Following the announcement, in the 2007 Pre-Budget Report, of a number of changes to the UK tax rules for non-UK domiciled UK resident individuals (“non-doms”), the Treasury issued a consultation paper in December 2007, and draft legislation in January 2008. See our summary note, “Domicile and residence – Changes to the Tax Rules – Act Now”.
The changes will affect all non-UK domiciled UK resident individuals, with effect from 6 April 2008. Here is a selection of commonly asked questions, for your information, we hope you find them useful.
Question 1: Previous tax years
I am non-UK domiciled and have been resident in the UK for a number of years, and due to the level of my income, I intend to declare and pay tax on my worldwide income, rather than pay the £30k charge to claim the remittance basis. I haven’t previously remitted income or gains to the UK, so I will submit my first UK tax return for 2008/09. Is HM Revenue & Customs (HMRC) likely to query my income levels in previous years?
Answer: The new rules will mean that more non-doms will have to submit UK tax returns and pay tax, providing HMRC with more individuals’ details than before. It is possible that HMRC will enquire in to individuals’ financial and tax affairs for previous years, to ensure that all tax due has been paid, and that there really have been no remittances in those years. It is also likely that that HMRC will dedicate more time and resource to reviewing the domicile status of those who claim to be non-UK domiciled.
Question 2: £30k annual charge to use the remittance basis
I understand that there will be an annual charge of £30k to use the remittance basis. Will this £30k charge cover other members of my family too?
Answer: The annual charge must be paid by each non-UK domiciled individual resident in the UK who wishes to use the remittance basis. It may be that your spouse, for example, should also pay the charge. It will be essential to consider the appropriate course of action for each individual. For those individuals liable to pay US tax, it is also worth noting that the £30k annual charge is unlikely to be creditable against a US tax liability, for example.
Question 3: Remittance basis election
Will the claim to use the remittance basis be a once and for all election, or can I decide year by year?
Answer: Individuals will have a choice each year as to whether to pay the charge and claim the remittance basis. The proposed changes mean that it is unlikely to be possible to manipulate this annual election for tax planning purposes, through for example, building up income offshore whilst claiming the remittance basis and only remitting the income to the UK in a year where you pay tax on your worldwide income.
Question 4: Remittance basis – allowances and exemptions
I understand that from 6 April 2008, individuals who claim the remittance basis will no longer be entitled to income tax personal allowances for that tax year. Will I still be eligible for the annual exemption for capital gains tax (CGT)?
Answer: Anyone claiming the remittance basis will also lose the CGT annual exemption (£9,200 for 2007/08).
Question 5: Offshore trusts and companies
I have an interest in a trust which holds shares in a number of offshore companies. How will the changes affect this interest?
Answer: Fundamental changes to the taxation of offshore trusts and companies will take effect from 6 April 2008. These changes will mean that UK resident settlors and/or beneficiaries of offshore trusts will be taxed on capital gains realised by the trust. Owners of certain offshore companies, where there are fewer than five owners, will also be taxed on the capital gains realised by those companies. It is essential that you seek advice now, to consider the full impact of the changes, and to identify action to be taken before 6 April.
Question 6: Existing offshore structures
I am non-UK domiciled and use a long-effective structure to remit funds to the UK tax free. Can’t I simply elect to pay the £30k annual charge and carry on as before?
Answer: No, the proposed changes are likely to affect all existing structures, and simply paying the £30k annual charge will not allow you to continue as before. All current structures should be reviewed in light of the proposed new rules.
Question 7: Investment income used to buy assets
If I claim the remittance basis and use overseas investment income to buy an asset which I then bring into the UK, will that income be taxable in the UK?
Answer: Such income will now be deemed as remitted to the UK, and will therefore be taxable.
Question 8: Offshore mortgages
I am non-UK domiciled but resident in the UK, and have a mortgage with an offshore bank, with which I purchased a residential property in the UK. Will I still be able to pay the interest on this loan with income from outside the UK?
Answer: It will still be possible to service such loans with offshore income, but from 6 April, such income will be treated as having been remitted to the UK and will be taxable. The Inheritance Tax benefits of offshore mortgages will remain.
Question 9: Residence
I am currently not resident in the UK, but do spend a number of days in London each year on business. I understand that the rules for determining residence in the UK are changing. Am I likely to be caught?
Answer: It is proposed to tighten the residence rules considerably and that the days of arrival in and departure from the UK will be included when calculating days spent in the UK for the purpose of establishing residence. This is likely to mean that a number of individuals (both UK domiciled and non-UK domiciled) will become resident in the UK, for tax purposes after 6 April 2008.
For further information, please contact Chris Maddock using the online form below.