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UK Non-Domiciled Residents to be affected by changes: action may be required before 6 April 2008
At a recent briefing AMS learned that proposed changes for rules relating to non-domiciled residents in the UK will potentially have a significant impact on some of our clients. Draft details have just been released of the changes announced in October's Pre-Budget report, and we have below summarised some of the main areas of change that need to be considered by affected clients.
Please note, this summary does not cover all changes. It is also worth noting that clarifications have been issued by HMRC and the final position is not clear at this stage, accordingly, the below information is as we understand it currently. Consultations are continuing until the end of February.
Changes for Individuals
An annual charge of £30,000 will be payable from 6 April 2008 by individuals wishing to claim the remittance basis, that is to only pay tax on foreign income and gains when these are brought into the UK (i.e. “remitted”). This applies to any individual who:
- is UK resident and non-domiciled,
- has been resident in the UK for 7 out of the previous 9 years, and
- has unremitted foreign income or gains in a tax year of £1,000 or more.
Importantly, the calculation of years of residence is retroactive from 6 April 2008, meaning someone who arrived before 6 April 2002 may be caught by the rule. The government is currently discussing this charge with the US authorities as to how it might be creditable against US tax.
Individuals are free to opt in and out of the remittance basis. If you use the arising basis (i.e. paying tax on worldwide income and gains) instead of the remittance basis, you are eligible for appropriate personal allowances.
UK Residence Day Counting Rules
Previously, arriving in the UK on Monday and leaving on Friday would be counted as 3 days for the purpose of calculating whether a person is resident. This was based on HMRC policy rather than statute. The new arrangements, however, put the method of determination into law, and both the day of arrival and day of departure will be counted as days present in the UK. This means that arriving on a Monday and departing on Friday will now be counted as 5 days. There is an exception for days spent in transit where the person does not leave the restricted area of the airport.
Offshore Companies
Current arrangements provide that gains for “close” companies are not attributed to UK non-domiciled persons. From 6 April 2008, however this will change and gains may be attributable under the following circumstances:
- the offshore company is a “close” company, i.e. under the control of 5 or fewer “participators”, and
- the UK resident non-domiciled participator's interest in the company exceeds 10%.
Gains will be attributable where the underlying assets are located in the UK or there is a remittance of gains from assets outside of the UK if the remittance basis is claimed. If the remittance basis is not claimed, then all gains will be taxed on the arising basis.
Income Source Ceasing
Formerly it was possible to remit income to the UK without incurring a tax liability by termination of the source of income, such as closure of a bank account. This practice will not be available from 6 April 2008. Where a source of income has ceased since 5 April 2007 any remittance of that income will incur a UK tax liability.
Changes for Offshore Trusts
Attribution of gains
Non-domiciled UK resident settlors with an interest in an offshore settlement will become subject to tax rules relating to gains on offshore trusts from 6 April 2008. Where settlors use the remittance basis, tax will be applied to gains on UK assets either realised through trustees or an underlying company, or on gains deemed to be remitted to the UK. These rules define the settlor's interest widely to include benefits for connected persons.
Non-domiciled UK resident beneficiaries of an offshore settlement may be charged for receiving a capital payment on gains which arose on UK assets or otherwise, irrespective of where the benefit is given. Unremitted foreign gains attributed to a settlor in certain trusts may be attributed to capital payments to beneficiaries and be taxed as such.
Requirement to notify HMRC of the creation of offshore trusts
Non-UK domiciled settlors of trusts will now be required to notify HMRC of the trust and provide various details within 3 months of settlement or within 12 months of becoming resident or ordinarily resident. Trusts created between 19 March 1991 and 6 April 2008 will have a 12-month deadline for notification, calculated from 6 April 2008 or when the settlor becomes UK resident, whichever is later.
Further Information
Details of the proposals are available from the HMRC website: http://www.hmrc.gov.uk/cnr/res-dom-tax-amends.htm.
Lawrence Graham LLP has published a document entitled “Non-residents and non-domiciliaries - the draft new rules” which reviews the changes. We have referred to this document to assist in writing this email. A PDF version of the document is available at: http://www.lg-legal.com/publications.html. It should be noted that since this document was prepared, HMRC has issued a clarification which may render some of the details out of date.
Alternatively, please contact your personal legal or financial professional.
Please be aware that the proposals outlined above may change so it is important to stay up to date in the next couple of months on any of these issues that may affect you.
We strongly advise that all clients potentially affected by these changes seek professional advice as soon as possible to minimise any possible negative impacts of the proposals. Please bear in mind that, depending on your circumstances, changes may be required prior to 6 April 2008.
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