Non-UK domiciled individuals
Non-UK domiciled individuals have for a long time enjoyed a favourable tax treatment. These are individuals who have come to the UK but have retained their non-UK domicile (usually from having non-UK domiciled parents and maintaining, despite being resident in the UK, that the UK is not intended to be their permanent home). The individuals concerned have been able to keep non-UK income and capital gains outside the UK tax net, unless and until such income or gains are required in the UK.In addition, well-known planning techniques have been used to import funds into the UK, without monies being treated as, in technical terms, “remitted” and therefore liable to UK tax. These have ranged from careful use of bank accounts to more sophisticated offshore trust and company structures.
The rules on the so-called “remittance basis” has changed from 6 April 2008. The changes to the remittance basis are as follows:
they will apply to individuals whose unremitted non-UK income and gains are in excess of £2000 a tax year;this is an increase from the original proposal of £1000 per tax year
non domiciled individuals will be able to continue to claim on an annual basis to be taxed on the remittancebasis
however, the costs of such claim will be that the individual concerned loses his or her personal income tax allowance (normally £5,435) and their capital gains tax exemption (of £9,600). This could lead to an
individual paying additional tax of just under £4,000
for individuals who have been UK tax resident for more than seven of the past ten years, claiming theremittance basis will, in addition, give rise to a tax charge of £30,000 for each tax year
The structure of the £30,000 charge will operate as a tax charge on the unremitted income and capital gains, which is then treated as taxed for UK purposes. An individual’s remaining unremitted income and capital gains will then be treated as untaxed.
Amendments to the remittance basis
The HMRC have also closed what they regard as loopholes. They are as follows:
it will no longer possible to claim the source of the relevant income no longer existed (by for instance closing the relevant bank account).
the remittance basis has previously operated on the so-called “cash basis”. It will no longer be possible forpeople to import goods bought outside the UK and delay the remittance until sale of the asset.
the claims mechanism will be removed. This allowed income to be the subject of a claim for relief on the remittance basis in one year and to be remitted in a subsequent year when the remittance basis was not
claimed without being taxed.
interest payments on mortgages advanced on or after 6 April 2008 from non-UK banks used to fund acquisitions of UK property will be treated as giving rise to a remittance.
the rules will be extended to prevent the practice of a UK individuals gifting or “alienating” (ie passing the benefit of) the relevant income or gains to family members or to a family company, and for that relative to remit the gift to the UK tax-free. From 6 April, tax is charged on the donor of such gifts to some connected parties,
but adult children over the age of 18 have been excluded.
From 6 April, non-UK income used to purchase an asset which is brought to the UK, is treated as remitted tothe UK, and therefore taxable (there is a relaxation for certain items including heritage assets and personal
items). This will lead to practical and administrative difficulties for individuals, in addition to a potentially
increased tax bill.
Non-UK domiciled individuals and offshore trusts
Offshore trusts and companies have been frequently used both for tax and non-tax purposes (such as preserving confidentiality and employee tax planning) by non-UK domiciled individuals; a series of changes in the last twenty years or so have made them largely ineffective purely from a tax point of view for UK domiciled individuals. Following the changes to be made with effect from 6 April 2008, UK tax resident non-domiciled beneficiaries will in future be subject to tax on the remittance basis in respect of gains made by the offshore trust.
Unlike UK-domiciled beneficiaries, they will not be subject to the rules which deem gains to be made by them. In addition, in a concession (from the original proposals) which will be welcomed by many, they will not be subject to detailed disclosure requirements.
Non-UK domiciled individuals and offshore companies
The changes to the use of offshore companies is likely to have a similar effect to those affecting offshore
trusts - that is to say make them less effective to defer or avoid UK capital gains tax.
Non-UK domiciled individuals have in the past used companies based outside the UK, to hold assets such as shares and real estate. Any gain on the sale of the investment would be made by the non-UK company and held offshore.
The capital gains tax treatment will change so that, in respect of UK investments disposed of after 6 April 2008, any gain made will be subject to UK tax in the hands of the shareholder. The shareholding in the non-UK company will also be outside the scope of UK inheritance tax, even if the underlying investment would not have been.
For non-UK investments, a remittance basis will apply. This is expected to continue to be subject to the provisions of the UK’s double taxation agreements which may permit the on-going use of companies based in some countries which are not seen as traditional tax havens.
Changes to the residence rules
Until April this year, only whole days spent in the UK were counted towards establishing residence, and days of arrival and departure are generally ignored. From 6 April 2008, nights spent in the UK count as a day of UK residence, significantly reducing the time an individual can spend in the UK before becoming UK resident, and thus possibly liable to UK tax on worldwide income and gains.
An exception will be available to transit passengers travelling via the UK, provided they remain “airside” in the airport terminal or, if in transit to another airport in the UK; do not engage in business en route.
