New Regime for the Taxation of Resident but Not Domiciled or Not Ordinarily Resident Individuals in the UK

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In his budget speech of 12 March 2008, Chancellor Darling announced some changes to the proposals (first announced in November 2007) to the tax treatment of those individuals Resident in the UK but Not Domiciled or Not Ordinarily Resident. These changes, together with the draft legislation published at the end of January 2008 now form the basis of the new tax regime which came into effect on 6 April 2008.

The new legislation is both detailed and complex but a summary of the effect of the new rules is set out below.

  • Residence in the UK for a particular tax year is determined by the number of days spent in the UK in that tax year. Under the old rules, both the days of arrival in and departure from the UK are disregarded. From 5 April 2008, a day counts if the individual is present in the UK at midnight on that day. Consequently, although the day of arrival will now count, the day of departure will not. There are exceptions for days spent in the UK in transit between two places outside the UK, e.g. airport stopovers.
  • New rules will bring individuals Resident but Not Ordinarily Resident within the charge to tax in respect of Employment Related Securities. Specific rules will apportion such benefits where they are partly derived from overseas employment and partly from the UK.
  • The significant changes to the tax regime of non resident trusts first proposed in November 2007 have been somewhat relaxed. Overseas trusts will not be liable to tax on income and gains unless remitted to the UK.
  • Anti avoidance legislation designed to prevent UK Residents from realizing chargeable gains free of tax through a holding in a Non UK Resident company are to be extended to include Non Domiciled individuals as well as those Domiciled.
  • The old rules regarding remittances contain a number of loopholes and anomalies enabling income and gains to be effectively remitted without being subject to tax. From 6 April 2008, the term “remittance” is being widened. These changes include:
    • Foreign savings and investment income were not taxed when remitted to the UK if the source of the income no longer exists in the year of remittance. The new rules will now tax these remittances.
    • From 6 April 2008, money, property and services brought into the UK which are derived from relevant foreign income will be treated as a remittance.
    • Foreign savings and investment income arising in a year in which the remittance basis is claimed will be taxed if remitted to the UK irrespective of the year in which it is remitted and whether or not a claim to the remittance basis is made in the year in which the remittance is made.
    • There will be statutory rules for determining how much of a transfer from a mixed fund is treated as income or capital gains and the manner in which these amounts are chargeable to tax.
    • It will no longer be possible to escape UK tax on money, property, services or benefits received in the UK that were funded out of untaxed foreign income or gains by way of alienation to a third party such as an offshore vehicle or close relative.
    • Non domiciled individuals will be brought within the charge to tax under the Accrued Income Scheme.
    • It will now be possible for non domiciled individuals to claim relief for foreign capital gains tax losses. However, to do this, the individual will have to make an irrevocable election requiring the disclosure of unremitted capital gains.
    • Offshore loan interest paid on loans to acquire a UK residential property, funded out of offshore income and gains, will not be treated as a remittance in respect of loans currently in existence. This will continue for the life of the loan or until 5 April 2028. However, for new loans, or if the terms of existing loans are varied, the overseas income or gains used to fund the loan will be treated as a remittance.
  • From 6 April 2008, subject to a de minimis limit, individuals who claim the use of the remittance basis of taxation will not be entitled to various UK personal tax allowances nor to the Annual Exempt Amount (AEA) for Capital Gains Tax.
  • The de minimis limit will have effect so that remittance basis users who have unremitted income and gains of less than £2,000 a year will continue to be entitled to personal allowances and the AEA for capital gains tax.
  • The remittance basis is subject to an annual claim so individuals are free to claim one year and not the next.
  • Adult Non Domiciled individuals, who have been resident in the UK for at least 7 out of the last 10 tax years, and who have unremitted income or gains in excess of £2,000 a year will be able to continue to be assessed on a remittance basis on payment of an annual charge of £30,000. Individuals under the age of 18 will not be required to pay the charge until the tax year in which they attain the age of 18.
  • The annual charge will be collected through the self assessment system. Offshore income and gains can be used to pay the £30,000 charge directly to HMRC without that being treated as a remittance but if it is subsequently refunded by HMRC then it will be taxed as a remittance at that point.
  • The £30,000 charge is a tax charge on unremitted income and gains. Individuals can choose what unremitted foreign income or gains the £30,000 is paid on, resulting in the charge being treated as income tax or capital gains tax. The unremitted income or gains on which the tax is paid will not be charged again, when and if the income or gains are eventually remitted to the UK. Ordering rules will determine that untaxed foreign income or gains will be remitted before income or gains upon which the £30,000 has been paid.
  • The £30,000 charge could be treated as income tax or capital gains tax and might be treated as creditable against foreign taxes for the purposes of Double Taxation Agreements. The tax will also be available to cover Gift Aid donations.

1 July 2008

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