Background
The Pre-Budget Report, published in October 2007, introduced a number of changes to the way UK resident non-domiciled individuals are taxed.
Previously such persons had been taxed on the remittance basis, ie they were subject to UK income and capital gains tax on their UK income and gains, but only paid tax on any foreign income and gains to the extent that they remitted them to the UK. This is in contrast to UK resident domiciled individuals who are subject to tax on their worldwide income and gains on an arising basis.
The draft legislation regarding the changes to the residence and domicile rules has now been published and no further significant changes are anticipated prior to the legislation coming into force on 6 April 2008. The following is a summary of the main changes.
Non-domicile £30,000 charge
Any UK resident non-domiciled individual who opts to pay tax on the remittance basis and who has been resident in the UK for seven out of the past nine years, and has unremitted foreign income and gains of £1000 or more, will be liable to pay an annual charge of £30,000 on the following terms:
- The £30,000 is an additional charge and will not be creditable against any tax due on foreign income and gains remitted to the UK or on UK income and gains.
- Anyone claiming the remittance basis will lose their personal allowance for income tax and the annual exempt amount for capital gains tax.
- It will be possible to opt to be taxed on the arising basis one year and the remittance basis the next.
- It will be up to foreign tax authorities of individual treaty partners to decide whether the tax will be dealt with as if it were a tax for foreign tax credit purposes under a double tax agreement.
- At present there is no higher charge for those who have been resident in the UK for over ten years, although the Government is still consulting on this issue.
Offshore trusts and companies
- Settlors
The legislation has been extended so that any non-domiciled settlor who retains an interest in a settlement will be taxed on any gains made by the settlement, which arise from assets situated in the UK. This will not apply to any gains realised before 5 April 2008. Gains on assets situated outside the UK will be subject to tax if remitted by the settlor or by the trustees. Any such gains not remitted will be attributed to any capital payments made to the beneficiaries. - Beneficiaries
Any non-domiciled UK resident beneficiary who receives a capital payment or benefit from an offshore trust will be subject to tax to the extent there are gains in the settlement. This will apply to the beneficiary regardless of whether they remit the funds to the UK or not. This will also apply to gains that arise prior to 6 April 2008. In addition the supplementary charge of 10% per year (up to a maximum of six years) will apply on the number of years between realisation of the gain and distribution. - Notification requirements
The legislation, which requires any settlor of a trust to notify HMRC of the date of settlement, and names and addresses of the trustees, has been extended to include UK resident non-domiciled settlors who must now notify HMRC within three months of creating the settlement or within 12 weeks of becoming resident or domiciled. This also applies to any trusts created prior to 5 April 2008 and includes any trusts established when the settlor was non-resident. Disclosure must be made by 5 April 2009 of any such trust created before 6 April 2008 by any non-domiciled settlor who is currently UK resident. - Offshore company gains
With effect from 6 April rules which attribute gains of non-resident close companies to UK resident and domiciled shareholders will be extended to UK resident non-domiciled shareholders, if the asset which gives rise to the gain is situated in the UK. If the asset which gives rise to the gain is situated outside of the UK, then any gain will be taxed on the remittance basis.
UK residence rules
A change has been made to the current rule that days of entry to and exit from the UK are not counted as days of residence; so that from 6 April 2008:
- A statutory change has been made to the law that an individual is UK resident if he spends 183 days in the UK in any tax year so that from 6 April days of entry and exit are included in the day count.
- Additionally a person is UK resident if they spend an average of 91 days or more in the UK over a period of four years. The published guidance on this rule (it is not statutory) is to be amended so that days of entry and exit from the UK are counted as days of residence.
Amendments to the remittance rules
- Source ceasing rules
Currently no tax liability can arise if the source of the income has ceased before the year in which it is remitted. It is relatively straightforward therefore to close a bank account and remit the income it has produced in the following tax year. This rule has now been abolished and it seems that this will apply even where the source of the income ceased in an earlier year. - Meaning of remittance
There is a new definition of remittance which is 'any money or other property brought to or received or used in the UK by or for the benefit of a relevant person; or any service provided in the UK to or for the benefit of a relevant person'. This new definition will mean that if, for example, a non-domiciled person purchases a car overseas with foreign income and then brings the car back to the UK, this will count as a remittance and be taxable.
'Relevant person' includes spouses or civil partners (anyone living together as husband and wife or civil partners are to be treated as if they were married to each other / in a civil partnership), any relative, any relative of a spouse or civil partner, any trust of which the individual or someone connected with him is the settlor, any company under the control of the individual, and a person with whom the individual is in partnership. - Remittance from mixed accounts
There will be a statutory basis for identifying funds transferred from a mixed account, which gives an order of priority of each category with which the transfer is to be matched. As it is rare to make a remittance from a mixed fund, this may not have a very big impact. - Alienation of income and gains
Previously if a non-domiciled person made a gift of foreign income or gains outside the UK to a third party, this could then be remitted by the third party to the UK without tax. The new provisions will ensure that where a person makes such a gift to a relevant person (as defined above) the donor will be taxable on any income or gains gifted if the donee remits them to the UK as if the donor had remitted them personally.
Temporary non-residence
A new anti-avoidance measure applies where a person has been UK-resident for four out of the seven years before departure and then becomes non-resident for less than five full tax years. Any income they remit during this period of non-residence, which arose either in the year of departure, or in any earlier year during which they were UK resident, will be taxed in their year of return.
As can be seen from the summary, the changes this legislation introduces are extensive and far reaching. We advise all clients who are non-domiciled to review their affairs. There are a number of planning mechanisms and actions which may need to take place prior to 6 April 2008 and Penningtons can advise you further on this.
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.
