qualifying businesses" The categories of "qualifying businesses" for which the relief would be available are

  • businesses carrying out trading activity; and
  • businesses developing or letting commercial property

The second category of qualifying business has been included because developing or letting commercial property might not fall within the definition of "trading" as established by case law. However, in relation to both categories of qualifying business the commercial activity in question must constitute a substantial proportion of the overall activities of the business.

The definition of qualifying business extends to all sectors of the economy and to entrepreneurial as well as traditional businesses. It encompasses for example import businesses, technology, retail and manufacturing. It also includes financial services provided a trade is being carried out.

Excluded businesses Although holding and letting residential property would be excluded from the relief, investing in a business that builds and develops residential property as a trade would be permitted, as would investing in certain types of residential property where a commercial trade is carried on, such as nursing homes and hospitals.

Also excluded are leasing businesses which include within their activities the leasing of items such as yachts, cars, furniture and paintings or the provision of personal services such as nannies, cooks and chauffeurs. This restriction is intended to ensure that the relief is not used for non-commercial services or personal benefit of the investor.

Forms of investee businesses A potential restriction for some investors is the proposed stipulation that the investment must be made into a company. There may well be some investment target business which are run as partnerships, for example. A point yet to be clarified is whether investments within the relief may be made into limited liability partnerships.

A question raised expressly by the consultation is whether "relieved" investments may be made into companies listed on the stock exchange or on other exchange-regulated markets such as the Alternative Investment Market. Clearly it would be helpful if these are included in case investee companies are listed only after a non-domiciliary has invested funds. From the Government's point of view, however, allowing such investments would render the relief less specifically targeted towards those companies most likely to benefit from additional investment funding.

Investors There would be no restriction on what kinds of entity may make the investment. For example, the investment could be made by an individual, company, trust or partnership. In practice non-domiciliaries are likely to want to invest through non-UK resident trusts in order to avoid any capital gains tax charge on profits realised when selling their UK investments, whether or not the proceeds of sale are then taken out of the UK within the two week time limit (so that the tax charge on the original remittance is avoided).

Forms of investment Nor would there be any restriction on the form of the investment, which could be by way of shares or loan capital. The investment may furthermore be made into (UK or non-UK) companies which hold shares in other companies provided the underlying company carries out a business activity and is UK resident or has a permanent establishment in the UK. There is no restriction as the percentage of the underlying company that is held by the company in which the non-domiciliary makes his investment. Thus private equity and venture capital companies (although presumably not partnerships) could qualify even where they do not have a majority ownership stake in the underlying companies.

Connection to the qualifying business There are to be no restrictions on the investors' connections to the businesses in which they invest. For example they may work for or be a director of the business and may be paid by it provided the pay is commercial. These principles moreover extend to individuals who are connected (for example as family members) with the investor.

Anti-avoidance The relief incorporates anti-avoidance provisions with a view to preventing funds or other benefits being withdrawn from the investments and enjoyed tax free in the UK. Thus although there is no restriction on the length of time for which the investment must be held, when the investment in question is disposed of the income and gains originally remitted for the investment must be taken out of the UK within two weeks or be reinvested into another qualifying business within the same time frame. We believe that this is unlikely to be practicable in many cases and this is one of the points on which we will make representations in response to the consultation. In practice wherever possible non-domiciliaries should ensure that sale proceeds are paid directly into an offshore bank account. It is moreover unclear how share for share exchanges and other forms of capital reorganisation will be treated.

There will furthermore be restrictions on transactions which effectively pass value to the investor. For example, it will not be possible for the investee company to use the invested funds to guarantee loans to the investor, nor to make payments to a third party which are linked to payments made to the investor.

Claiming the relief Any non-domiciliary using the new business investment incentive in practice will already be submitting a self-assessment ("SA") tax return to HMRC in order to claim the remittance basis. It is therefore proposed that such an individual will also claim the new investment relief on their SA return. According to the consultation only minimal information will be required on the return namely, whether the non-domiciliary in question had remitted funds to the UK for investment, how much and in what businesses they have invested.

Interaction with the remittance basis charge Individuals who make tax free remittances under the business investment scheme will still be required to pay the annual £30,000 or £50,000 charge in full if they have been resident in the UK for the relevant number of years.

Simplifying the existing remittance basis rules

De minimis remittance of nominated funds In connection with paying the £30,000 charge mentioned above a taxpayer must nominate specific unremitted income and gains to be "matched" against the £30,000 charge. Such nominated income and gains will be treated as taxable on the arising basis and so, provided the so-called mixed funds rules do not come into play, it will not be taxed again if actually remitted to the UK. (The purpose of the legislation in requiring such matching is to enable the £30,000 charge to be recognised as a credit, if necessary, under a double tax treaty.)

