UK: Pre-Budget Report - Changes Affecting Non-UK Domiciliaries

Last Updated: 24 October 2007

For many years changes to the basis of taxation for non-UK domiciled individuals have been anticipated, but successive governments have found the issue too difficult to tackle. This is no longer the case.

In the Pre-Budget Report (PBR) of 9 October, the Chancellor of the Exchequer, Alistair Darling announced sweeping changes to the way non-UK domiciled individuals resident in the UK will be taxed. While the proposals were short on detail, it is clear there are a number of areas where clients will have to give serious thought as to how best to organise their affairs going forward.

Who Is Affected?

Some of the new rules apply to all non-UK domiciled individuals while others apply specifically to non-UK domiciled individuals who have been resident in the UK for tax purposes for seven years or more. Currently it is unclear if this means seven consecutive fiscal years or any seven years over a longer period. Care will have to be taken in determining years of residence, as in reality if you arrive in the UK part way through a tax year, the seven-year fiscal test can be breached much sooner.

Who Is Not Affected?

It was stated that internationally-mobile workers will not be affected if they are present in the UK for six fiscal years or less. Nor do the proposals impact on those who are resident but not ordinarily resident in the UK.

What Are The New Rules?

With effect from 6 April 2008, there will be a new levy of £30,000 levied on non-UK domiciled individuals who elect for the remittance basis to apply.

If individuals choose the remittance basis, then in addition to the £30,000 charge, there are some further consequences.

  • Remitted income will still be taxed but subject to a de minimis level of £1,000.
  • It will no longer be possible to claim personal allowance, the married couples allowance or blind persons allowance when computing the UK tax liability.

The capital gains tax annual exempt amount would appear still to be available to apply to any remittance of chargeable gains but this point requires clarification.

There are some other more specific changes outlined below.

What Happens If You Decide Not To Elect For The Remittance Basis?

If no election is made, then by default, the individual will be taxable in the UK on an ‘arising basis’ on their worldwide income and gains. Full personal allowances would also be restored (£5,225 for 2007/8).

Careful attention will then have to be given to claims for foreign tax credit relief to avoid double taxation where income may be taxed in more than one jurisdiction.

Other Changes Announced

Many of the techniques commonly employed in remittance and offshore planning have also been outlawed.

  • Income arising in one year can no longer be remitted tax-free in a later year by claiming/disclaiming the remittance basis.
  • There will be reduced scope for creating non-taxable income and gains by using offshore structures.
  • Anti-avoidance measures are to be extended which currently do not apply to non-UK domiciliaries.
  • The rules relating to cessation of source will no longer apply.
  • There will be some technical changes extending the definition of remittance relating to ‘relevant foreign income’.
  • Previously, the income and gains of individuals domiciled in the Republic of Ireland were taxable in the UK. From 6 April 2008 this will no longer apply if the remittance basis is claimed.

Consultation

Her Majesty’s Revenue & Customs (HMRC) will be consulting on the details of the changes outlined above and we expect draft legislation towards the end of 2007. We cannot therefore at this stage provide more than an overview of the proposed changes.

It has also been announced that the Government will consult on whether non-UK domiciliaries, who have been resident in the UK for more than ten years, should, in the words of the Chancellor, ‘make a greater contribution’.

What Can Be Done To Mitigate The Effect Of The Changes?

Until we have more detail of these new provisions, it would be wrong to take any hasty action. However, there are a number of areas where review will be essential prior to 6 April 2008. We will therefore be recommending to our clients that attention is given to the following areas.

  • The tipping point for electing for the remittance basis will very much depend on the level of an individual’s income and gains already subject to UK tax before accounting for the offshore element. It will therefore be necessary to quantify offshore income and gains annually to decide on the best basis.
  • Where individuals are already taxed on a worldwide basis, such as in the USA, double tax relief will have to be considered in assessing the tax effects of making the election for the remittance basis.
  • If the remittance basis is chosen, how will the £30,000 levy be funded? If funds have to be remitted to pay the levy, then one could end up with a tax charge arising on the levy itself unless remittances are carefully structured.
  • We will have to examine the ongoing residence position of clients carefully to take advantage of any protection offered by double tax treaties with their home jurisdictions. If circumstances permit, it may be possible to employ the various tie-breaker tests to prove closer connection outside the UK to avoid the new provisions.
  • Existing offshore structures will have to be reviewed. We expect that anti-avoidance rules will be extended such that there will be a deeming provision to tax UK resident shareholders or beneficiaries of trusts on the income and gains arising in those structures. Such income and gains have up until now only been taxed on a remittance basis. There may be some structures where it would be more cost effective to collapse them before 6 April 2008.

There will be many other issues depending on individual circumstances.

One Final Word On Residence

Changes were also announced regarding the rules to be applied in determining tax residence status in the UK.

Following the perceived abuse highlighted in the high profile Gaines-Cooper tax case earlier this year, from 6 April 2008, days of arrival and departure will be counted as days of physical presence in the UK when looking at the day count test.

It will therefore be even more important for individuals who commute to the UK on a regular basis, to structure their visits properly and keep detailed records.

Conclusion

The proposals put forward by the Chancellor have wide-reaching effect. Non-UK domiciliaries who have until now enjoyed a relatively benign taxation regime in the UK are now faced with even greater complexity. It is therefore more important than ever to take professional advice in this area.

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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