18 September 2019 - Article
As part of the Pre-Budget Report (‘PBR’) on 9 October 2007, HM Treasury announced a series of sweeping changes to the tax regime for individuals resident but not domiciled in the UK. A consultation paper has today, 6 December 2007, been published providing further detail in relation to these changes.
The PBR Proposals
Broadly speaking, the PBR announced four principal changes:
- § Firstly, once a non-domiciled individual has been resident in the UK for seven years, he will only be able to use the remittance basis of taxation if he pays an additional charge of £30,000 per year;
- § Secondly, individuals using the remittance basis will no longer be entitled to income tax and capital gains tax personal allowances;
- § Thirdly, the residence rules would be changed so that days of arrival in and departure from the UK would count towards establishing residence;
- § Lastly, various “anomalies” in the current rules favouring remittance basis taxpayers would be corrected. It had been understood that these “anomalies” included (in HM Treasury’s view) the capital gains tax benefits conferred upon resident but non-domiciled individuals through the use of offshore trusts, in addition to source closing and “back to back” loans structures.
Today’s Consultation Paper (Paying a Fair Share: A Consultation on Residence and Domicile)
The Paper confirms the first three bullet points listed above, adding a little detail to the £30,000 regime. For example, individuals would need to be resident in the UK for seven out of ten years (meaning that a four year absence from the UK would restart the clock) and confirming that it is possible to elect in and out of the regime (which will begin in April 2008). If the test is similar to the deemed domicile test then it will apply to any person who is resident in any part of a tax year so an individual who becomes resident right at the end of a tax year will be caught by the rules after being resident for just over five calendar years. For example, an individual becoming resident on 1 April 2007 may satisfy the test from 6 April 2012, whereas if he had waited until 7 April 2007 he may not be caught until 6 April 2013.
It appears from the expansion upon the perceived “anomalies” that:
- § The cessation of source doctrine will be removed (as expected);
- § If foreign income is used to purchase an asset and such asset is brought into the UK, a deemed remittance will take place – this was not specifically mentioned in the PBR; it had been considered that the PBR may have been referring to “back to back” loan arrangements designed to leverage off non-remittable funds to access funds in the UK – these may yet be caught but there was no specific mention of them in the Consultation Paper;
- § Legislation will be provided to clarify the tax treatment of remittances from “mixed funds” (i.e. funds containing a mixture of income, employment income, capital gains and capital). Current HRMC practice is that income will be deemed to be remitted first, followed by capital gains on a pro-rata basis to capital. It will be interesting to see whether this legislation gives the scope to ‘cleanse’ mixed accounts leaving behind only clean capital that can be remitted tax-free.
- § It will not be possible to make gifts to offshore vehicles or closely connected persons to cleanse unremittable income and gains (as expected);
- § The consultation paper confirms that it is intended to take away the capital gains tax benefits of offshore trusts for non-UK domiciled individuals (although this had been widely understood to be HM Treasury’s intention) – currently gains arising in offshore trusts are not taxed in the hands of non-domiciled beneficiaries who receive a benefit from the trust.
It should also be noted that some further alternatives to the £30,000 regime have been put forward for consultation (with comments being invited by 28 February 2008). These include:
- § Reducing the £30,000 charge (perhaps to £25,000) but making it apply to all remittance basis users, whether or not they have been resident in the UK for seven years;
- § Increasing the £30,000 charge to £50,000 for those who have been resident in the UK for at least ten out of twelve years; or
- § Removing the remittance basis altogether once an individual has been resident in the UK for seventeen out of twenty years (i.e. align the income tax and capital gains tax rules with the inheritance tax rules).
Where does this leave us?
Frustratingly, the consultation paper does not contain any draft legislation – rather, it states that this will be available “soon”. Final legislation will apparently be included in the 2008 Finance Bill, suggesting that all these changes will apply from April 2008.
Although it is not possible to plan definitively without seeing the legislation, it seems clear that HM Treasury intend to proceed with the anticipated erosion of the capital gains tax benefits for non-UK domiciliaries through offshore trusts. Further, there may only be a small window of time between the legislation being available for review and the new regime taking effect. Therefore, it is critical for people potentially affected by the new regime to consider their position as early as possible. Decisions such as whether or not distributions should be made from offshore trusts before next April will take time (taking into account other tax and non-tax considerations) and we would recommend that steps are taken now to consider all the options.