HMRC also published some proposals for the taxation of foreign domiciled individuals broadly following the announcements made in the Budget. There are 5 main issues:
- The non-dom charge is to be increased from £30,000 to £50,000 for those who have been resident for twelve of the last fourteen years. Everything else regarding the non-dom charge is unchanged.
- The rules relating to nominated income have been simplified. Serious disadvantages exist if an individual remits some of their nominated income and gains to the UK. It is
- proposed that the first £10 of nominated income or gains may be remitted free of tax and without becoming subject to the identification rules.
- Foreign currency bank accounts have caused many complications because foreign currency is a chargeable asset and any withdrawal of funds from such an account represents a part disposal on which a capital gain or loss can arise. It is proposed that individual foreign currency bank accounts will be removed from the scope of capital gains tax.
- Where an asset has been purchased out of foreign income and is brought to the UK, it is now regarded as a remittance of that foreign income. Certain assets are exempt from this charge (personal assets, assets temporarily imported or assets worth less than £1,000) but if they are sold, the sale proceeds are regarded as having been remitted. It is proposed that this charge will not arise if all the proceeds from the sale are removed from the UK within two weeks of the money being received by the individual.
- Investments in the UK business. The most significant proposal relates to the exemption from the remittance basis of funds which are brought to the UK for investment in a qualifying business. At the moment, the remittance of foreign income or gains is liable to tax regardless of how the money is used and it is proposed that any income or gains remitted to the UK for commercial investment will not be liable to tax as a remittance.
There are two main categories of qualifying businesses – trading companies and companies developing or letting commercial property. It is recognised that the letting of commercial property may not represent a trade and it is therefore to be specifically included as a qualifying business. (The relief will not extend to the holding and letting of residential property or any leasing activity.)
In both cases, the trade or the commercial property activity must constitute a substantial proportion of the overall activities of the company. (This is obviously a point to be clarified, because “substantial” is defined for various tax purposes as being 5%, in other cases 10%, in other cases 20%, and in other cases over 50%.)
This is a very valuable relaxation. However, it will only apply to investments in companies – so investments in unincorporated businesses or partnerships (or LLPs) will not be protected. The target company does not need to be incorporated or resident in the UK but it does need to have a permanent establishment in the UK.
There will be no restrictions on the investor being connected with the business in which they invest – nor is it proposed for there to be any restrictions on the individual working or receiving commercial remuneration from the qualifying business. However, it will not be possible for him to buy an existing business from himself or a connected party – and of course there will be anti-avoidance provisions to prevent the value of the investment leaking out to the investor by indirect means.
The proposals specifically contemplate the investment in UK businesses may be made using funds held in off-shore companies and trusts without attracting a tax charge on the remittance.
When the investment is disposed of, the money must be removed from the UK within two weeks from the individual receiving the money or it will be treated as having been remitted. It will be possible to reinvest the funds in another qualifying business without the need to take the money out of the UK – but again this would need to take place within two weeks.
It is anticipated that these relaxations to the remittance basis rules will come into force on 6 April 2012 and it is said that there will be no other changes in respect of the taxation of foreign domiciled individuals for the rest of this Parliament.