Important changes for non-uk domiciles

According to the 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 trust and taxation practitioners, on 18 January 2008, HM Revenue and Customs (HMRC) published in draft form dramatic legislation, which formed the basis of the revised tax rules for NDRs from 6 April 2008.

Since 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 some much needed comfort, clarification and concession for NDRs. The Finance Act 2008 was published on 21 July.

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 has bitten the dust.
Alienating income and capital gains by making gifts offshore to connected parties has seen its last days.

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.
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 the 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.

This article was correct at the time it was written (7/8/08).