Non-UK domicile important changes
March 2008
According to my Oxford English Dictionary, the definition of the
current UK chancellor’s surname is “a beloved or lovable
person”. Non- domiciled UK residents (NDRs) may wish to run
their fingers a bit further down the page to the word “dastardly”
which they may feel is a more appropriate definition of our
“beloved” Mr Darling. Without any prior consultation with the
industry, on 18 January 2008, HM Revenue and Customs (HMRC)
published in draft form dramatic legislation, which will form the
basis of revised tax rules for NDRs from 6 April 2008.
Since the 18 January, we have witnessed a
plethora of bemused tax advisers, lawyers and business people
advocating a relaxation of the proposals. As a consequence, on 12
March, the press releases with the budget provided much needed
comfort, clarification and concession for NDRs.
So what is all the fuss about?
1. Changes to the residency rules
Should an individual spend more than 183 days
in any tax year in the UK, or more than 91 days on average over a
four year period, then he or she will be classified as UK
resident.
With effect from 6 April 2008:
- Any day on which an individual is present in
the UK at midnight will be counted as a day of presence in the UK
(original proposals had sought to include days of arrival and
departure).
- There is an exemption for transit passengers
as long as no business meetings are conducted whilst in the
UK.
2. Changes to the remittance basis of
taxation
This is what started the uproar and what a red
herring this now proves to be. With effect from 6 April 2008
those NDRs resident in the UK for 7 out of the last 9 tax years
will need to pay a £30,000 annual levy if they wish to claim on a
remittance basis.
The £30,000 levy will only attract a credit
against taxes paid abroad if provisions of the relevant Double Tax
Treaty permit this. Any offshore funds remitted into the UK
to satisfy the levy will themselves be taxed on a remittance basis,
unless the payment is made direct to HMRC!
Anybody claiming the remittance basis will
lose their income and capital gains tax allowances, although,
rather interestingly, you can opt in and out of the remittance
basis annually, which may offer some planning opportunities.
3. “Flaws and anomalies” – the
correction
Apart from the heading sounding like a sequel
to a ‘B’ movie, with effect from 6 April 2008:
- “Source ceasing” – the ability to convert
income to capital over a tax year end will bite the dust.
- Alienating income and capital gains by making
gifts offshore to connected parties will see its last days.
- Goods, such as cars and watches, purchased
outside the UK using foreign investment income will give rise to a
tax charge if brought into the UK.
4. Non-UK mortgages
Any non-UK mortgages, secured against a UK
property in existence on budget day, will be grandfathered into the
new regime and so unremitted foreign income or gains used to fund
interest payments will not be treated as a remittance. This
grandfathering position will only have effect for the remaining
term of the existing mortgage, subject to a longstop date in
2028. In addition, if the terms of the mortgage are varied or
further advances are made after 12 March 2008 then repayments using
unremitted foreign income or gains will be treated as a
remittance.
5. Changes to the taxation of offshore
trust and company structures
This is where the pain was originally going to
be unbearable for NDRs, however, clearly the chancellor has taken
heed of the uproar from prominent intermediaries and industry
bodies and watered down his original proposals.
With effect from 6 April 2008:
- UK gains in a settlor interested trust or
underlying company will now not be subject to capital gains tax
(CGT) at 18% on the settlor on an arising basis. A trust is
settlor interested if the settlor or his family can benefit. This
can include the settlor’s spouse, children, grandchildren or their
spouses. The original proposals would have sent shockwaves through
the investment property market, where historically such gains in
non-resident structures were not exposed to CGT.
- Now any gains on UK and non-UK situs assets
will only be taxable in the hands of NDRs upon receipt of “capital
payments” into the UK. If capital payments are made offshore
and the remittance basis is claimed then no capital gains tax will
apply. Capital payments include such things as interest free
loans, rent free occupation of property owned through the
structure, as well as capital distributions.
- HMRC have advised that “the tax charges will
not apply to (trust) gains accrued or realised prior to 5 April”
and that offshore trustees will be able to elect for rebasing of
trust assets as at 5 April 2008.
- Post 6 April 2008, any capital gain not
distributed in the year it arose will be stockpiled and matched
against future capital payments on a last in, first out (LIFO)
basis.
- Existing and new non-resident trusts with NDR
settlors will now not have to be disclosed.
Prior to budget day my original conclusion had
been that while NDRs cannot vote directly they have the last laugh
by voting with their feet. However, the last minute changes
to the Government’s proposals have helped circumvent the mass
exodus and left NDRs thinking the chancellor is perhaps not so
“dastardly” after all.
If you would like to discuss any of these
issues in more detail, please contact our trust team on +44 (0)1534
823202.
This article was correct at the time it was
written (25/3/08).