UK: Consultation On A UK Statutory Residence Test and Reform Of Non-Domiciled Taxation Rules

Last Updated: 2 August 2011
Article by Helena S. Whitmore and Sarah K. Challis

In June 2010, the UK coalition government promised to review the rules relating to the taxation of UK resident but non-domiciled individuals (non-doms), and to introduce a statutory residence test (SRT). The results of the government's review have now been released in two consultation papers, designed to provide a framework for the proposed new rules. The consultation closes on 9 September and responses will be released thereafter.

The Statutory Residence Test

Background

The rules on residence and ordinary residence status in the UK have become increasingly unclear. In 2008, the old established guidance in booklet IR20 was replaced with booklet HMRC6, which in turn has been updated several times. A number of court cases over the past few years have also produced diverse results, leaving many taxpayers uncertain of their residence status, which is fundamental to their tax position. This has created the need for clearer guidance.

The Proposals

The UK government wishes to achieve clarity as to residence status by introducing a SRT. Individuals who wish to spend time in the UK without inadvertently becoming a resident need certainty as to their position. Equally, individuals should not be able to leave the UK and become non-resident without reducing their connections and ties to the UK. Therefore, the SRT will be based on more than just the number of days a person spends in the UK. The test will take into account a person's "relevant" connections, intended to be simply and clearly defined. The test will provide a distinction between:

"Arrivers": individuals who were not resident in the UK for all of the previous three tax years; and

"Leavers": individuals who were resident in one or more of the previous three tax years.

The test will also have three parts. In using the test, individuals will be regarded as not resident in the UK when they satisfy any of the conditions contained in Part A. They will be regarded as resident in the UK when they satisfy any of the conditions in Part B. When the conditions contained in Part A and Part B are not satisfied, then Part C, looking at relevant connections and day counts, should be applied.

The government is also consulting on the concept of ordinary residence status, and reviewing whether or not this status should be abolished for all tax purposes other than for overseas workday relief. Overseas workday relief may also be restricted so that it only applies to non-doms.

For further details on the SRT and how it may apply, please contact a member of our team.

Reform of the Taxation of Non-Doms

The current rules on the taxation for non-doms have been heavily criticised for their complexity and the administrative burden that they place on non-doms, and for discouraging non-doms from investing in the UK. The purpose of the proposed reforms is to encourage non-doms to invest in the UK, whilst ensuring that they also make a fair tax contribution.

The UK government has identified three main target areas for reform:

  1. Increasing the £30,000 remittance basis charge (RBC) for those taxpayers who have been resident in the UK for 12 or more of the previous 14 tax years.

    Non-doms who have been in the UK for 12 or more tax years will pay an increased RBC of £50,000 if they wish to use the remittance basis of taxation. The £50,000 RBC will work in the same way as the current £30,000 RBC (for those individuals who have been in the UK for seven or more tax years) and the claim will be made in the same way on the UK self assessment tax return.

  2. Providing a framework for non-doms to invest overseas income and gains into UK businesses without triggering a UK tax charge on the remittance.

    The most significant and positive change that the government is proposing is to allow non-dom remittance basis users to invest overseas income and capital gains into UK businesses without suffering a UK tax charge on the remittance. The Business Investment Incentive (BII) will only apply to those who use the remittance basis of taxation in the UK.

    The BII is to be widely drawn and designed to provide a significant incentive for non-doms to invest their wealth into UK businesses, boosting the UK economy and providing much needed funding for businesses. It is intended that the BII will only apply to investments made into companies (partnerships and sole traders are excluded), but the relief will not be limited only to investments made by the taxpayer personally. Non-doms frequently hold their assets through offshore trusts and companies, and it is intended that qualifying investments can be channelled through such structures.

    What types of businesses will be "qualifying businesses"?

    • Businesses which carry out trading activities. This includes businesses involved in manufacturing, financial services, retail, technology and importing goods. Trading must be a "substantial proportion" of the overall activities of the business.
    • Businesses which develop or let commercial property. To qualify for the relief, development or letting of commercial property must constitute a "substantial proportion" of the business activities.

    There are some proposed anti-avoidance provisions, to prevent abuse of the rules so that investors cannot convert their investment into tax-free money to be used for personal rather than commercial purposes. However, the investor will be able to work for the business and draw commercial remuneration from the company into which the investment is made. Once the interest in the business is sold, the proceeds of sale must be taken out of the UK or reinvested in another qualifying business within two weeks of the individual receiving the proceeds. If the two-week period is exceeded, the original income invested will be treated as a taxable remittance on the individual.

    Taxpayers who wish to use the BII will only be required to provide limited details on the investment made, including details of how much the remittance was and the name of the business invested in.

  3. Simplification of existing remittance basis rules.

    Plans to simplify aspects of the operation of these rules in practice will be welcomed by both taxpayers and advisors. The government intends to introduce legislation to simply the rules in four different areas, being the nomination of income, currency gains on foreign currency bank accounts, taxation of assets remitted to and sold in the UK, and Statement of Practice 1/09 related to overseas workday relief.

    The nomination of income for the purpose of paying the RBC has caused problems for many taxpayers, and legislation will therefore be introduced to allow up to £10 of nominated income to be remitted without triggering the adverse identification rules on a small inadvertent remittance.

    The existing calculation rules for currency gains arising on foreign currency bank accounts have resulted in an extensive administrative burden, when the tax arising is often very small. It is therefore encouraging to see that the government proposes to remove foreign currency bank accounts from the scope of capital gains tax.

    UK based art dealers and auction houses will welcome the proposed new relief enabling remitted exempt assets to be sold in the UK, provided that the proceeds of sale are removed from the UK within two weeks of the sale.

    The proposed amendments to SP1/09 will be of interest to taxpayers who wish to claim overseas workday relief.

For further information on the application of these proposals please contact any member of our team.

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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