23 March 2018
In his Pre Budget Report, published on 9 October 2007, the Chancellor of the Exchequer announced that there was to be a new tax regime for non-domiciled UK residents. Between publication of draft legislation by the Treasury on 18 January 2008 and the Budget Announcement on 12 March, with expected re-release of legislation in early April, there was intense lobbying to clarify the new rules and to either delay or stop their implementation in part or entirely.
It is now clear that the options for non-domiciled UK residents (who have been in the UK for seven out of the last nine tax years) are:
a. To pay a £30,000 fee in order to be taxed on the remittance basis; or
b. Pay tax on a worldwide basis.
In addition to the introduction of the £30,000 fee rule, there is also a raft of changes relating to residence, domicile, remittances and the taxation of offshore trusts and structures. Of particular concern for art collectors is the taxation of chattels remitted into the UK that were acquired with offshore investment income.
Income used to purchase chattels
Prior to 6 April 2008, it was possible to purchase a work of art outside the UK with offshore investment income and bring the work of art into the UK without incurring an income tax charge. The general position now is that an income tax charge will apply if the work of art was acquired after 11 March 2008. For example, if somebody uses cash from a bank account that includes rolled up income of £5,000 to buy a painting before 11 March 2008 and brings the painting into the UK at any stage, no income tax charge will arise. If, however, the painting was bought after 11 March 2008 and brought into the UK after 6 April 2008, income tax will be chargeable on the £5,000 at his marginal rate (40% for a higher rate tax payer).
In effect this means that the new rules will apply from 11 March 2008 and will only concern those individuals who acquire works of art after that date.
As regards exemptions, the Budget 2008 Notes provide that any asset in the UK on 5 April 2008 will be exempt from charge under the remittance basis, for so long as the current owner owns it, even if that asset is later exported and then re-imported into the UK. There is also an exemption for assets brought into the UK for repair and restoration and assets in the UK for less than a nine-month period.
Art for public display
The opportunity to export and then re-import works of art owned on 11 March 2008 means that there will be no disincentive to lending works of art currently held in the UK for display abroad.
There will be an exemption for works of art bought overseas which are brought into the UK for public display, either indefinitely or temporarily. Even if these were acquired after 11 March 2008 using offshore income or gains, no tax charge will arise. Works of art not on display but held by approved establishments for the public to see or for educational purposes will also be covered.
It is not clear whether this exemption will extend to works of art brought into the UK for display prior to an auction. If not, this will clearly reduce the UK’s attraction as an auction venue. However, changes have also been announced to the proposed new rules on the taxation of gains made by offshore trusts. These would seem to mean that it will continue to be possible for trustees to sell works of art into the UK without incurring capital gains tax charges for the settlor of the trust. The details of these changes is still awaited but if they are implemented in the manner suggested in the Budget Notes, this will be welcome news to UK auction houses concerned that they would no longer be employed by a significant group of collectors.