Non Domicile Draft Legislation
Story added: 25/02/2008

On 18 January HM Treasury released the draft legislation heralded by the Chancellor of the Exchequer in his Pre-Budget Report of 7 October 2007 as it relates to residence and to non-domiciled individuals.

A very short period of consultation remains open until 28 February. These proposed rules will have significant consequences for all UK non-domiciled individuals resident in the UK, those planning to move to the UK and any individuals regularly here but non-resident at present.

The final legislation will have effect from 6 April 2008 which allows only a very short period to consider your position and how you might be affected.

The proposed introduction of a £30,000 annual charge for individuals wishing to elect the remittance basis of taxation after a number of years of residence is included in the draft legislation and now seems certain to come into effect for the tax year 2008/09:

• The £30,000 fee will apply to individuals who are not domiciled in the UK and who are resident in the UK for the current tax year and for seven of the previous nine tax years. Resident here means for any part of a tax year so the charge will apply to an individual resident in the UK before 5 April 2002
• The £30,000 is the price of choosing the remittance basis. A charge to income tax and capital gains tax will continue to be calculated on amounts that are remitted
• The election to be taxed on the remittance basis in respect of employment income, investment income, and capital gains will be made as part of the tax return filing for 2008/09
• The fee has one small de minimus exception where overseas income is below £1,000; such individuals will automatically be taxed on the remittance basis
• The alternative to electing the remittance basis is to be taxed on the arising basis in the UK on worldwide income
• The election is annual so the taxpayer can be on an arising basis for one tax year and elect the remittance basis the next year. Income that arose in a year when the remittance basis applied and which is delayed until a year of tax on an arising basis will also be caught
• Any individual electing the remittance basis, however long they have been resident in the UK, will lose the benefit of their personal allowance for income tax and their annual exemption for capital gains tax

The doubt as to whether the charge can be offset against taxes in other countries is acknowledged by HM Revenue & Customs simply stating the onus will be on each individual country to consider whether the levy falls within the terms of the Double Taxation Agreement (DTA) with UK.

For those who are US citizens it seems very unlikely that this £30,000 will be available as a foreign tax credit on their US tax return.

There are further changes to the remittance basis of taxation that were described in the Pre-Budget Report as the correction of a number of anomalies. Most significant amongst these would appear to be:

• An end to the ceased source doctrine that no income tax liability can apply to a remittance if the source of those funds had been closed during a prior year and therefore does not exist in the following year when remitted
• To eliminate room for differing interpretation the statute will now define the order in which different elements of income and capital are to be considered as remitted. A particular development appears to be that, where proceeds from the sale of an asset that realised a capital gain are remitted, the entire gain will be treated as brought into the UK before any of the capital element. The ordering applies on a current year basis so it would appear that a last in, first out basis applies to remittances from a mixed account
• The remittance basis of taxation applies to assets as well as liquid funds. An asset, such as a car or a work of art, purchased outside the UK using offshore funds and subsequently brought into the UK gives rise to a charge to tax on the income used to acquire the asset at the point the asset is brought into the UK
• Gifts of offshore income made to connected parties outside the UK will give rise to a charge to tax on the donee should that donee bring the funds into the UK. Currently, under anti-avoidance rules, there is only a tax charge if the donor enjoys the benefit of the funds in the UK
• An individual must maintain his non-resident status for five years to be clear of UK income tax on sums that are brought into the UK following departure (similar principles already exist for capital gains tax); if not, the sums will become chargeable in the year of return

If you believe that you may be affected by the proposed legislation and are concerned, please contact us.

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