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TaxationWeb by Laura Hutchinson ATII ATT

The government are considering amending the rules applicable to individuals who are not domiciled in the UK. Tax specialist Laura Hutchinson ATII ATT of Tax Advisers Forbes Dawson explains the basics behind the current income tax regime for non-UK domiciliaries who are resident in the UK.The government are considering amending the rules applicable to non-UK
domiciled individuals. The following article attempts to explain the
basics behind the current income tax regime for non-UK domiciliaries who
are resident in the UK.

UK Income Tax - Who is Assessable?

To be taxable to UK income tax the individual must be UK resident or
ordinarily resident, or the income must be UK source (ie arise in the
UK).

To be assessable on the arising basis the UK resident must also be UK
domiciled, otherwise the individual is taxable on a remittance basis
only (and on UK source income as it arises).

How Income is Assessed

The individual is taxable to foreign income under Schedule D IV & V.
This income, if remitted, does not fall under the legislation allowing
savings income to be taxable at lower rates. The income forms the
highest part of the individual's income and is assessable at the basic
and higher rates only. No deduction is allowed such as trustees' fees
against the income and the full amount is assessable.

The UK resident individual is entitled to the usual reliefs such as
annual exemption and the 10% band on the first portion of income.

Non-UK domiciliaries becoming resident in the UK after 6 April 1997

If an individual arrives the UK part way through the tax-year and
becomes resident at that time, the amount on which he is taxed on the
remittance basis can be reduced to the proportion that would have been
chargeable on the arising basis.

Example 1

Mr X arrives in the UK on 6 October 2002.

He has overseas investment income of:

£200 on 7 Apr 2002

£500 in June 2002

£100 in Aug 2002

£250 in Nov 2002

£350 in Feb 2003

£300 on 2 Apr 2003

Total for tax year 2002/03 = £1,700

If he remitted £1,000 this would strictly be the amount chargeable.
However this is compared to the amount he would have been taxable on the
arising basis (had he not been non-domiciled). This would have amounted
to 6/12 x 1,700 = £850.

In practice the IR may reduce the amount chargeable on the remittance
basis to £850.

If a source of income ceases before the individual becomes UK resident
no liability will arise.

Types of Remittance

A remittance is not restricted to simply a physical transfer of money
into the UK but can arise in cases such as:

1. Utilisation of income funds offshore to repay a loan or
overdraft in the UK.

2. Repayment of a debt to a UK resident individual (ie not actually
received by the taxpayer but still effectively used by him in the UK).

3. A cheque from the offshore bank account encashed in the UK when
used to; purchase goods; repay a debt; exchanged for cash; or given away
as a gift.

4. A gift of cash abroad may also be treated as remitted income if
the income firstly came to the UK before the gift was made, also if any
financial consideration was made for the gift to the UK resident.

5. Payments of debts on a UK credit card even if made direct to the
credit card company, as the individual does not physically have to
receive the funds to be taxable.

6. Using an offshore credit card in the UK where the debt is
ultimately settled by the offshore income account, as offshore monies
are used in the UK.

7. If an offshore credit card is used as above but instead of being
used in the UK is used offshore no remittance will apply. If however,
whatever was purchased offshore is remitted to the UK this is treated as
a remittance of income.

The IR have also stated that they will look at any circumstance where it
appears that the individual has benefited in the UK from the funds
offshore, whether directly or indirectly. In practice it may be
difficult to apply such a broad-brush anti-avoidance approach.

Mixed Funds

If the income arises in a mixed fund ie a bank account of capital and
income, any cash remitted will be treated as income up to the level of
income that has arisen in that account, there is no apportionment.

If the bank account is mixed with income taxable on the arising basis
(UK source) and that on the remittance basis, any income remitted will
be primarily be treated as the income assessable on the arising basis.
This income will have already been taxed and this reduces the income
assessable in that year.

On the separate matter of capital gains remittance a different rule
applies. Any capital sums remitted that contain an element of proceeds
of sale will include a due proportion of the capital gain arising on
that disposal. It will not treat the whole gain as arising, only the
relevant proportion to the disposal proceeds remitted.

Income not Assessable

1. The source of income has ceased before the year in which the
remittance is made.

2. Remittances are made which do not relate to income arising in a
year in which the individual was resident.

The latter is true except it seems in relation to settlements in which
the settlor is taxable under s660G(4) ICTA 1988. This states that income
which has arisen in previous years where the settlor was not resident
can become assessable on the settlor but as if it were income arising to
the settlor in the year of remittance.

If a remittance into the UK is delayed by reason of restrictions in the
country of source and the income is all remitted in one year, the
individual can claim to spread the income over the years in which it
arose. The individual must be able to prove that the remittance could
not have been made earlier and this was not through his ineffectiveness,
but the laws of the country.

Simple Tax Planning to Reduce Income Tax Payable

Income tax can only be charged on remitted income if the source on which
the income has arisen is in existence in the year it is remitted. This
rule does not apply to employment income, only investment income.

A UK resident non-domiciled individual could close down his source of
income in year 1 (i.e. close the bank account) and remit income into the
UK in year 2. In year 2 the remitted income would not be taxable on the
individual as there is no source existing in year 2.

New accounts can be opened and closed every year.

If the source is an asset that the individual does not want to dispose
of, a ceasing of a source includes:

* A transfer to a company

* A transfer into discretionary trust

* A transfer into certain types of interest in possession trusts