Matthew Hutton MA, CTA (fellow), AIIT, TEP comments on the proposed tax changes announced in Pre-Budget Report 2007 affecting residence and domicile.

Matthew Hutton

Context

UK residents who are not domiciled or not ordinarily resident within the UK can currently use the remittance basis of taxation. This means that any income and capital gains arising overseas are only taxed here when that income or gain is remitted into the UK.

After a non-domiciled individual has been resident in the UK for seven years they will only be able to use the remittance basis of taxation if they pay an additional tax charge of £30,000 a year. Where an individual then decides not to use the remittance basis (and not pay the additional tax charge) they will be taxed on all their worldwide income and gains whether or not they are remitted to the UK.

The new rules will come into force on and after 6 April 2008 and all previous years of residence will count from that day. So, for example, an individual not domiciled within the UK who has been resident in the UK for five years in April 2008 will only be able to claim the remittance basis of taxation for two more years before they have to pay either the £30,000 annual tax charge or account for tax under the arising basis.

Residence

When deciding if an individual is resident in the UK for tax purposes HMRC do not currently count the days they arrive in or depart from the UK. On and after 6 April 2008, days of arrival and departure will be counted as days of presence in the UK for residence test purposes.

Personal allowances

Everyone who is resident in the UK is entitled to an income tax personal allowance and, in some circumstances, a blind person's allowance. These are the amounts of income someone can receive without paying tax. Certain individuals are also entitled to the married couple's allowance. These allowances reduce the amount of tax they have to pay.

On or after 6 April 2008, subject to a de minimis limit, individuals who are resident but not UK domiciled or not ordinarily resident will not be able to use both the remittance basis and any of the personal income tax allowances. The change will apply to personal allowances, married couple's allowance and the blind person's allowance. A de minimis limit will apply such that remittance basis users who have unremitted foreign income of less than £1,000 a year will be able to retain their personal, married couple's and blind person's allowances as appropriate.

A person who has triggered the additional tax charge detailed above will still have no entitlement to UK personal allowances in the following year if they decide to continue using the remittance basis and pay the additional charge. If, at any future point, that person no longer uses the remittance basis, they will again be entitled to UK personal allowances.

Anomalies

Anomalies in the current rules mean that individuals using the remittance basis of taxation can avoid paying UK tax on their foreign income and gains effectively brought into the UK. A number of changes are being made to ensure that where foreign income and gains are remitted to the UK then tax is charged on those remittances. The changes include:

• Correcting a flaw in the current claims mechanism which allows income arising in one year to be remitted tax-free the following year by claiming the remittance basis in the first year but not in the second;
• Reducing the scope for the alienation of income and gains through the use of offshore structures, such as companies and trusts, which convert taxable income and gains into non-taxable payments;
• Extending those existing anti-avoidance measures which currently do not apply to remittance basis users so that in future they do;
• Removing the ‘ceased source' rule; and
• Extending the definition of remittance in relevant foreign income.

Consultation

There will be consultation on the detail of the changes, based round draft legislation that will be published towards the end of the year.

The Government will also be consulting on whether people who have been resident in the UK for longer than ten years should make a greater contribution.

(PBRN 18 9.10.07)

Some Observations

(a) The future ‘cost' of the remittance basis

The title of PBRN 18 is rather misleading, as it contains specific measures and nothing related to the review launched in 2003.  From 2008/09 a UK resident non-UK domiciled individual will be able to use the remittance basis only on payment of an additional tax charge of £30,000 per annum [subject to future increase?] once he has been UK resident for seven years.  The individual can decide not to use the remittance basis and not pay the additional tax charge, though he will then be taxed on worldwide income and gains, whether or not remitted.

(b) Draft legislation by the end of 2007: what will it cover?

We are told that draft legislation will be published towards the end of 2007 which will lead to consultation.  One perhaps worrying stated anomaly is ‘reducing the scope for the alienation of income and gains through the use of offshore structures, such as companies and trusts, which convert taxable income and gains into non-taxable payments'. What is envisaged here?  Do HMRC intend to extend the offshore settlor charge (under TCGA 1992, s 86) to settlements with a non-UK domiciled settlor or so that capital payments made to non-UK domiciliaries will be charged under TCGA 1992, s 87?  Or will the rule in the transfer of assets abroad legislation (now ITA 2007, part 13 chapter 2) be changed so as to repeal or restrict the relief for income which, had it arisen directly to the transferor, would be taxed on a remittance basis - or indeed the relief for benefits received by non-UK domiciliaries outside the UK?  Nothing is said about excluded property generally and excluded property settlements under IHTA 1984, s 48(3) in particular.

(c) What impact will all this have?

At first sight this seems very odd.  Remember how the House of Lords rapped HMRC on the knuckles some years ago for the ‘extra-statutory administrative arrangements' under which Mr Al Fayed and others could avoid any UK compliance or substantive liabilities by paying an annual hundred thousand pounds or two.  This I suppose is different in that it would be statutory and of course seems pretty much like the Tory proposals except that it will cost another 20%.  The question really is whether certainly the very rich will think that the annual £30,000 fine is a price worth paying for the privilege of the remittance basis.  Those with ‘moderately wealthy estates' might consider it’s not worth the candle and move outside the UK.  But those whose family wealth is in offshore trusts rather than being owned absolutely should continue to be OK (subject possibly to introduction of further rules mentioned above), by taking benefits in the form of capital from offshore trusts and so not really using the remittance basis to any great extent.

It is conceivable that some UK resident non-UK domiciliaries might be assisted by a relevant double tax treaty.

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Article Added Saturday, 15 December 2007 | 3501 Hits

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