There is, however, a complication in that if any of the nominated income or gains are in fact brought into the UK before any funds not so nominated then the so-called mixed funds rules come into play. These rules determine the order in which income and gains are to be treated as coming into the UK from mixed funds, that is, from bank accounts in which income and gains from different sources have been mixed. Under these rules the taxpayer is usually deemed to have brought into the UK first the slice of income or gain which bears tax at the highest rate. The rules are moreover complicated to apply. It is therefore usually important, wherever possible, to avoid the mixed funds rules from becoming applicable.

In order to avoid bringing the mixed funds rules into play, standard advice to UK resident non-domiciliaries liable for the £30,000 is to open a separate bank account to generate sufficient income to be nominated in each year in respect of the £30,000 charge. Such an account can then be ring-fenced with no remittances being made from it to the UK. Since such individuals are not required to nominate the full amount of the £30,000 they might nominate annually as little as £1. They are likely therefore to maintain a bank account holding a small amount for this purpose (although with current very low interest rates it is in practice difficult to generate even minimal income from small deposits).

The proposed simplification provides that a taxpayer may remit to the UK up to £10 of nominated income or gains without bringing the mixed funds rules into play. This means that an inadvertent remittance to the UK of no more than £10 of nominated income or gain will not bring into play the mixed funds rules. However, given the complexity of these rules, it remains to be seen precisely how this change will work.

Foreign currency bank accounts At present foreign currency bank accounts are chargeable assets for capital gains tax purposes (subject to an exception for sums used for personal expenditure outside the UK). This means that each withdrawal of funds from such an account constitutes a part disposal on which a gain or loss can arise. Moreover the calculation of such gains and losses can be extremely complicated. However, over time the gains and losses on such accounts tend to balance out. The consultation therefore proposes that foreign currency bank accounts held by domiciliaries or non-domiciliaries should no longer be chargeable assets (although neither will they be capable of generating losses). This simplification is extremely welcome.

Taxation of assets sold in the UK Under the current rules, bringing assets purchased overseas into the UK results in a remittance of offshore income or gains used to purchase such assets although an individual may bring certain "exempt" assets into the UK without charge. Exempt assets are

  • a work of art or antique brought to the UK to be displayed in public
  • an item of personal clothing, footwear or jewellery
  • an item brought to the UK temporarily (up to 275 days) or for repair; or
  • an item worth under £1,000

However, under the existing rules if any exempt item is sold in the UK, the individual is at that point liable to UK tax on the remittable income or gain represented by the initial cost of the asset in question.

The new rule proposed in the consultation document would remove the remittance based tax charge on selling an exempt asset in the UK. However, the sale proceeds would have to be taken out of the UK and under the proposals in their current form this would have to be done within two weeks of the sale proceeds being received by the individual (although this time-frame is expressly open for consultation.) Moreover any gain realised on the sale would be subject to capital gains tax in the usual way.

Employees with duties in the UK and overseas HMRC's current practice affecting this group of individuals is to be enacted, giving it statutory force. More specifically the group benefiting from the relevant HMRC practice comprises individuals who are UK resident but non-ordinarily resident employees performing duties both inside and outside the UK and in the case of each individual under a single employment contract. Such individuals normally receive all of their employment income relating to both UK and non-UK duties into a single bank account. When determining whether UK or non-UK earnings are transferred into the UK by payments from such accounts this category of employee must apply the so-called mixed funds rules (already referred to above). The mixed funds rules specify the order in which income held in a mixed account is deemed to come into the UK. These ordering rules are extremely complex to apply. Therefore in the particular case of UK resident but non-ordinarily resident employees performing duties inside and outside the UK under a single employment contract, HMRC's practice is to simplify the way in which the mixed funds rules work. This is done by allowing such employees to calculate their tax liability by reference to the total amount transferred out of a mixed fund during the whole tax year, rather than by reference to individual transfers. Determination of their UK tax liabilities is thereby rendered simpler than it would be under the mixed funds rules in their unmodified form. Enactment of HMRC's practice in this regard will provide clarity and certainty and is to be welcomed.


We see as the most significant of the above proposals the relief for investments by UK resident non-domiciliaries into UK trading businesses. The relief is widely framed and will certainly be of interest to UK resident non-domiciliaries wishing to invest in the UK. Certain aspects of the relief might be problematical for some investors, especially the two week limit for taking sale proceeds out of the UK. We are hopeful that this time limit might be extended as it is one of the points expressly open for consideration in the consultation document.

The various proposed simplifications of the remittance rule are potentially helpful in reducing the burden of administration for UK resident non-domiciliaries who are taxed on the remittance basis. Also welcome is the removal from the capital gains tax net of foreign currency bank accounts for domiciliaries as well as non-domiciliaries. Nevertheless in certain respects, including in relation to "mixed funds", the operation of the remittance rules remains unduly complex and scope for further simplification remains.

We will send an update in due course with our comments on the consultation.

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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