UK resident non-UK domiciled individuals should review their non-UK assets and income, and restructure as necessary.
Extensive changes to the UK tax rules for UK resident non-UK domiciled individuals were announced on 9 October 2007. Draft legislation was published on 18 January 2008, and is subject to a consultation process ending on 28 February 2008. The new rules will be effective from 6 April 2008.
On 12 February 2008, HM Revenue & Customs issued a letter confirming minor changes to the proposed new tax rules, but did not modify the general effects of those rules or the commencement date of 6 April 2008.
New UK Tax Rules from 6 April 2008
Days of arrival in, and departure from, the United Kingdom are counted as UK days. The residence rule remains more than 182 UK days in one UK tax year, or more than 90 days on average over four UK tax years.
- Ways of avoiding taxable remittances of non-UK source income and capital gains are greatlyrestricted under the new tax rules. From 6 April 2008, the following are ineffective: Gifts to relatives outside the United Kingdom and remittance by those relatives to the United Kingdom
- Closing non-UK investment income sources in tax year one and remitting segregated income from that closed source in year two
- Buying property offshore to bring to the United Kingdom (e.g., a Ferrari)
- Payment of interest on offshore mortgages on UK real estate
There are doubts about using these structures to make remittances before 6 April 2008, and continuing to use remitted assets in the United Kingdom after 6 April 2008, as the new draft legislation applies to use in the United Kingdom of value derived from non-UK income and capital by the individual taxpayer or a connected person, from 6 April 2008.
Remittance Basis of Tax
The remittance basis is the principal benefit for non-UK domiciled individuals, resulting in no UK tax on non-UK source income and capital gains, provided they are not actually or constructively remitted to the United Kingdom.
The remittance basis continues to apply to individuals who have been UK resident for less than seven out of the last nine UK tax years, calculated on a rolling basis.
This basis only applies to individuals who have been UK resident for seven or more out of the last nine UK tax years who have £1,000 or more non-UK source income and capital gains, if they pay £30,000 per person, per year, additional UK flat tax, and make a claim in their UK tax return.
From 6 April 2008, no annual income tax or capital gains tax annual reliefs and allowances areavailable to individuals who are taxable on the remittance basis.
UK resident non-UK domiciled settlors (individuals who created or funded trusts) who have an interest under a non-UK trust, or whose spouses have an interest, must treat trust income as their income from 6 April 2008. UK resident non-UK domiciled beneficiaries are taxable on trust income not attributed to a settlor, when and to the extent that they receive distributions or benefits from the non-UK trust while UK resident. If settlors or beneficiaries are taxable on the remittance basis (i.e., they have been UK resident for less than seven years or pay the £30,000 per year additional tax), there is no UK tax payable, provided trust income is not remitted to the United Kingdom.
UK resident non-UK domiciled settlors who have an interest under a non-UK trust (broadly, the trust can benefit spouses or relatives) must treat trust capital gains as theirs from 6 April 2008. If the trust gains are from UK property, these gains will be taxable whether or not remitted to the United Kingdom. If the trust gains are from non-UK property, these will be taxable on the remittance basis, provided settlors are eligible for that basis (i.e., they have been UK resident for less than seven years, or pay the £30,000 per year additional tax).
UK resident non-UK domiciled beneficiaries of a non-UK trust must treat trust gains as theirs from 6 April 2008, to the extent that they have received “capital payments” at any time from the trust; this means distributions, use of trust assets, interest-free loans, etc., which were not taxed as income. This applies whether or not trust gains arise from UK assets, whether or not beneficiaries are taxable on the remittance basis, and whether or not trust gains are remitted to the United Kingdom.
Trusts created on or after 6 April 2008 by non-domiciled settlors must be reported to HM Revenue & Customs within three months.
Pleaser note, HM Revenue & Customs announced on 12 February 2008 that trust gains “realised or accrued” before 6 April 2008 would not be taxable, and there would be a relaxation of UK reporting of unremitted non-UK income and gains, but no further details are currently available.
Capital gains realised by non-UK companies with five or fewer “participators” (shareholders and others having economic interests, or rights to acquire shares or interests) are treated as belonging to “participators” with at least a 10 per cent interest in the non-UK company, from 6 April 2008. Where the company realises gains on UK assets, these are taxable to those “participators” whether or not remitted to the United Kingdom. Where the company realises gains on non-UK assets and these “participators” are subject to the remittance basis, those gains are only taxable if remitted to the United Kingdom.
UK ordinarily resident, non-UK domiciled “transferors” (broadly, individuals who transferred assets or created rights) executing transactions resulting in actual income being received by certain non-UK companies, must treat that company income as their income from 6 April 2008, where they or their spouses can benefit from the company; current practice is to apply this to unquoted companies.
UK resident non-UK domiciled individuals who are not “transferors” in respect of a non-UK company receiving income as a result of transactions executed by a UK ordinarily resident “transferor”, must treat company income as theirs from 6 April 2008, to the extent that they have received capital payments at any time from the company. This means distributions; use of trust assets; interest-free loans, etc., not taxed as income. If the company income is from non-UK property, that income will be taxable on the remittance basis, provided the individual is eligible for that basis (i.e., has been UK resident for less than seven years, or pays the £30,000 per year additional tax).
HM Revenue & Customs Letter of 12 February 2008
The HM Revenue & Customs Letter of 12 February 2008 was issued to notify minor changes to the proposed new rules effective from 6 April 2008. It does not confirm any major modification of those proposed rules nor any delay of the commencement date of 6 April 2008. The letter confirms these modifications to the proposals:
- Individuals using the remittance basis will not be required to make any additional disclosures about the source of their overseas income and gains, provided remittances to the United Kingdom are declared and UK tax is paid on those remittances.
- Trust gains accrued or realised prior to 6 April 2008 will not be subject to the new regime.
- Money brought into the United Kingdom to pay the £30,000 charge will not itself be taxable under the new regime.
- It will still be possible to bring art works into the United Kingdom for public display without incurring a charge to tax.
- In addition, HM Revenue & Customs is continuing discussions with the US tax authorities as to how the £30,000 charge can become creditable against US tax.
The Internal Revenue Service is resisting this.
Action Points Before 6 April 2008, UK resident non-UK domiciled individuals should take the following steps:
- Identify non-UK tax-free capital that can be used in the United Kingdom after 6 April 2008
- Consider remittance structuring
- Realise non-UK assets with latent gains, and do not remit proceeds to the United Kingdom
- Review offshore mortgages secured on UK real estate and restructure if necessary to avoid tax on interest payments from 6 April 2008
- Restructure non-UK trusts and non-UK close companies owning UK property
- Restructure non-UK trusts and non-UK companies owning non-UK property, to avoid income and gains being taxable from 6 April 2008
From 6 April 2008, non-UK domiciled individuals who have been UK tax-resident for more than seven out of the last nine UK tax years with non-UK income and capital gains in excess of £1,000 per UK tax year will have to choose between the following options:
- Paying a charge of £30,000 per person per tax year in order to retain the benefit of the remittance basis of taxation and not having to disclose worldwide non-UK income and gains
- Not paying the £30,000 charge, filing UK tax returns reporting worldwide income and gains and paying full 40 per cent UK income tax and 18 per cent UK capital gains tax (in the same manner as a UK resident and UK domiciled individual)
Individuals can decide each tax year whether to pay the £30,000 charge or not. Individuals who have less than £1,000 of non-UK income and capital gains per year will be covered by existing UK tax rules and do not have to pay the £30,000 per tax year additional charge to benefit from the remittance basis of taxation.